Delta Apparel (DLA) is a vertically integrated apparel company that is composed of three segments: a manufacturer of basic and private labels, apparel brands, and most recently a Direct to Garment (DTG) fulfiller for brands and retailers. DLA has leveraged its competitive advantages from being a vertically integrated apparel company towards DTG so that it can supply printed custom shirts to brands and retailers in a faster and cheaper fashion than competitors. Given the rapid rise of DTG and DLA’s competitive position in this industry, DLA has about one hundred percent upside from its current levels.
Background
DLA’s core business that it has operated in for the last two decades revolved around selling basic and private label apparel to screen printers and retailers. This has been met with mediocre success as these industries have been commoditized by much larger players. So what’s changed? For the last 9 years, DLA has been leveraging its relationships and supply chain to become the only vertically integrated digital to garment player- named DTG2GO (direct to garment to go). Vertically integrated means they manufacture their shirts (done in Central America), they can distribute them, and they can digitally print on them. DTG2Go provides the full stack: the technology, personnel, quality control, equipment, blank apparel, and experience to be able to offer this service at the cheapest price in the fastest time. DLA has been growing this segment organically at about a 25% CAGR for the last four years.
DLA is catering to the retail sector (direct to retail) and brands to fulfill their DtG needs. DLA currently has about 70 Atlas Printers (a little over a 100k prints per day capacity) and 9 fulfillment centers throughout the USA-enough to offer two-day shipping anywhere.
What is DTG?
Digital to Garment printing is printing designs on t shirts. You insert a blank t shirt into the printer, enter in the design digitally that you want and voila, outcomes a t shirt with art on it. Before DTG printing, screen printing was the primary method of imprinting designs. Screen printing is labor and time-intensive (with extremely long setup times) and as a result is only economical when producing large bulk orders. Digital printing is a technological leap forward and is orders of magnitude faster and less labor intensive. DTG favors smaller orders and more time constrained operations. We expect printing capability will continue to improve and take share from screen printing for the foreseeable future.
Currently, the largest player in the DTG space is Printful– recently valued at over 1B. Printful is more geared for the individual creator as opposed to retailers or brands. It does this by connecting people’s custom design apparel to the various marketplace (eg Shopify, Amazon), making it extremely easy for someone to sell even one article, there is no minimum size order. In this interview, the founder of Printful states their avg order size placed on their website is for only two pieces of apparel! Printful is not vertically integrated which puts them at the mercy of large private apparel companies such as Gildan along with having a higher price point as they have to purchase from wholesaler distributors. Although an apples-to-apples comparison is hard as they have different margins and Printful does not manufacture their apparel, by earnings Printful is about 3-4x larger than DLA’s DGT division. Amazon Merch is also a large player (size of Printful). Amazon Merch competes more with Printful than DLA as the former two go after individuals and not brands and retailers. Retailers and Brands are less willing to list their products on Amazon as Amazon has a habit of competing with the most successful products.
So how large is the DTG space and how much bigger can it get? The market size of digital printing is currently a little more than 500 mm dollars, or about 2% of all graphic impressions. The TAM and share will only be increased as digital printing becomes better with time, printing capabilities are expanded (replacing antiquated methods such as heat transfer and embroidery), and the convenience is increased. This industry is projected to grow at about a ten percent CAGR (seen below) for the foreseeable future.
DTG2GO
Delta Apparel’s DTG segment focuses on brands and retailers instead of individuals. Why would brands and retailers use this service? First DTG allows retailers and brands to carry less inventory- why bother carrying inventory and tie up working capital when you can get what you need on demand? The reason for this is traditional screen printing is only economical with large bulk orders, this is not needed with modern day DTG printing. The slide below shows how much waste is produced from retailers carrying large inventories. With today’s green consumerism rapidly changing, and competition from dominant emerging apparel companies such as Shein, retailers, and brands face an existential threat and need to become more efficient and nimble.
Although DTG printing is not the most complex process, DLA has had about a decade head-start to automate the process from taking the order to having it printed. The automation of nuances such as printing on different thickness shirts and material blends has been gained through years of experience. In addition, the operation of DTG printers takes time to learn and that skillset drastically increases/decreases the run time of the printers. Less run time equates to less profitability.
“So today, for example, the Atlases can run at above 100 impressions per hour. But the limitation of running constantly 100 impressions or above per hour on the Atlas is actually the operator” – Kornit conference call Q1 2020
Volume and inventory turnover is the name of the game and new entrants would have to scale up to DLAs size while having to learn by trial and error. Not insurmountable but certainly no picnic either. DLA in their DTG offers “blank” apparel cheaper as they manufacture it and distribute it at cost whereas middlemen such as Printful have to buy from distributors who have a 5-15% markup. 50% of Delta Apparel’s DTG apparel is from their own manufacturing sites. This is up from 7% a couple of years ago as customers have seen the cost advantage and quicker fill times and decide to go with DLA apparel. The map below shows DLA’s distribution and manufacturing footprint. This allows them to sell at a cheaper price (about 40-60 cents per shirt) than competitors and take advantage of economies of scale to lower their manufacturing costs per unit. So even though Delta Apparel sells their apparel at cost on their DTG side, they still benefit from fixed cost dilution at their manufacturing sites.
“So, in fact we actually make more money off of a Delta garment, even sharing the benefits with the customer and have a higher profitability within our business.”
DLA is also able to partner up with brands and retailers easier as these relationships have already been formed through their other business segments. DLA can leverage these pre-existing relationships to fulfill the DTG needs of brands and retailers. A recent partnership with Hot Topic highlights this. DLA will integrate their DTG fulfillment with Hot Topic’s distribution center showcases the growing interest in this space. It is important to note that Hot Topic is owned by Sycamore Partners, a private equity firm specializing in apparel brands. This is to say that a deal with DLA was likely assessed on financial merit and deemed profitable, giving DLA’s DTG offering social proof. It will be interesting to see how this unfolds.
“the big things we also have is – we’ve been an apparel supplier for a very long time. We have relationships as a trusted partner to a vast number of customers …. So as they enter a new marketplace, we are a trusted partner for them…we are a strategic supply chain partner not only to brands but also direct-to-retail” – Mar 2020 Conf Call
DLA is also working on lowering the activation energy for retailers and brands to embrace DTG by providing tools such as Autoscale AI. The purpose of this acquisition was to offer retailers and brands an automated solution for the designing and selling of DTG garments. It is hard to identify if this will represent an inflection point in demand however we know that the more convenient DLA makes DTG for retail, the more they increase their TAM.
Other DLA Segments
About 65% of DLA’s revenue comes from its basic apparel (sells blank shirts to screen printers) and private label segment (sells to retailers and brands). The basic apparel segment has been growing at about a 5% CAGR for the last decade albeit at a gross margin of about 8-10%. This segment mostly competes on price and DLA is smaller than the larger dogs in this space, Gildan and Hanes, hence the lower margin profile.
The other 15% of DLA’s revenue comes from its brands- Soffee and Salt Life. Soffee has seen mediocre results and calling it a brand is a stretch. Salt Life on the other hand seems to be gaining traction. Salt Life has grown at about a 13% CAGR for the last seven years since it was acquired and is the closest thing DLA has to a brand. It also commands the highest gross margins out of DLA’s segments at above 20%. Salt Life brings in about 50mm in revenue and DLA expects EBIT to be around 10mm in a couple of years.
A look below at the entries and exits DLA has had in several “brands” shows how hard the apparel business is. DLA has attempted to make several brands but they have been met with failure and they have sold the majority of brands they bought a few years later. Unless DLA gets lucky and hits the jackpot, brands will not be the reason for DLA’s success.
Catalysts and Tailwinds
1. DTG printing capabilities will continue to increase, increasing the efficiency and profitability of DTG. DTG printing will only get better with time. Kornit (the largest manufacturer of DTG printers) is already going after new markets such as the embroidery and sports apparel markets. We suspect as manufacturing capabilities get commoditized and cheaper, the surplus will accrue to players such as DLA and Printful. Who will commoditize their complement will be interesting to see play out.
2.Larger apparel manufacturers (Gildan, Hanes) or other e-commerce players such as Walmart or Target could acquire DLA as the DTG space gets larger. Currently Amazon Merch is the only large e-commerce player that has DTG capabilities, think Amazon web services for DTG.
3. The following trends are also in DLA’s favor: immediate gratification (speed to consumer favoring DLA’s distribution network which also helps reduce shipping costs), green consumerism (DTG is far and away better than traditional screen printing in terms of environmental impact), shorter product lifespans (ever-changing consumer expectations), and casualization (work from home).
Risks and Headwinds
1.Gildan or another large apparel manufacturer could decide to get into the DTG, undercutting the price advantage DLA currently has. We ascribe a low risk to this as Gildan has just gotten rid of their distribution channels and sell primarily to wholesalers, it would be significantly easier to buy out DLA than reconstruct what they have. One gets the manufacturing, distribution, operational experience, and hardware- DLA has spent roughly 50mm on DTG printers.
2.Large customers (retailers) can enter the space instead of outsourcing to DLA. This is possible however volume is the name of the game otherwise the profitability is not there. DLA can aggregate customers’ demand whereas retailers/brands cannot. This is a risk however it is much further down the line.
3. The biggest risk to DLA’s direct-to-garment segment is product-market fit- screen printing is much more economical with large orders > 1000. DTG printing is the much better option for smaller orders (Printful’s avg order size is 2 shirts!) and hence why it has given rise to the individual artist. However, DLA’s customers are all large players (retailers and brands) and their order size will be much bigger. It seems DLA is aiming for the sweet spot between 100-1000 units per order. Time will tell how large this TAM is.
Valuation
DLA makes about 400mm in revenue per year. About 25% of this is from the DTG segment, 60% is from their basic apparel segment, and the other 15% is from their “brands”. The lion’s share of DLA’s valuation is from their growing DTG segment. Given its margins (about 15%) and a 20% CAGR, it should be throwing off about 25mm in cash by the end of 2023.
DLA’s other segments (basic apparel and brands) combined will be throwing off about 24mm in cash by end of 2023. These are with conservative assumptions- basic apparel grows at 4% with gross margins of around 7%. We have their brands growing at around 10% with around 12% gross margins.
As for DLA’s balance sheet, the 100+ mm in debt DLA has is negated by its inventory. The debt supports the inventory (blank apparel that has little write-down risk), as it is primarily blank t-shirts and similar apparel that are quickly sold (inventory turnover is about 2x per year). The low-risk nature of this debt is recognized by banks and DLA currently has a revolver with Wells Fargo at an interest rate of 2.9%.
After factoring in operating lease expenses and growth capex to the tune of about 20mm per year, DLA’s EBIT will be about 30mm by 2024, putting it around 6x 2023 EBIT. Given the stability of its basic apparel segment and its brands, we do not see a significant downside to DLA but we do see significant upside if DLA captures more of the growing DTG industry. We believe fair value should be more than $50/share, almost a double from today’s price.
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