Superior Group of Companies, Inc. (NASDAQ:SGC) Q1 2023 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q1 2023 Earnings Call Transcript May 8, 2023

Superior Group of Companies, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.14.

Operator: Good afternoon, everyone. Welcome to the Superior Group of Companies First Quarter 2023 Conference Call. With us today are Michael Benstock, the company’s Chief Executive Officer; and Mike Koempel, the Chief Financial Officer. As a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding the company’s plan initiatives and strategies and the anticipated financial performance of the company including, but not limited to, sales and revenue. Such statements are based upon management’s current expectations, projections, estimates and assumptions. Words such as expect, believe, anticipate, think, outlook, hope and variations are such words and similar expressions identify such forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties are further disclosed in the company’s periodic filings with the Securities and Exchange Commission including, but not limited to, the company’s most recent annual report on Form 10-K and the quarterly reports on Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements contained herein, expect — except as required by law.

And now I would like to turn the call over to Mr. Michael Benstock.

Michael Benstock: Thank you, operator, for the introduction, and I’d like to welcome everyone to our call today. I’ll start by reviewing our first quarter highlights, including the performance for each of our 3 business segments. During the discussion, I’ll also provide updated thoughts on the evolving macro environment and our strategy to more profitably grow the business. I’ll then turn the call over to Mike, who will take us through the first quarter results in more detail and discuss our 2023 outlook. We’ll then open it up for Q&A. Consolidated revenues were $131 million relative to $144 million a year ago, and our consolidated EBITDA was $7 million, down from $10 million in the prior year quarter. We view this overall performance as consistent with both our expectations and messaging on our last call with respect to the softness we anticipate and still anticipate in the first half of this year.

It is also reflective of the continued strategic investments we’re making to tap into the attractive addressable markets across all 3 of our business segments. Starting with Healthcare Apparel, which includes the brands under CID Resources and Fashion Seal Healthcare first quarter revenues of $28 million compared to $31 million in the prior year first quarter as conditions across the healthcare market remains subdued. EBITDA came in at $1.6 million, which was down from $2.9 million a year earlier, primarily due to a combination of the lower revenues and gross margin rate pressure. As mentioned in March, we are focused on achieving better inventory equilibrium by the end of this year through already significantly reduced purchasing and a more disciplined inventory approach.

Our strategy for Healthcare Apparel centers around capturing market share well beyond the 2 million caregivers who already wear our brands every day. Healthcare Apparel is a large and growing addressable market, and we are increasing our focus on digital growth. On that point, we soft launched our own direct-to-consumer website featuring our Wink product line few weeks ago, which has more than met our initial expectations. Over time, our direct-to-consumer strategy will nicely complement our omnichannel approach, driving higher consumer awareness and engagement with our brands. In the coming weeks, we expect to launch a new B2B website to our wholesale accounts to make their engagement with us even more efficient. We’re confident in the attractive long-term prospects for Healthcare Apparel with stronger year-over-year results anticipated in the second half.

Photo by Vadim Bozhko on Unsplash

Turning to Branded Products, our largest segment, revenues of $82 million during the first quarter compared to $97 million a year ago. Again, this is in line with the outlook we described last quarter with the cloudy economic environment suppressing demand. EBITDA decreased during the quarter to $7.5 million from $8 million in the prior year period due to the sales decline. Notwithstanding near-term economic challenges, our plan is to continue expanding our less than 2% market share in this $26 billion marketplace. Contact Centers, our highest margin segment, continues to generate robust top line growth. Revenues of $22 million were up 23% over the prior year first quarter, slightly above the fourth quarter growth rate. The pipeline for new customers remains strong as the Contact Center segment onboarded the same number of new customers during the first quarter of this year as we did for all of last year.

While revenues remained strong, first quarter EBITDA of $2.8 million was down from $4.8 million in the prior year period, due to a combination of higher labor costs negatively impacting gross margins and our continued investment in talent, technology and infrastructure. Moving forward during the year, a combination of price increases, some of which were already implemented in March and cost reductions, of which most have already been implemented as well, are expected to improve profitability towards achieving a normalized annual EBITDA margin approaching 19% to 20%. Strategically, we continue to see The Office Gurus as having significant growth potential with high margins and a large addressable market. With that, I’m going to turn it over to Mike for additional detail on our financial results and our 2023 outlook.

Mike?

Michael Koempel: Thank you, Michael, and we appreciate everyone being on the call today. Overall, the first quarter was as expected. Consolidated revenues of $131 million compared to $144 million in the prior year first quarter, and our gross margin improved to 36%, which was up from 34.7%. The expansion of our overall gross margin was driven by favorable pricing and customer mix shift within Branded Products, our largest segment, as well as the Contact Center segment, our highest margin segment, becoming a larger portion of the overall revenue mix. While the overall gross margin rate was up, the Contact Center’s gross margin rate declined during the first quarter due to increased labor costs that were only partially offset by price increases implemented later in the first quarter, as Michael mentioned.

Our first quarter SG&A expense of $43 million or 33.2% of sales was up from $42 million or 29.4% of sales in the prior year first quarter. While SG&A expenses were down year-over-year for both the Healthcare Apparel and Branded Products segments due in part to successful cost reduction actions, the SG&A rate was up due to deleveraging on the sales declines in both segments. Contact Centers drove the overall increase in SG&A expenses, reflecting the investments in talent, technology and infrastructure to enhance future growth. I should note that while Contact Center SG&A expense was up year-over-year, the level of spending was fairly consistent with recent quarters. Interest expense for the quarter was $2.6 million, up from approximately $300,000 a year earlier, primarily due to higher interest rates and, to a lesser extent, higher average debt outstanding.

Net income for the quarter was approximately $900,000 or $0.06 per diluted share as compared to net income of $5.2 million or $0.32 per diluted share in the prior year quarter. Let’s turn to the balance sheet and an update on our covenant compliance. We ended the first quarter with cash and cash equivalents of approximately $27 million, up from $18 million at the end of 2022. The increase in cash was driven by our focus on driving significant free cash flow, lowering working capital and reducing capital expenditures. As a result, our first quarter net leverage ratio was 3.83x our trailing 12-month covenant EBITDA, which is within our required covenant ratio of less than 4x. While we are currently in compliance, as I mentioned on our last call, it is more likely than not that we will exceed our maximum net leverage covenant ratio during 2023.

As a result, we executed an amendment to our credit agreement, which temporarily increases our maximum net leverage ratio to 4.8x and 4.5x covenant EBITDA for the second and third quarters, respectively. We will continue to focus on cash flow enhancement by improving our working capital position, particularly by optimizing our inventory levels within our Healthcare Apparel segment as well as scrutinizing our operating expenses and capital expenditures. I’ll wrap up with a reiteration of the outlook we provided for full year 2023 on our last call. On a consolidated basis, we continue to look for full year sales of $585 million to $595 million, up from $579 million last year, and earnings per diluted share of $0.92 to $0.97, up from adjusted earnings per diluted share of $0.62 last year.

More specifically, for Healthcare Apparel, we continue to expect low single-digit sales growth that gradually improved throughout the year as inventory levels and customer demand return to normalized levels. For Branded Products, we now expect a flat to mid-single-digit sales decline, again, with meaningful improvement during the second half of the year. And for Contact Centers, we continue to expect strong double-digit sales growth with the strong profitability of this segment enhancing our overall margins. As referenced last quarter, these segment-by-segment expectations for improvement should result in consolidated financial performance this year that is back-end loaded and our strategic plan to capitalize on the large addressable markets for each of our 3 business segments should drive significant shareholder value creation over time.

With that, operator, Michael and I will be happy to take questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Mitra Ramgopal with Sidoti.

Operator: Our next question comes from Kevin Steinke with Barrington Research.

Operator: I turn the call — the question over to Tim Moore with EF Hutton.

Operator: This concludes the question-and-answer session, and I would like to turn the call back over to Michael Benstock for closing remarks.

Michael Benstock: All right. Thank you again, operator. As we progressed while navigating some pretty uncertain times, what you need to know is that our team is extremely energized. I hope you’re feeling that on the call about the opportunities ahead and the investments we’re making to drive growth and future profitability. Thank you, everyone, for joining us. We look forward to updating you again on our next call. And please don’t hesitate to reach out with any questions. Thanks again.