Superior Group of Companies, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Market Conditions: Modest improvement in customer hesitancy, but uncertainty remains around inflation, interest rates, and tariffs. Branded Products managed ambiguity by taking market share and negotiating cost relief.
• Financial Highlights: Consolidated revenue grew over 9% year-over-year. Net income per diluted share was $0.10. Strong balance sheet with $21 million in cash and cash equivalents, and shares repurchased during the quarter.
• Segment Details:
  • Branded Products: Pipeline and order backlog strong, sales team winning new accounts.
  • Health Care Apparel: Investing in digital channels and growing Wink and Carhartt licensed brands.
  • Contact Center: Impacted by a solar customer bankruptcy and slower decision-making, but pipeline is full.
• Cost Management: Launched expense reduction initiative, seeing benefits in SG&A.

Segment Performance:

• Branded Products: Grew 14% year-over-year. Gross margin improved 100 basis points to 35.6%, SG&A rate improved to 27.5%, and EBITDA was $9 million, up from $6.7 million in the prior year. It remains a large segment with strong pipeline and backlog.
• Health Care Apparel: Grew 6% year-over-year. Gross margin was 35.5%, down from 38.4% due to higher COGS, but SG&A was 35.7% of sales, 150 basis points better than the prior year. EBITDA was $800,000, down slightly from $1.3 million.
• Contact Center: Revenue declined 3% year-over-year. Gross margin was 52.6%, up 40 basis points, but SG&A was 48.4% due to a credit loss reserve from a solar customer bankruptcy. EBITDA was $1.6 million, down from $3.2 million.

Guidance:

• Full-year revenue expected in the range of $550 million to $575 million, suggesting year-over-year growth at the high end of about 2%. Unchanged from prior quarter.

Risks:

• Macro uncertainties including inflation, interest rates, and tariffs.
• Impact of customer bankruptcies, such as the solar customer in the contact center.
• Uncertainty in decision-making from prospective customers in the contact center.

Q: Nice to hear you guys a lot more upbeat than you were last quarter. So congrats on the quarter. Just wanted to zero in on the SG&A a little bit. I see as a percentage of revenue that it is down nicely sequentially and year-over-year. But on a gross dollar basis, it's up, and I'm guessing it's up driven by the higher revenues. So I was just wondering if you might be able to help us kind of quantify as a percentage like what percentage of SG&A is tied to increases and decreases in sales and kind of what percentage is more kind of fixed recurring type costs?

A: Sure. I would just call out, Dave, from -- as we mentioned in our prepared remarks, within SG&A for the quarter, so our SG&A is $52.2 million for the quarter. That does include $1.8 million of credit loss reserves charges. So more like onetime charges. So if you were to take that out, our SG&A would have been about 35% of sales. So even better leverage for the quarter relative to those sales that we drove for the quarter. So again, we would have had a much, much better rate there. Commissions, particularly within the Branded Products segment are variable, and they are included within G&A. And we've got some other variable expenses related to sales, obviously. But again, by and large, with that -- with those credit loss charges this quarter, that's what kind of impeded some of the otherwise strong improvement in G&A that we would have realized.

Q: A lot of talk this quarter on different conference calls and different industries about the impacts of AI on business. I'm trying to understand if there are any opportunities for Superior Group to take advantage of AI, perhaps to reduce costs in some of the business lines. Could you just talk about what those opportunities might be?

A: Yes. It's a long conversation. I'm going to try to get through it quickly. I'll speak to our contact centers in particular, but then jump over to some of the other businesses. We are employing AI in every facet of our contact centers, talent acquisition and development, onboarding people, enabling agents to build confidence readiness before even reaching the production floor. In our sales and marketing enablement, we've -- in identifying high-value prospects, optimizing outreach strategies, really contributing to a more target efficient go-to-market approach using AI. We have a product called Guru Assist that basically does real-time next best action guidance to agents on the phone, improves their accuracy, the average handle time and customer satisfaction, which makes our customer particularly pleased because it's a much more efficient process for them. In addition to that, we've got insights from AI and reporting from AI that's enhanced our ability to really be a whole lot more effective in our business. Our clients are reporting measurable improvements in interaction quality, effectiveness and overall customer experience, and we're seeing our satisfaction scores, which were already high, even higher than ever. Then you go and you jump into Jake's business. I'll let Jake jump in since he's on the call and tell you what we're doing in our branded products business and...

Q: My question is going to be on everyone's favorite topic, tariffs. I was wondering if you guys saw any customer pull forward related to tariffs this quarter? And then also what you're seeing in inventory because I see you had a little bit of a build.

A: Yes, Keegan, this is Jay Kimelstein. I'll start there with what I'm seeing in the Branded Products segment. Certainly, from a tariff perspective, there -- it puts some cost pressures and supply chain challenges around the business. I think that with some of the more recent deals that have happened from the U.S. with like China and Vietnam, it's eased a little bit of that pressure. We've responded to these tariffs with very strategic inventory buys, leveraging long-term supplier relationships, leaning on our suppliers to get better pricing in some cases. And the beauty of the Branded Products business is the vast majority of it is made to order, meaning the orders come in and we price them to order. And so if there are tariffs there, we will add in that tariff cost and for the most part, be able to pass it through to our clients. So while certainly tariffs are a headwind, we've been very proactive, and we've been able to kind of use it as a competitive advantage in the environment. Our competition shockingly has basically buried their head in the sand the last 4 or 5 months on the tariff side. And we've been very aggressive doubling down, picking up new clients, picking up new sales reps from some of our competitors. And it's kind of been our MO throughout our history is that when things are challenging, when there's a difficult economic environment, we get more aggressive, and it's been really beneficial for us.

Q: I just wanted to dig a little bit more into the strong growth in branded products and just kind of a portion, the drivers of that. You talked about market share gains. I think you also mentioned timing of orders, maybe an improvement in terms of customer sentiment. So I just -- if you could talk about really, is that most of that growth driven by the market share gains, like you said, competitors really pulling back or have customers have become more comfortable with moving forward in this environment despite some of the uncertainties?

A: Kevin, this is Jake. I'm happy to talk about that. It is really a combination of all of those things. And last quarter, we talked about how pipeline and backlog were extremely strong. And so even in spite of the tariff environment, we saw that pipeline and backlog and knew that was going to pull through. And sure enough, it did. And we've been really happy with that -- with those gains. And our pipeline still remains very healthy, continue to see a lot of organic expansion with some of those key enterprise accounts, particularly on the tech side that I spoke about earlier. But yes, look, we did have some Q2 pull forward some orders that were maybe going to deliver later in the year that pulled forward. A lot of this was potentially looking at tariffs and trying to pull orders a little bit earlier. But really, that's in my view, a testament to the strength of our operations team and being able to pull orders in the second quarter. But I still think we're going to have a really solid second half of the year. Things look very strong, pipeline, backlog, both very, very encouraging. And yes, we're starting to see those decisions open up again where people were very apprehensive in the second quarter because of the tariffs. Starting now into the third quarter, we've seen really encouraging signs of momentum from our clients across all industries.

Q: So Mike, you called out that $1.8 million of credit loss reserve, which would bring your SG&A down to the around 35%. Is that a good metric for the end of the year? Do you think SG&A right around 35% is realistic?

A: I think that's a reasonable target, Jim. I mean, obviously, it depends on where we fall into that range. But I think when you take into account the cost reductions that we talked about in the first quarter call, that have begun to kick in during the second quarter. Obviously, we'll see more of a benefit of that going forward. That should enable us to get overall a little bit of leverage for the full year.

Q: And you also mentioned that the 3-point acquisition was starting to contribute to branded products. Are there other 3 points out there? And how aggressive are you at this point on the acquisition side?

A: I can take that one. This is Jake. Yes. There are -- look, there are 25,000 companies in our industry that are distributors just like us, Jim. So there are quite a few other 3 points out there. I would say at this point, we're opportunistic. If there's a great opportunity out there, we'll certainly look at it, but we're going to kiss a lot of frogs. We're going to talk to a lot of companies that are not the right fit, and we will be very selective to find the right ones. But the easy answer to the question is that there are a lot of companies just like 3 Point out there that have owners that are aging out that want to look for an exit, and we are a very appealing landing spot for them.

Q: So Mike, you called out that $1.8 million of credit loss reserve, which would bring your SG&A down to the around 35%. Is that a good metric for the end of the year? Do you think SG&A right around 35% is realistic?

A: I think that's a reasonable target, Jim. I mean, obviously, it depends on where we fall into that range. But I think when you take into account the cost reductions that we talked about in the first quarter call, that have begun to kick in during the second quarter. Obviously, we'll see more of a benefit of that going forward. That should enable us to get overall a little bit of leverage for the full year.

Q: And you also mentioned that the 3-point acquisition was starting to contribute to branded products. Are there other 3 points out there? And how aggressive are you at this point on the acquisition side?

A: I can take that one. This is Jake. Yes. There are -- look, there are 25,000 companies in our industry that are distributors just like us, Jim. So there are quite a few other 3 points out there. I would say at this point, we're opportunistic. If there's a great opportunity out there, we'll certainly look at it, but we're going to kiss a lot of frogs. We're going to talk to a lot of companies that are not the right fit, and we will be very selective to find the right ones. But the easy answer to the question is that there are a lot of companies just like 3 Point out there that have owners that are aging out that want to look for an exit, and we are a very appealing landing spot for them.

Q: So in the last call, you indicated that there would be some mitigation efforts to offset tariffs. And I know we talked a lot about tariffs, including the prospect of manufacturers taking a portion of the tariff impact. Can you just add a little color on how those mitigation efforts went? Have all of those mitigation efforts been implemented at this point? And were there price increases already factored into the second quarter?

A: I'll start with the last portion of that price increases mostly kick in during the third quarter, the very end of second quarter, some of them, most of the third quarter. As far as the mitigation activities, we were successful in what we contemplated we would be able to push back and adjusted our pricing to our customers accordingly, not trying to take unfair advantage of them. But we feel like we've landed in a really good place. And from a competitive standpoint, I don't want to get too specific about what we did. But I feel we're in very good stead. And really, I believe that going forward, we protected our margins pretty much.

Q: And it seems like you're pretty sanguine about the outlook. But obviously, given where the trend lines are, you're still a little cautious about the second half. Is that largely because it seems at least that the tariff impact largely would fall in the second half, right? Because most lead times and shipping and things like that probably wouldn't affect the second quarter as much as it probably would like maybe the third quarter or the fourth quarter. I was just wondering if you can just discuss those mitigation efforts as it might impact the margins. And I know you talked a little bit about SG&A, but I was just wondering where is the sense of caution that you have? Is it on the margin? Or is it on the revenue side as we kind of look towards the second half?

A: Yes. If you take the first half of the third quarter of this year, very little impact from margins, except in Jake's business, of course, on the branded merchandise side of this business, a lot of ad hoc orders there that we already price in the tariffs into every single order as they come up. But remember, we're keeping for the most part, 6 -- at least 6 months of inventory on the shelf. And so the impact to our -- most of our inventory is still sitting on the shelf at pre-tariff ranges. And -- but we'll start seeing some impact in the fourth quarter, although the fourth quarter is usually from the uniform side of the business is probably a slower quarter for us. Most retailers are more focused on driving their sales in the fourth quarter and spending money on new uniforms. So I don't think tariffs are going to play a huge part in the second half of this year. We have raised prices to the extent we thought they would and kind of spread it out over the second half of the year. And we'll look at it again next year to see if we need to raise prices yet again. It's a very fluid situation. Generally, we have to give 90 days notice to most of our customers on raising prices. And we get to the end of this year, and we feel we need to do another price raise, we will.

Q: And then in terms of the call centers, what would -- and maybe you may have said this, and I apologize, what was the impact from the solar company in terms of revenue? What was the revenue impact in the second quarter?

A: The revenue impact in the second quarter was relatively small. We started to pull back on that particular customer. We'll be transitioning out of that customer over time. But the impact in Q2, the biggest impact was, again, the credit loss that we had to take on prior services. But we continue to service them post petition, albeit at a smaller scale. So again, some impact, but not major. The impact will be felt more significantly from a revenue standpoint as we move forward.

Q: Can you kind of quantify what that revenue impact might be going forward? And it seems like just from your commentary, you anticipate maybe the third quarter still to be down maybe in the fourth quarter to be up given the pipeline that you have? Or maybe you can just clarify that.

A: I mean, I can't give specific on specific revenue by customer. But I would say that as we look at the contact center forecast for the balance of the year, certainly, there's a headwind, if you will, associated with the bankruptcy. But as Michael alluded to, the team is working to convert what's sitting in the pipeline as quickly as possible. Again, a lot of that might -- will generate revenues next year, but there's also certainly the possibility that the conversion of that pipeline could offset some of that softness here in the third and partially in the fourth quarter.