Yet Another Value Podcast - Chris Lee discusses his winning stock pitch on $DLA

Episode Date: November 4, 2022

Chris Lee, a MBA student who won the Dorsey Stock Pitch Competition, comes on the podcast to discuss his winning pitch for Delta Apparel (DLA). Chris's winning pitch: https://dorseystockpitchcompetition.substack.com/p/long-delta-apparel-dla?utm_source=substack&utm_campaign=post_embed&utm_medium=web  Chapters  0:00 Intro  2:30 Chris's background  4:45 DLA overview  10:20 DLA's valuation  13:40 Returns on capital and competition  17:35 DLA's Fanatics partnership  23:10 The Salt Life Brand  27:30 Is this the right management team for Salt Life?  32:30 End game for Salt Life  34:50 Lack of disclosure worries  41:20 Why is this company public?  43:40 Closing thoughts

This episode is sponsored by TIGIS. Understanding expert insights is table stakes for investors today, and there's no better option than TIGUS. I've been using them for years to get up to speed on companies, and they've helped me immensely as an investor. Teagis also recently acquired both BAM SEC and Canales, adding a super fast way to access SEC filings and earning calls via BAM FCC, and offering access to more than 4,000 fully driveable financial models with Camelis. TIGIS is well on their way to building a full suite

of research products that can displace the legacy terminal providers like CAPIQ and FACSET. And I'd encourage you to check them out if you hadn't recently. They're moving incredibly quickly with many new features and datasets. As a bonus note, blog readers will know that I run a monthly, well actually buy monthly deep dive series sponsored by TIGAS. In them, I go deep into industries and companies with fascinating questions using TIGIS expert calls. I'd encourage you to check that out if you're interested in seeing how expert interviews can help you learn more about a company and industry. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this

podcast, it would mean a lot if you could rate, follow, review, subscribe wherever you're watching or listening to it. With me, I'm happy to have Chris Lee. Chris is a student at Duke University, MBA student at Duke. Chris, how's it going? Good, Andrew. Thanks for having me. Hey, Thanks for coming on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true, but that's going to be particularly true today because we're going to be talking about a very small nano-cap stock, 100 to 150 million market cap. So that obviously comes with lots of extra extra equity risk, smaller companies have lots of, it's tougher to get financing, all that type of stuff. So people

should just remember, please do your own research. Nothing on here is financial advice. And then second, and with the pitch for you, my guess, you're coming on because you won the Dorsey stock stock pitch competition, you know, that attracted dozens of pitches from college students all across the country. I thought your pitch was great. Congrats on the win. And, you know, I wanted to highlight some really good work from somebody who's kind of up and coming in the finance world. So when you won it, I talked to Edwin and said, hey, whoever wins, we'll have them on the podcast. So that's it. We're going to dive into your pitch in a second. There'll be a link to that in the show notes if anybody wants to see it. But, you know, since there's a little bit

of a different episode. Why don't you just give a little bit about your background so listeners can get to know you a little bit. Yeah, thanks, Andrew. You know, as MBA student, I didn't realize the competition was primarily undergrad. So like I told you earlier, I kind of just wanted to win the TECA's access, but a little bit about me, MBA student at Duke School Business first year, prior to business school, I was working in a consumer goods industry for a couple different food companies in corporate finance and also did a stint in sales. Outside of kind of that experience, I've always been interested in the stock market. My dad was a, and he kind of taught me young about the market, but it turns out he was kind of more like a day trader, momentum type

guy. So I'm very different than him in terms of my philosophy. But yeah, passionate about finance, passionate about investing. I consider myself kind of an individual investor on the side right now. And I'm primarily focused on small and microcap companies. So Delta, the company will talk about the pitch I wrote. We'll talk about it. It kind of fits that. But yeah, just as an individual investor, you know, have access to management companies of the size

and don't feel like I'm at a disadvantage. In fact, probably actually might even have some info or analytical edges in this space just as an individual. uh but uh yeah that's pretty much kind of a quick feel about me uh looking forward to talk about the company yeah no just two things on that first you know tegis is a spot i know they sponsored edwin's competition and they're they're sponsored this podcast so happy to hear that but when you said i kind of entered the competition just to win the tegis uh just to win the tegis access i was like my god you know

that was the first thing you told me i was like my god this man's an MBA student and that is literally the greatest recruiting catchphrase that I've ever heard. Like, hey, all I want is TIGAS access. If you're looking for fundamental investors, I don't know what is better. And I'm going to make sure to email my contacts over at Tegas and let them use that as a catchphrase going forward if they want to. But all that with the way, let's dive into the company we're going to talk about today. Again, microcaps, everybody should keep that in mind, consider those risks. But the company is Delta Apparel. The ticker there is DLA. I actually, this has been pretty popular in microcap circles.

I've known about this company for a while, but that's neither here or there. I'm going to turn it over to you. You know, what is Delta Apparel and why are they so interesting? Yeah, sure. So Delta Apparel is about $100 million market cap, vertically integrated apparel manufacturer. So apparel manufacturing, a pretty boring business, but there are some interesting segments that I guess get me excited. So essentially, the company has three main business lines.

The first one is Delta Activeware, which is about three-fourths of the revenues currently. But that's kind of your bread and butter basic apparel business, right? Kind of boring. They sell to a diverse set of customers as providing basic active wear. Most of the manufacturing footprint is in Central America as well as the U.S., and it's a very diversified customer base where no customer kind of makes up more than 10%. That's not what gets me excited, but it is a very core part of the business, just, you know, generating the vast majority of the revenues about before. The two more sexier sides of the company would be, first is DTG to Go, which is a digital printing business.

And so essentially, what Delta, the capability they have is they can partner with, with, brands and manufacturers to provide a digital print service. So what this basically means is that instead of having to hold a fiscal inventory of a lot of different skews, they can Delta can print it for you on demand. And they'll integrate with your supply chain. They'll be in your factories. They'll integrate with your e-commerce sites. They'll also ship it to, you know, anywhere in the United States in less than two days.

So this is a business that I believe is misunderstood. Honestly, a lot of it is the way the disclosures they give. It's embedded within Activeware, Delta Activeware and DG are kind of combined the same segment. So that muddies the water a little bit. Secondly, they don't necessarily provide regular disclosures about DTG.

It's been spotty. So it's kind of hard for investors to understand kind of what they grow trajectory looks like, what multiple they should be placed on this business. But medium to long term, the company has said, hey, this is a, you know, 20% plus revenue grower at a 20, 25% eBay margin, which that's like much better, different profile than kind of the boring, right, commoditized, active web business. So that's exciting. The third piece of the business is called Salt Life. So Salt Life is about a little over 10% of the sales. This is a, I guess, regional lifestyle, a brand currently. And so you've probably seen bumper stickers saying, you know, with the Salt Life branding,

if you're driving anyone to South, even in the Midwest or West Coast. And so with Salt Life, you know, they're rapidly expanding their retail footprint. The unit economics are pretty strong at retail. They also have a sizable DPC, e-commerce business. And again, just like DGG to go, it's very margin to creative to the business. And also a business that is, you know, it should command a higher multiple than your kind of commoditized, you commoditized Delta VACAware segment.

So I think what caught my attention is, you know, COVID was a call a catalyst for these guys where people who are buying more, you know, physical goods, right? So obviously that's a good thing, but the valuation where it sits right now, trading about four times forward earnings, trading below tangible book value, which is like $17 a share. I think we're like under 15 today. So I think, you know, unfortunately, I've been long a little bit, you know, earlier. So I'm a little bit of a bad holder right now. I do think it's a very attractive entry point

just because if you think about the long term where this company is going from a commoditized apparel business to one where they should generate, you know, like 40, 45 percent, 40 to 50 percent of their revenues from more attractive, higher RIC businesses, higher businesses that have more remote around either brain. or technical capabilities in digital print.

And so, you know, I, in the pitch, I kind of said, hey, this business to me, you know, deserves to be training at eight times at least, which is kind of an industry multiple. And that puts you at about 35 bucks a share. I think that the value is actually even higher, just given, you know, so life could be worth the entire kind of enterprise value today and things like that. So that's kind of me rambling about why I like the company. No, that was a fantastic overview. And I want to dive into a couple of different things there.

You know, I think you could probably tell I'm going. But let's start with one thing. Just you mentioned the valuation, right? This is trading four or five times forward earnings, which also doubles as about four or five times trailing earnings. It's trading underneath tangible book value. So I do think people need to keep that in mind. You know, a lot of times I'll have people on the podcast and somebody will go into

the comments and say, hey, this company isn't the best business in the world. And the response will be like, yeah, but it's trading at seven times earnings. Like here, you know, it's a below book. It's below. So people need to keep in mind when we're talking about this, like you're really getting paid for. Yeah, it's not the best business in the world, but you're really getting paid that. But just on the valuation, on the book value side, right, $17 per share tangible book. It's actually about $25 or 26, if you include the goodwill there. A lot of the tangible book here is a Counts receivable, which you're fine. Those are generally from very good customers, but a lot of it is inventory, right? You're talking at June 227 million. I believe there's a big buildup as they work towards kind of the summer seasons and the fall seasons, which is the big for the athletic gear side. But 227 million of inventory. Like, how comfortable do you feel that that inventory is like, you know, we just went through 2021 and targets writing off all of their home decor inventory and everything. How confident do you feel on that tangible book value? Yeah, Andrew, that's a great question.

You know, I didn't even mention the book value in my pitch because I didn't want to go down this inventory rabbit hole. But if you think of Delta's inventory, it's mostly blank T-shirts, right? And so, like, this is not like a target, like high fashion or even like medium fashion where the trends go out of style and all of a sudden you got to write down inventory, sell it, you know, fire sale it. These are T-shirts that are literally already have a customer on them. They just need to, you know, do what they need to do, print on them, right? So to me, you know, the inventory is almost like it's pretty, you can think about it more like more liquid than your traditional apparel inventory just because of the nature of what they sell. And even talking with the company, right, like they, a lot of that 200 mil or I think 160 million

dollars in inventory, they already have a home for. So it's kind of already spoken for. It just hasn't been converted into cash. Right. So if you look at their cash balances, it is low, but I like to think for them, you know, this is different than, you know, other apparel companies. But for them, because they're selling blanks, it is more liquid and not prone to kind of write downs as other, you know, clothing businesses. No, that's great. And, you know, I think you mentioned a lot of the inventories, blank t-shirts. And this is going to come out a lot in the pushback. But, when you say a lot of the inventory is blank t-shirts, that's good because it's pretty fungible, right? Like if this company went belly up, you'd have five different companies. Exactly. Oh, blank t-shirts are, so you could probably get close to book.

But the pushback would be, and we're going to talk about this for all the businesses, except for salt life, which is different. But which is okay, cool, they're selling blank t-shirts and DTG go, which is where I really want to spend more time. Yeah, they're doing stuff on demand, reducing them. But they're also just like screen printing for T-shirts and selling them, like, what's the real edge here? this is never going to be a business that is worth more than tangible book or a lot more than tangible book because it is a it's about the most competitive least advantage business I can imagine and you can kind of see this like I was just flipping through the proxy statement the other day so I'm looking over here they they pay awards based on return on capital employed ROCs I believe

what they call it and you know their target to get your bonus is 10% which 10% is fine it's a little bit above the cost of capital like if you're doing that in this industry it's great but it's tough to see how this like you said 10 times earnings 35 37 per share that's two times tangible book 1.5 times goodwill like 1.5 times normal it's tough to see how you get there when you start saying oh they can barely earn above their cost of capital does all that make sense yeah i think it's a very fair fair pushback for sure i think on the legacy kind of activeware business uh there's a couple things i i would mention so so first of all the pandemic exacerbated this, but there is a trend from sourcing from Asia and overseas

and moving that more onshore. And so Delta being, you know, primarily located in Central America and the U.S. have an advantage in terms of near-shoring, right? Because the security that it provides their customers is one, I guess, advantage. The second thing that that this does is Central America labor market is quite good for Delta, you know, through the pandemic, you know, talking to management. It's not like they're having labor shortages. People want to work and they're happy to work at a company at Delta. That's a good job for the workers there. So from a manufacturing standpoint, stability and labor, that those are good, those are good.

Again, not huge advantages, but those are definitely advantages. how it fits with DTG and even Salt Life, kind of the blank business. I will say that the vertical integration in this arena actually does matter. So, you know, the digital print business, right, they're using, they're leveraging the ecosystem of the activeware business and having those, you know, high availability of those blanks they can print on end. And, you know, I don't know the exact numbers, but they've shown over time how most. of the t-shirts they're printing on are internally produced versus outside, right? So it's kind of like they have, there's a little bit of ecosystem effect there. Again, not a huge competitive advantage.

But I will say on the digital print side, if you look at the competitors, it's really like Amazon, you know, has a business that's, you know, it's hard to get a read on, you know, who I guess the. Yeah, shockingly, the Amazon digital t-shirt printing. business isn't exactly the number one thing they're talking about with investors. Exactly. Exactly. Right. But they're kind of seen as the market leader. And DTG is by most accounts, the number two player. Then you have kind of like a lot of different tail competitors, right? So let's think about deciding between going to Amazon and Delta. Well, Amazon's going to have

all your data as a brand. You might not want that, right? They're not vertically integrated, which Delta is, and Delta can still deliver to the U.S. within two days, which is a capability you know, Amazon gets out as well. So I think just look at that landscape, they're positioned okay in that, in that regard. Let's come at, let's actually come at it from a different track, right? Because they've announced two big people who are using their digital print digit, DTG to go or whatever it is. The first one was hot topic, which I was laughing with you earlier. When they announced Hot Topic was their number one client, I was like, okay, cool, there's the real paragon of retail in there. But the second one was Fanatics, right? And anybody who's

studied the sports business or anything knows Fanatics is a multi-billion dollar company. They're eating share like crazy. They took over the tops trading card business. Like this, this is the behemate in sports apparel and sports memory. So that is a real partner. And a big piece of their business is, hey, the Patriots won the Super Bowl, we want to get people Patriots Super Bowl champion T-shirts within 24 hours, right? So you could see how not only is Fanatics a real company, you can see how perfect this is for their business? So can you just walk me through, not the economics of the partnership, but like, why does Fanatics partner with them? What are they doing for Fanatics? How does that, obviously not the economics, because we don't know the

economics, but how does that partnership work? Why would Fanatics choose to work with them versus in-house unit, going with 50 different partners across the country for every local market, all that type of stuff. Yeah, I think DTG offers an end-to-end solution for a company like Fanatics, right? So I'll talk a little about the technology. You know, on the surface, like, it doesn't seem that hard. They buy a digital printer. They print it. They fit full of orders. And, you know, it's pretty much what they do, right? But they've actually worked with the company that, that manufactures these machines. And from what I understand in talking to the company, there is somewhat of a proprietary process where over time, they've worked with that manufacturer and know how to

operate that machine the most efficient manner. Right. So that's some technical know-how that DTG brings. And they've also worked with large customers such as Hot Topic where they, they've been able to integrate in their customer supply chains and kind of fulfill those orders. Right. So fanatics to me, you know, is a little bit of a game changer for the company because actually it's likely going to be the largest customer for Delta Paro as they ramp up. So they only started recently. This Q4, they're on their Q4, which, you know, they're reporting soon this month. You know, it will be the first quarter where they have, you know, a full quarter of Fanatics business in the books. But I think Fanatics, you know, understands that they have

this, Delta has an end-to-solution. They've done it with big customers for big retailers before, and they're building specific capacity and technical processes for Fanatics. So, you know, Cornett, which is a machine, a digital, you know, printing machine manufacturer, widely seen. as the industry leader in garment, digital garment printing, Delta is not using their machines for Fanatics. They had to work with a different company to come up with a process that met kind of requirements that Fanatics had from a quality standpoint. So actually, I do think quality here is a selling point and the fact that they'd be able to do with large customers. So that's kind of a fanatic side. But for Delta, it's great because now you're getting a sports

based customer, high growth that's not as tied to kind of like your traditional fashion cycles, right? So like all end of the year, like holiday rush, right? Fanatics gives them a little bit more diversification in terms of

when the peak time is on, right? So the sporting events have different you know, Super Bowls, different times. It's not all holiday merch season. It could be February and Super Bowl. It's going to be March badness. It's kind of consistent throughout the year. So that's kind of what's in it for Delta. So in many ways, Delta, you know,

tell me if I'm wrong here, but Delta could say, oh, look, obviously we need to stock up for the back-to-school season's going to be massive. The return to team sports is going to be massive for an apparel, athletic apparel focus business. Christmas is going to be massive. But guess what? Fanatics has almost a completely different peak season, right? Super Bowl is obviously their peak. As you said, March madness. You could imagine NBA playoffs, that type of stuff. so hey we've got all this it's not all excess capacity we have to build extra stuff for fanatics we have to go to different markets but in some ways they've already got the capacity this fanatics partnership just lets them kind of smooth it over am i thinking about that correctly yeah i think so

i think they're also you know i did mention they're building specific capacity for fanatics and they're still ramping up and so a lot of the capex i believe it was meant for fanatics and they still have a lot of throughput improvements so they're not even they and they don't even even have all the fanatics business. They don't have a slice of a pie. It's hard to triangulate how much the old tam is, but based on my research and talking to the company, there's a long runway of just fanatics business. So, like, one of the conference calls, you know, I think the CEO mentioned, hey, you know, we're not going to onboarding new customers. And, you know, people started getting worried about that. But like, listen, they have so much, I think what his

point is there's so much fanatics growth alone that that can carry them without kind of onboarding smaller customers. Yep, yep, perfect. Okay. I think that's good on the DTG side. So let's just talk about, I think the interesting piece here is the salt life side, right? Because as you can probably tell, like, I'm a little skeptical of the base business in DTG to go. But again, you're paying under tangible value. So the market's clearly expressing some skepticism. So you don't need things to go swimming there. But salt life is really interesting to me because it is the type of thing that I've seen companies do and incubate. And obviously there's tons and tons of risk there. This is a small brand. I don't want to run too far ahead. There's tons of risk. But

this is the type of thing I've seen companies grow to be a billion dollar brands. It's a hundred million market cap. So I'll pause there. I'm rampant in a little bit. What is salt life and why why am I so interested in the possibilities there? Yeah. So salt life, I mean, if you live under a rock, you never been to a beach, like, you know, then you might not have seen Salt Life. But, I mean, Salt Life essentially is a lifestyle brand that celebrates the outdoors, the fishing, and just be on the beach, right? So different than the rest of the Delta business, it's branded, and they, you know, own their own retail locations. And so what gets me excited is a couple things. First of all, the retail build-out. So they started the year with 13 stores and they're up to like

21 now. And so that's large growth there. But the unit economics are quite, quite strong in terms of the build-out where, you know, they're generating very, I don't have exact numbers for me, but very strong cash on cash returns when they open new stores. And there's plenty of opportunities. in terms of potential locations, right? So this is a brand that's most well known in the southeast, you know, those kind of beach towns, but there's no reason why they can't expand into, you know, on the northeast, west coast,

and things like that. So at 21 stores currently, I mean, you could probably, you know, over a decade five times that number and still not beach saturation. And so currently, you know, This company, sell life on its own to generate around $10 million in EBITDA for FY22. And it's not crazy to kind of assume a seven-day time it's multiple on that, right? It's comparables are in that range.

And so to me, this is kind of a early growth story in terms of the retail build-out, but then also on the e-commerce side, again, margin of creatives to the overall business, leveraging the blank t-shirts from, you know, the Delta Activewear side. So there's definitely a lot of synergies being in the ecosystem. But a decent amount of the revenues will come from e-commerce. And the retail and e-commerce are, like I said, margin of creative to kind of the wholesale business. So a lot to be excited about, but it's mostly kind of like the maybe spin-off potential. they are reporting Sol Life financials separately, and they're doing that on purpose to leave the

door open for something like that. But it's not crazy to say that, you know, Sol Life alone is worth, you know, two-thirds or almost even all of the value today. No, I'm completely with you. Look, this is, this has been, I think, the most interesting part of the story. You know, as you said, it's in the first, in the first nine months of the fiscal year, 46 million. So they're probably going to do. what, 60 million. I think you said it in FY22, about 10 million in EBIT. That's growing really quickly. You know, it's growing 20% plus revenue per year. Margins are expanding as they kind of get over the buildout stores. Like that's the type of thing. You could see it's almost fun with numbers,

right? But two, three more years of 20% growth, all of a sudden you have a hundred million dollar revenue brand doing 20 million plus in EBITDA. Like that's the type of sexy small cap, midcap, growth story. You could see the market getting excited by. You could see a private equity firm getting excited by. You could see a strategic taking out and using it. So that's why it's so interesting to me. And you mentioned like everything you said with margin of creative, all that type of stuff. Like I, I 100% agree. I don't disagree. And I think the backdoor to that is, hey, it's just a better business to own the brand and have like a brand that people are searching for than it is to just produce all these different things. Let me provide some pushback on

something. I think the first pushback would be, look, and this will actually go a little bit into management. This management team has run Delta Life since. I think the CEO has been there since the late 90s. Delta Life IPOed in 2000. The stock hasn't done great, but it hasn't done terrible, right? It's like a 3X since they IPOed. It's actually beat the market since the IPO, though it's pretty much flat over like the

past 15 years or something. But I think the first pushback would be, hey, they're growing this direct-to-consumer lifestyle brand is the CEO who's, run a like on-demand apparel athletic like kind of commodity shop. Is this the right management team and company to build out this lifestyle brand? Yeah, that's a fair pushback. I think so. The company IPO was a spinoff and the CEO's been there ever since then. He owns a sizable percentage of the shares. So I think the first thing I'll say that there's definitely strong alignment with with management there. The CFO is is relatively new. She's been there.

like a little over a year. So it's hard to say kind of what her, how she fits in a longer term. But listen, these, I mean, they're good at what they do in terms of, you know, making blank t-shirts, right? They have separate salt life is run as its own segment. So there's leadership there. I'm not too familiar with whoever heads up that, that division. But I would just say, like for me, I look at more.

execution. So when they started FY22, they said, hey, we're going to build out, you know, seven new stores and they did that, right? So from that standpoint, like, there's no reason for me to doubt their ability to execute. And I think having that experience on the blanks side is beneficial because, you know, they can source a lot of their t-shirts internally, which is a good thing. And it seems like from a store selection standpoint, they are doing a good job picking the right markets, picking the right locations. And so it's kind of like I'm not worried about until something goes wrong. And, you know, in recent history, Salt Lake has been, has been firing all cylinders.

So I just go back to having that alignment with management that helps me sleep a little bit better. But in the past, too, Solite's been trying to do all sorts of different things, make sunglasses and things like that. It's like, listen, you guys are good at selling your birthday. brand, opening stores, selling the apparel. Like, just focus on that. I think they're doing that. Yeah, no, look, I definitely hear you there. I'm laughing at the sunglasses because they're selling $300 sunglasses, which I get

you're a lifestyle brand, but you're selling, if I remember correctly, the shirts are like $25. Yeah. With $300 sunglasses, with $300 sunglasses, it doesn't really make a lot of sense to me on that dimension. It doesn't match up. Yeah. no it's really interesting you know i think of this almost i don't know if they're still a popular

brand but i remember back when i was like kind of just coming out of college or stuff everybody talked about the life is good company do you know them yeah i'm familiar with them um the the comparables i had in mind were like tombie bahama and vineyard vines which are like you know they're doing like half a billion in sales or more than that so to me i don't know what life is good sales numbers are but there's no reason like sold life in my opinion can't be you know something like that in the half billion range longer term yeah I mean two million decals have been sold so there's cars well you know two million cars in the United States rolling around these decals and they definitely punch above their way in terms of the social media following uh so I definitely think this is like a regional to national story maybe even international

I did think vineyard vines when I was looking at this company as well but you know vineyard vines is like a little more upscale and the funny thing so there salt life isn't going to be more upscale but the funny thing is I was going to say and vineyard vines is bigger it's like yeah they're bigger because they grew and they like expanded into lots of little different things that's what salt life could do over time though you know at the same time the beach lifestyle like I'll wear it on the podcast. You can wear it casually, but I don't know if it has quite as many, like, growth opportunities as Vineyard Vines, which, you know, people started using some of them for like a lot more occasions. But yeah, look, I think it's a really interesting company. One of the

things I love, if you go on the website, all the male models they use are like, they're actual guys, right? Like, I'm sure they are models, but it's a middle-aged man who, you know, he's in okay shape, but it's not like he's sporting a 17 pack or something. There's, there's another guy who's got a little bit of a gut, but it just looks like the people who are actually using the product, which I think is like kind of interesting for authenticity and everything. Anything else we should be talking about on Salt Life? No, I think we covered that one pretty well. Obviously, they report it as a separate segment. I think it's really early. They're growing stores. You know, I'd almost like to see them grow the store base a little bit faster and lean into that.

but what do you think the end game for SaltLife is? Like there's three options, right? Salt Life grows 20% per year for the next five years and it becomes bigger than the Delta brand and they resegment themselves as, you know, like Monster Energy Drink used to be a different company and then Monster grew so big, they rebranded themselves Monster. Like Salt Lake grows so big, they rebrand the whole thing Salt Life. Option number two, they sell it to someone in a few years or option number three. They spin it out.

And obviously all of these are assuming it's successful. Which one of those three do you think would be the most likely? That's tough. I mean, I think a spinoff or sale makes sense to me. I guess as a shareholder, that probably those two options would probably unlock the most value. On the flip side, though, I do think like there is a benefit to being in the, I guess, Delta apparel ecosystem just from a blank t-shirt standpoint. So I honestly have no. I don't have any, like, unique point of view on this.

I do think the spin-off and the sale would unlock value. And so I guess I am more rooting for that, but I see the other side. You're a true, a true investor, rooting for it. You know what, it'd be nice to take the mark. Let's sell this. Exactly. I like it. Just two more things that kind of came up when I was researching these guys.

We just talked a lot about how they do a lot of disclosure around Salt Life. And when you mentioned the DTG to go or whatever, you said, hey, they don't really provide disclosures. And one of the things I was impressed with your write-up is you went through a lot of old things they said. You know, I think you had something at the 2020 annual meeting. They gave a little bit of just, you use that to kind of back into the revenues for DTG. But, you know, I look at the company and say, okay, well, they know to disclose a lot of stuff on salt life so people can start valuing that. And they're really cagey on the disclosure on this high growth business that they think they're, you know, they're going to grow rapidly, they're taking sure with Benatics. When I see a company being cagey around disclosures

with a segment like that, the first thing that passed in mind is, oh, the economics of this segment are really bad. They know it and they're trying to kind of hide the ball from investors. It just goes back to the worry I originally had there, but I just wanted to expand on that a little bit and give you a chance to kind of comment on that. Yeah, I think it's fair and it's a frustration I know other investors have that they've kind of brought up the company. But I think, so I think that the long and short of it is basically they were disclosing the revenues and rough margins or targeted margins when things were going well, which was kind of like 17 through 20. And then based on like piecing things together, either from, you know, transcripts, old disclosures, old investor decks, talking to other investors, I believe that the revenue actually dropped in FY21. And so obviously you might not want to disclose a high growth segment that's all of a sudden, you know, facing tough comps and had a down here, right?

The second piece is on the profitability, I do think like the fanatics ramp up is hurting margins. And this is not something that they're being a cagey about the, you know, CEO Bob mentioned on the call, the last conference called say, hey, listen, like we're running at like essentially a flat, break-even operating income margin. But once all this, you know, once we ramp up our throughput, which they can increase like 40% or, you know, higher on the fan addicts line, they're going to get in line with kind of like 15% operating profit margins and closely, you know, 20% deep margins. So I think it's a combo of basically like DGG did have a down year in 21 and that our profit short term. profitability concerns, but in my opinion, those are, will be alleviated once, you know, they exit kind of a startup phase. But yeah, listen, I like, talk of professional investors and they can't piece, like, I asked them, hey, what's, what numbers you got for

DG? And they're like, oh, let me live on those. I don't have it. Like, so there are people that own the stock that don't even know, like, the revenues by year for this segment, right? Which is kind of scary. But, but like you said, if this is a high growth segment that can, can do 20% plus, 25% even the margins long term and should on a normalized environment be grown 15 to 25%. Listen, that multiple is much more than what the legacy business deserves.

And so I think if they want to realize that value of this segment, they have to do a better job with their disclosures. And I think the new CFO recognizes that and they're adding a little bit more in their SEC filings, but it needs to be consistent So hopefully next year we'll see some more information on that. But yeah, it's definitely an issue.

Perfect. And then last question I just want to talk about. I know you've talked to management a little bit, it sounds like. But I just wanted to ask out management because it's, they seem good to me, right? Like obviously I think seeding salt life, which as you can tell, that's what I'm most excited about, I think has the most potential getting through COVID and a kind of commodity business that has some leverage. like I think all that speaks really well to them.

But there has been a little bit of hiding the ball with the margins as we just discussed. The CEO, as I mentioned, he's been here for 20 years. The stock's flat over the past 10 years. You know, it's a hundred million market cap company. I did, they are a little promotional. I think as you mentioned, you're right up. There's only one analyst covering them, but it's a sponsored analyst, which is always a little bit of a red flag for me. And they did, I was just flipping through their website and their investor

where he went on the TD Ameritrade Network to talk about Delta a couple months ago, which there's nothing wrong with that, but the host clearly had no clue who Delta was. And they were just like, you're an apparel company. Tell us about inflation and consumer and didn't ask about Delta once, which it just, you know, it just screams me a little bit of a company that's trying to be promotional. And I just wanted to discuss that. I don't want to say red flag, but it was a little bit to me.

It's funny you say that because I actually have. have the opposite view. I don't think they're promotional at all because, so the analyst coverage, I mean, listen, no one's going to cover these guys, right? So like the sponsored research, you know, it gives you a little bit of attention. I don't think that's necessarily something you can knock them on. I think historically the last couple of years, they do like one conference a year, the ICR and West Coast in Q1, and that's pretty much it. So it's not like they're hitting the microcap, all the conferences, and doing all that kind of stuff, right? The TD Ameritrade one is interesting because that kind of was a step out of what they normally

do from an outreach standpoint. If you listen to the interview, though, the guy could be, he was not, he didn't say anything that investors, you know, would have taken as bullish because they were talking, the conversations focused on inflation and passing through pricing. So, like, I was excited when he went on because, hey, you know, any, getting the word out on this name is good, but, like, he didn't say anything that could be construed as bullish, in my opinion. So, and that was the first kind of retail outreach. I was, I mean, it's a retail focused, uh, oriented platform, right? Um, so. I don't, I'm with, I'm with you because the The TD Ameritrade thing, like, look, you get, it's a professional network. It's a professional

anchor. Like, obviously, it's not CNBC or something, but they invite you to come on. You know, most people are going to take up that invite, so it's hard. Just when I watched it, I was like, oh, no, the anchor did no work on the company. So it's more than them, but it's just like kind of built into that thing. So let me just one more point of pushback here, right? Like, it's a hundred million market company. As you even said, hey, they have one analyst. It's a sponsor analyst, but that's because no other analyst is going to care about 100 billion market cap company, which my answer, yes. But at the same time, you're a $100 million market cap company, you're doing a stock

road show every year, or a stock conference, one or two every year, you're doing four earnings calls, you're paying for a sponsored research. And most people estimate the cost of being a public company, a million to $2 million per year. Like, you throw it all together and it's like, hey, why are these guys public? Why don't they just go private, sell themselves to private equity, management, take, right? whatever it is, and spend that, let's say it's $2 million all in public company cost for the public company cost, the accounting and the sponsor research they're doing, plus the management time.

Take that $2 million and throw it back into Salt Life. Take that $2 million and put it out to dividends to your new private owners. Like, I don't care, but just why, you know, why? Yeah, you know, I don't have a great answer for that, but I will say there will be value that's unlocked if they are sold to a larger company, right? So I think, like, the competitors in the space, they see, you know, the digital printing capabilities that's attractive. They see a fast-growing brand that's attractive. So, I mean, I guess when you put it that, I've never thought about it this way in terms of the cost you mentioned, which is why I don't think they're a promotional company.

But when you frame it the way you did, I understand kind of where you're coming from. Hey, look, this isn't a Delta specific thing, though the sponsored research, it does take a different angle. but this is the question I ask every two or three hundred million market gap company, right? Like, why? If you're spending $3 million per year and you're a $300 million market gap, just go private and put that money in your pocket or something, you know? Yeah, I think, you know, one potential catalyst is the CEO is getting older. And he, you know, like he's a career industry guy, you know, when he wants, I mean,

there's probably a point where he wants to exit and the private equity exit is one that I think, could or hopefully would unlock value all true and if i remember correctly i'm trying to flip through the proxy real quickly as we talk he owns like six or seven percent of the company here in six point one percent of them which uh you know when the stock was at 30 that was real real money there right now that it's at 15 it's a lot of money but it's not quite as real money but if you think it's worth 30 in a sale that that's real money real value unlock maybe split the company up into sell the commodity business to one person, sell the salt life sides, the other. You could imagine a lot of value unlocked there,

mint a pretty penny and keep all that public company costs in your pocket instead of paying it out to a bunch of different people providers. Chris, I think this has been great. I always like to ask before we wrap up, anything that we didn't hit that you think we should have been talking about, anything we kind of glanced over, you think we should hit harder? Yeah, I just kind of reiterate some of the key points I made, because I don't know if we touch on all of them,

But the first one is that, you know, obviously, inflation is on everybody's mind, right? This is a, like you said, commodity consumer discussion. Cotton inflation has been a big driver here. Cotton inflation has been a big driver here. So one of my points in the write-up was that, listen, like, kind inflation was terrible this year. Essentially, they're short cotton in perpetuity, right? But even with that, like, listen, the FY22, they are probably going to finish with

the highest operating margins in, you know, recent history for the company. And if you take a look at the chart and cotton, it's obviously come down quite a bit since the peak. The second thing, we kind of touched on it with the fanatics, you know, essentially DTG is running at flat operating profit margins. That will go back up to 15% once the ramp up happens. So that was one of my points, just given, you know, how much more room they have on the throughput improvements, what they can do without spending a lot of money. But long term, and we touched on this throughout the conversations, like, listen, this company is going from a very boring one, where they generate, you know, 75% of revenues from a legacy commoditized activeware business

to one where, you know, in the near and long term, about half. of the revenues will be DTG and Salt Life. And so with that, you have better or, you know, investment, internal investment opportunities to have more of a moat. So DTG, I mentioned, there is a technology moat and being vertically integrated helps them. And in Salt Life, it's a well-known brand,

so there's a moat around that, right? Those that, as that mix changes long term, you know, I feel like it deserves a higher multiple as a result of that. So those were the three kind of key points in my write-up. I think things like trading below tangible book value, trading of four times earnings,

so like potentially being the biggest, you know, worth the entire market cap today, potential spin-off, like those are all kind of cherries on top. This is a very cheap stock, and it's not that crappy of a business. If you think about the medium long term of potential. That's another

slogan I can take for many portfolio companies that I own or look at. It's not that crappy of a bit. It's not that crappy. And there's alignment with management in terms of ownership. So, you know, that's the board. Well, Chris Lee, really appreciate you coming on the podcast. Look,

again, Chris's MBA at Duke first year. So anybody who wants to read his write up, get in touch with them. I'm going to include a link to the stock pitch that won the stock competition in the show notes. So anybody can go on there. His email is right at the top of it so you can easily reach out to him on that. So, Chris, thanks so much for coming on and looking forward to chatting soon. Thanks, Andrew. Hell out of fun. Thanks for

going easy on me. I don't think I did, but you did great. Thanks for that. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you. Thank you. Thank you. Thank you.

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