Delta Apparel Would Gain From Retaining Its Salt Life Business Than By Selling, Says Analyst

Telsey Advisory Group analyst Dala Telsey reiterated a Moderate Risk rating on the shares of Delta Apparel Inc DLA with an unchanged price target of $10.

DLA announced receiving an unsolicited offer for its Salt Life business yesterday.

When DLA acquired Salt Life in 2013, it was a small regional brand with a primarily wholesale business, noted the analyst.

Since then, the company has grown the brand to $60 million in sales last year and grown its total DTC offering (retail and e-commerce) to 28% of sales as of FY22.

Salt Life has been an important growth driver for DLA, with topline revenue growth of 33.9% in FY21 and 20.7% in FY22 before slowing to 4.0% on an LTM basis as a result of moderated tourist travel and slower wholesale ordering, opined the analyst.

The analyst is not surprised to see the company’s interest in Salt Life, given its strong lifestyle brand appeal and topline and margin expansion potential.

However, given what the analyst sees as its long-term runway for growth and scale opportunity, the analyst is of the view that DLA can realize greater ultimate shareholder value creation by retaining ownership of the brand rather than selling it at this early stage of its maturity profile.

The analyst is convinced that DLA is strengthening its business model and taking the right steps to reduce production, remove additional overhead costs and improve working capital.

Also, DTG2Go and Salt Life appear to have the ability to drive topline growth in the upcoming fiscal year, noted the analyst.

However, the analyst cautioned that the macro headwinds impacting earnings are expected to continue into next year before the model can return to top line growth in the back half.

Price Action: DLA shares are trading higher by 30% at $8.57 on the last check Tuesday.