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DA

DELTA APPAREL, INC (DLA)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 FY2023 was weak on GAAP with net sales $0.091B, gross margin 11.2%, operating loss $17.0M, and diluted EPS of -$2.34; adjusted results removed production curtailment, cotton and restructuring costs plus a $9.2M DTG2Go goodwill impairment to arrive at adjusted gross margin 15.9%, adjusted operating loss $2.1M, and adjusted EPS -$0.72 .
  • Management lowered FY2024 guidance vs Q3: net sales to $400–$415M (from $410–$425M) and operating margin to ~2.0%–3.5% (from 3.25%–4.25%), citing normalization in retail inventories and a path to sequential improvement through FY2024; D&A ~$15M and capex ~$5M .
  • Balance sheet execution continued: inventory fell to $212.4M (-18% vs December 2022), total net debt declined to $165.3M (≈15% reduction vs March 2023), while cash plus revolver availability ended at $14.2M .
  • Catalysts: cotton and demand normalization, Salt Life DTC expansion (retail and eCommerce), DTG2Go on-demand positioning and technology initiatives; risks include interest expense pressure and execution on cost consolidation and DTG2Go improvement .

What Went Well and What Went Wrong

What Went Well

  • Salt Life gross margin remained strong at 51.7% in Q4 (flat YoY), and management expects Salt Life to return to revenue growth in FY2024 led by higher-margin DTC channels .
  • Inventory and net debt reduction: inventory fell $47M sequentially vs December 2022 and net debt declined ~15% vs March 2023, reflecting execution on working capital efficiency initiatives .
  • Strategic cost actions: consolidation of digital print operations into the “On-Demand DC” footprint and streamlined offshore platform set up long-term efficiencies and improved returns on invested capital; “we implemented a number of needle-moving initiatives… set the stage for significant operational improvement” (Robert W. Humphreys) .

What Went Wrong

  • Delta Group margins and profitability deteriorated sharply: segment gross margin fell to 4.8% (vs 14.1% YoY), with a segment operating loss of $15.2M and a $9.2M non-cash goodwill impairment in DTG2Go .
  • GAAP results reflect ongoing demand softness and elevated cotton costs: Q4 gross margin 11.2% (vs 18.7% YoY) and diluted EPS -$2.34, even after SG&A fell to $17.1M (from $19.8M) .
  • FY2024 guidance lowered from Q3 levels: net sales and operating margin ranges cut, indicating a slower-than-expected recovery cadence and potential pressure on near-term profitability .

Financial Results

GAAP Sequential Comparison (Q2 → Q3 → Q4 FY2023)

MetricQ2 2023Q3 2023Q4 2023
Revenue ($USD Billions)$0.110 $0.106 $0.091
Gross Margin (%)14.7% 13.1% 11.2%
Operating Income ($USD Millions)-$5.354 -$4.461 -$17.001
Diluted EPS ($USD)-$1.00 -$0.90 -$2.34

Adjusted Metrics (production curtailment, cotton, restructuring, and impairment impacts removed)

MetricQ2 2023Q3 2023Q4 2023
Adjusted Gross Margin (%)N/A22.7% 15.9%
Adjusted Operating Income ($USD Millions)N/A$5.817 -$2.090
Adjusted Net Income ($USD Millions)N/A$1.216 -$5.009
Adjusted Diluted EPS ($USD)N/A$0.17 -$0.72

YoY Q4 Comparison

MetricQ4 2022Q4 2023
Revenue ($USD Billions)$0.116 $0.091
Gross Margin (%)18.7% 11.2%
Operating Income ($USD Millions)$2.228 -$17.001
Diluted EPS ($USD)-$0.04 -$2.34

Segment Sales and Margins

MetricQ2 2023Q3 2023Q4 2023
Salt Life Group Net Sales ($USD Millions)$19.0 $17.2 $12.5
Delta Group Net Sales ($USD Millions)$91.3 $89.1 $78.9
Salt Life Group Gross Margin (%)N/A50.5% 51.7%
Delta Group Gross Margin (%)N/A5.9% 4.8%
Delta Group Adjusted Gross Margin (%)N/A17.4% 10.3%

KPIs and Balance Sheet

KPIQ2 2023Q3 2023Q4 2023
Inventory ($USD Millions)$243.2 $226.2 $212.4
Total Net Debt ($USD Millions)$194.3 $166.2 $165.3
Cash + Revolver Availability ($USD Millions)$12.8 $14.4 $14.2

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales ($USD Millions)FY2024$410–$425 $400–$415 Lowered
Operating Margin (%)FY20243.25%–4.25% ~2.0%–3.5% Lowered
Depreciation & Amortization ($USD Millions)FY2024N/A≈$15 New item disclosed
Capital Expenditures ($USD Millions)FY2024N/A≈$5 New item disclosed
NarrativeFY2024Sequential topline and margin improvement, back-half growth Sequential margin improvement and back-half topline growth Maintained directional outlook

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3)Current Period (Q4)Trend
Cotton cost inflation and production curtailmentElevated cotton and production curtailments pressured margins; adjusted margins provided excluding these costs Continued margin pressure; adjusted metrics provided; signals that these dynamics are receding Improving normalization expected
DTG2Go and on-demand/digital initiativesDTG2Go ~20% topline expansion in Q2; launch of proprietary order portal in Q3 Goodwill impairment ($9.2M) recognized; continued consolidation into On-Demand DC footprint Mixed: strategic progress, near-term impairment hit
Salt Life direct-to-consumer expansionRecord sales pace and double-digit growth; retail store buildouts and licensing expansion Expect return to revenue growth in FY2024 driven by higher-margin DTC Positive trajectory
Working capital and debt reductionFocus on inventory and debt reductions; sequential decline in inventory and debt by Q3 Inventory down to $212.4M; net debt down to $165.3M Continued improvement
Interest expense and ratesInterest expense rising, pressuring earnings Interest expense essentially doubled YoY for FY2023 (per CFO remarks) Persistent headwind
Macro demand normalizationHigh retail chain inventories weighed on demand in H1; signs of improvement by Q3 Management sees normalization and improving demand across Delta Direct, Global Brands, Retail Direct as spring season approaches Gradual recovery expected

Management Commentary

  • “Fiscal 2023 was undoubtedly a challenging year… However, it was also a transformative year… we implemented a number of needle-moving initiatives across our business that set the stage for significant operational improvement.” — Robert W. Humphreys, CEO .
  • “We expect to generate meaningful long-term savings and efficiencies from our streamlined offshore platform and the further consolidation of our digital print operations into our nationwide ‘On-Demand DC’ footprint…” — Robert W. Humphreys .
  • “We saw encouraging indications… elevated cotton pricing and demand destruction… are receding… moving into a more normalized operating environment… For FY2024, we anticipate net sales in a range of $410 to $425 million… operating profit margins of 3.25% to 4.25%…” — Robert W. Humphreys (Q3 press release) .
  • “Our Salt Life business continues to capitalize on the growing popularity of its lifestyle brand… double-digit increases across branded retail and eCommerce channels…” — Robert W. Humphreys (Q2 press release) .

Q&A Highlights

  • CFO highlighted the non-cash DTG2Go goodwill impairment of $9.2M and the use of adjusted metrics to reflect production curtailment, cotton, and strategic action impacts .
  • Working capital execution emphasized: inventory down $47M sequentially; net debt down ~15% vs March 2023; availability at $14.2M despite higher interest expense .
  • Management reiterated FY2024 exit trajectory with sequential margin improvement and back-half growth, underpinned by normalization in retail inventories and demand .

Estimates Context

  • S&P Global (Capital IQ) Wall Street consensus was unavailable due to missing mapping for DLA in our SPGI CIQ company map; as a result, we cannot anchor to SPGI for Q4 estimates (unavailable) [SpgiEstimatesError].
  • Third-party reporting indicated an EPS beat versus expectations: adjusted EPS of -$0.72 vs consensus -$0.80; revenue miss with $91.4M reported .
MetricQ4 2023 ActualQ4 2023 Consensus (SPGI)Note
Primary EPS ($USD)-$0.72 (adjusted) UnavailableSPGI mapping unavailable
Revenue ($USD Billions)$0.091 UnavailableSPGI mapping unavailable

Key Takeaways for Investors

  • Sequential recovery path remains intact but from a lower base: guidance lowered for FY2024 net sales and operating margin, yet management expects margin improvement and back-half growth as cotton/demand normalize .
  • Balance sheet actions are working: continued inventory and net debt reductions provide flexibility to navigate a higher-rate environment; watch cash and revolver liquidity into spring season .
  • Salt Life is the bright spot: stable >50% gross margins and DTC-led growth plans should support mix improvements; monitor wholesale normalization and retail store productivity .
  • DTG2Go near-term reset: impairment underscores challenges, but consolidation and proprietary innovations (order portal) could re-accelerate as on-demand adoption rises .
  • Delta Group profitability is the swing factor: adjusted margins improved vs GAAP, but sustained demand recovery is necessary to lift EBIT and EPS; track production cadence and cotton basis costs .
  • Interest expense is a material headwind: rates essentially doubled FY interest burden; deleveraging and inventory turns are critical to protect earnings power .
  • Near-term trading lens: potential for relief rallies on evidence of demand normalization (Retail Direct, Delta Direct) and signs of adjusted margin expansion; downside if FY2024 margin trajectory stalls or DTG2Go underperforms .