August 20, 2023
From the company’s website:
“Delta Apparel, Inc., along with its operating subsidiaries, DTG2Go, LLC, Salt Life, LLC, and M.J. Soffe, LLC, is a vertically-integrated, international apparel company that designs, manufactures, sources, and markets a diverse portfolio of core activewear and lifestyle apparel products under the primary brands of Salt Life®, Soffe®, and Delta… The Company specializes in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military, and through its business-to-business e-commerce sites. The Company’s products are also made available direct-to-consumer on its websites… as well as through its branded retail stores.”
I first wrote about Delta Apparel (DLA) here: https://boolefund.com/case-study-delta-apparel-dla/
At the time, the stock was at $30.01. We ended up selling most of our position at $28-29 (after having bought at $15.26).
Since then, the stock has declined over 75% to today’s $7.40. The company is in the process of reducing its inventory to pay off debt. This means the recent results have been poor and the next couple of quarters will also be rough.
Delta Apparel has two segments: Salt Life and the Delta Group.
Salt Life is a very popular brand in the Southeast U.S. Many people who love the outdoors, including the ocean, love the Salt Life brand. In 2022, Salt Life had sales of $60 million with operating income of $8.2 million. Also, the brand grew its number of stores at a healthy clip. There is much room for the Salt Life brand to grow. According to a writeup on Value Investors Club, the Salt Life brand could reach $500 million in sales, like Tommy Bahama.
Here is the writeup on Value Investors Club: https://valueinvestorsclub.com/idea/Delta_Apparel_/1415242928
The Delta Group includes two different businesses: a commoditized active wear business and a specialized digital printing business, DTG2GO. In a normal year, the active wear business generates $320 million in sales with an operating margin of 6-7%.
DTG2GO is a market leader in the direct-to-garment digital print and fulfillment industry, bringing technology to the supply chain of its customers. DTG2GO uses proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of the customer. DTG2GO has sales of $60 million with an operating margin of around 15%. DTG2GO does digital printing for companies including Fanatics and Redbubble. Fanatics, a $30 billion private company, stopped in-house printing and fulfillment, and has outsourced them to DTG2GO.
Important Note: Digital impressions are about 2% of total graphic impressions on clothing. There is huge room for growth here. Digital printing will allow almost any retailer to lower costs, reduce inventory, increase selection, and speed up delivery times.
Here are the normalized figures for Delta Apparel: EBITDA is $60 million, net income is $30 million, cash flow is $95 million, and revenue is $440 million.
The market cap is $51.9 million, while the enterprise value (EV) is $273.7 million.
Here are the multiples for Delta Apparel:
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- EV/EBITDA = 4.56
- P/E = 1.73
- P/B = 0.31
- P/CF = 0.55
- P/S = 0.12
Delta Apparel has a Piotroski F-Score of 6, which is decent. This will likely begin to improve some time next year, after the company has reduced its inventory and debt.
We measure debt levels by looking at total liabilities (TL) to total assets (TA). DLA has TL/TA of 64.7%, which is OK. The company is in the process of paying down its debt.
Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. At DLA, insider ownership is approximately 16%. This is good.
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- Low case: The stock could decline 50% during a bear market or recession.
- Mid case: The company should trade for a P/E of at least 10 based on normalized earnings of $30 million. That would be a market cap of $300 million, or a stock price of $42.86. That is 480% higher than today’s $7.40.
- High case: Normalized earnings could reach $40 million. With a P/E of 12, that would be a market cap of $480 million, or a stock price of $68.57. That is over 825% higher than today’s $7.40.
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: https://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
If you are interested in finding out more, please e-mail me or leave a comment.
My e-mail: jb@boolefund.com
Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.