The US-based Delta Apparel, a casual and athletic wear company, is the most affected by current macroeconomic conditions.NYSE:DLAIt would be (). Its recent results for the first The company mentioned rising costs as a result of persistently high inflation numbers, and weakness in demand which are also explained by subdued economic development. Its financial results have been poor in the quarter ending December 31, 2022.
What do the stock movements tell us?
This does not mean that the US company, which produces blank apparel under Delta Group as well as lifestyle apparel under Salt Life branding, should be ignored. The ratio of its GAAP price to earnings (P/E), for the trailing 12 months, shows that it stands at 6.4x. This is significantly less than the 14.5x figure for the whole consumer discretionary industry.
This indicates that there is a possibility that its stock price might have overcorrected despite the fact that it has actually risen year-to-date, by 4.5%, and by more than the S&P 500 (SP500) (see chart below). But its performance is still underwhelming compared to the 9.65% increase in the S&P 500 consumer discretionary index. Even though the sector index dropped 24%, the stock fell by more than 61% in the past year.
This is where I look closely at the financials of the company to determine if it has the potential to increase its stock price in the future.
The company
Delta Apparel operates in a rapidly growing market. The US market for athletic wear is worth USD 8-10 billion. Global growth is predicted to be 6%-7% in the next ten years. The company had a 11% increase in revenue for FY22. This was clear evidence that it was doing well sales-wise and was profitable up until recently. However, the stock price movement shows that this is only part of the story.
Recent performance is poor
Its most recent earnings release provides some insight into why this might be so. As demand declined for mass retail supply chain, the company’s Q1 FY23 sales fell by 3%. For context, 87.6% came from its Delta Group segment, where a lot of its sales come from the wholesale business. The rest comes from its retail and online operations (see table below).
Its direct-to garment printing business DTG2go as well as Salt Life brand saw significant growth, with their respective sales increasing by 20% & 17% respectively. Salt Life has seen a lot of positive growth. It is a small percentage of overall company revenue at 12.4%, but it is encouraging. These segments provided a positive impetus but it was not enough for overall sales growth.
However, the company saw an increase in costs partly due to new store openings and also because its profits shrank due to the higher cost of raw materials like cotton. Its gross margin decreased sharply to 12.7%, from 20.8% last year. It also suffered an operating loss.
Potential positive developments
However, the company could see a turnaround going forward. First, if inflation continues to rise as expected, the company’s cost numbers will likely look better through 2023. This could improve its profitability. The company also has a number of initiatives that could improve its financials by increasing revenue and reducing costs.
Delta Apparel will reduce its dependence upon textile fabrics from outside suppliers and expand existing facilities to lower costs. It plans to move some of its production from Mexico to Central America. It is also looking at improving labour efficiency, which could lead to higher production at a lower cost. These measures are expected to lead to savings of USD 6 million per year, which represents 7.4% of the operating costs of FY22.
Its other initiatives include increasing pricing for blank garments and print services. This will help to pass on costs and increase revenue. It is noteworthy that Delta Apparel has set a goal to reduce inventory, given the 41.4% increase of inventory levels in Q1 FY23 over the same period last year. It is especially important because its quick ratio of 1.9x looks stretched. This ratio was already high in Q1 FY22. However, it is now lower at 1.4x.
Stock assessment
These numbers show why Delta Apparel isn’t a favorite among investors right now. This makes it appear risky given its falling sales, losses and increasing inventories. Even so, the company’s 6.4x ratio P/E, despite reporting losses for two quarters now, seems quite low. Its price to sales (P/S), at 0.2x, is comparable to the sector’s at 0.8x. This makes it competitive. However, it is not competitive for the wrong reasons.
What’s next?
I believe the company has the potential to perform better in improved macroeconomic conditions. The company’s results for the last year show this. Its balance sheet is also in good shape, even with increased debt. It is possible that the stock would rise if there were improved growth numbers or inflation. The economy is unlikely to improve in 2023. In fact, it’s looking to be quite opposite. There are more risks of recession and even though inflation is on the decline, it remains to see when the interest rate rises will end.
For the moment, I wouldn’t buy the stock. It isn’t a sell, but it isn’t a lose cause. In other words, it isn’t a company in trouble right now. It is best to wait and see.
Editor’s Note – This article includes one or more microcap stocks. These stocks come with risks.