Chris Lee discusses his winning stock pitch on $DLA (podcast #134)
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).
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Transcript begins below
Andrew Walker: 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, and subscribe to it wherever you're watching or listening to it. With me, I'm happy to have Chris Lee. Chris is a student at Duke University and an MBA student there. Chris, how's it going?
Chris Lee: Good, Andrew. Thanks for having me.
Andrew: 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- dollar market cap. So that obviously comes with lots of extra risks, liquidity risk, it's tougher to get financing, and all that type of stuff. So people should just remember, please do your own research. Nothing on here is financial advice.
And then second, with the pitch for you, my guest, you're coming on because you won the Dorsey Stock Pitch Competition. That attracted dozens of pitches from college students all across the country. I thought your pitch was great. Congrats on the win. I wanted to highlight it as some really good work from somebody who's kind of up and coming in the finance world. 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 pitching for a second. There'll be a link to that in the show notes for anybody who wants to see it, but 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?
Chris: Yeah. Thanks, Andrew. You know, [inaudible] I didn't realize the competition primarily in undergrad, so like I told you earlier, I kind of just wanted to win the TICAS access. But a little bit about me, an MBA student at the Duke Fuqua School of Business, first year. Prior to business school, I was working in the consumer goods industry for a couple different food companies in corporate finance and also doing statement sales. Outside of that experience, I've always been interested in the stock market. My dad taught me young about the market, but it turns out he was more of a day trader momentum type guy, so I'm very different from him in terms of my philosophy.
But yeah, passion about finance, passion about investing. I consider myself kind of an individual investor on the side right now, and I'm primarily focused on small and micro-cap companies. So Delta, the company. We'll talk about the pitch I wrote. It kind of fits that. But yeah, just as an individual investor. I have access to management companies at the sides and don't feel like I'm at a disadvantage. In fact, I actually might even have some of the info or analytical edges in this space just as an individual. But yeah, that's pretty much kind of a quick spiel about me. Looking forward to talking about the company.
Andrew: Just two things on that: First, I know TICAS sponsored Edwin's competition and their response to this podcast, so I'm happy to hear that. But when you said you kind of entered the competition just to win the TICAS access, that was the first thing you told me, and 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 TICAS access. If you're looking for fun, [inaudible] investors." I don't know what's better, and I'm going to make sure to email my contacts over at TICAS and let them use that as a catchphrase going forward if they want to.
But all that into [inaudible], let's dive into the company we're going to talk about today. Again, micro-caps. Everyone should keep that in mind and consider those risks. But the company is Delta Apparel. The ticker there is DLA. Actually, this has been pretty popular in micro-cap circles. I've known about this company for a while, but that's neither here nor there. I'm going to turn it over to you. What is Delta Apparel? And why are they so interesting?
Chris: Yeah, sure. So Delta Apparel is about a $100 million market-cap and is a vertically integrated apparel manufacturer. Apparel manufacturing is 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 Activewear, 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 it to a diverse set of customers, providing basic activewear. Most of the manufacturing footprint is in Central America as well as the US, 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 generating the vast majority of the revenues, about three-fourths.
The 2 sexier sides of the company would be: first is DTG2Go, which is a digital printing business. And so essentially, what capability Delta have is making partner with brands and manufacturers to provide a digital print service. So what this basically means is that instead of having to hold physical inventory of a lot of different skews, 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 eCommerce sites; and they'll also ship them to anyone in the United States in less than 2 days.
This is a business that I believe is misunderstood. Honestly, a lot of it is the way the company, the disclosures they give, are embedded within Delta Activewear and DTG, which are kind of combined in 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 what the growth trajectory looks like and what multiple they should be placing on this business. But medium- to long-term, the company has said, "Hey, this is a 20% plus of revenue grow[?] at a 25% little bit more," so that's much a better different profile than kind of the boring commoditized activewear business. So that's exciting.
The third piece of the business is called Salt Life. Salt Life accounts for about a little over 10% of the sales. This is, I guess, a regional lifestyle brand currently. You've probably seen bumper stickers with sayings with the Salt Life branding if you drive anywhere to South, even in the Midwest or on the West Coast. With Salt Life, they're rapidly expanding their retail footprint. The unit economics are pretty strong at retail. They also have a sizable DTC e-commerce business. And again, just like DTG2Go, it's very margin-accretive to the business, and also a business that should command a higher multiple, then you kind of commoditize Delta Activewear segment. So I think what caught my attention is that COVID was called a catalyst for these guys, where people are buying more real, physical goods.
So obviously that's a good thing, but the valuation where it sits right now, trading about 4 times, forward earnings trading below tangible book value, which is like $17 a share, I think we're at under 15 today. Unfortunately, I've been long a little bit earlier, so I'm a little bit of a bag holder right now, but I do think it's a very attractive entrypoint. Because if you think about the long-term, this company is going from a commoditized apparel business to one where they should generate 40% to 50% of their revenues from more attractive, higher ROIC businesses, businesses that have more of a moat around them, either in terms of branding or technical capabilities and digital print.
In the pitch, I kind of said, "Hey, this business, to me, deserves to be trading at 8 times at least." It was just kind of an industry multiple, and that puts you at about 35 bucks a share. But I think the value is actually even higher, given that Salt Life could be worth the entire enterprise value today and things like that. So that's kind of me rambling about why I like the company.
Andrew: No, that was a fantastic overview, and I want to dive into a couple of different things there. I think you could probably tell where I'm going, but let's start with one thing. You mentioned the valuation, right? The striking 4 or 5 times forward earnings, which also doubles as about 4 or 5 times trailing earnings. It's trading below its tangible book value. So I do think people need to keep that in mind. 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 their response will be like, "Yeah, but it's trading at 7 times earnings." Here, it's below book. So people need to keep in mind. 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, so $17 per share in tangible book. It's actually about 25 or 26, if you include the goodwill there. A lot of the tangible book here is accounts receivable, which is fine. Those are generally from very good customers, but a lot of it is inventory. You're talking about at June, it has 227 million. And I believe there's a big build-up as they work towards the summer and fall seasons, which are big for the athletic gear side. But 227 million of inventory. How comfortable do you feel with that inventory? We just went through 2021 and Target is writing off all of their home decor inventory and everything. How confident do you feel about that tangible book value?
Chris: Yeah, Andrew, that's a great question. 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. This is not like a Target high-fashion or even medium-fashion where the trends go out of style and also got to write down inventory, sell it, or fire-sale it. These are T-shirts that literally already have a customer on them. They just need to do what they need to do and print on them.
So to me, the inventory is almost like it's... You can think about it like more liquid than your traditional apparel inventory, just because of the nature of what they sell. I even talked with the company. A lot of that, 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. So if you look at their cash balances, they are low. But I like to think that for them, this is different than other apparel companies. But for them, because they're selling blanks, it is more liquid and not as prone to write-downs as other clothing businesses.
Andrew: No, that's great. I think you mentioned that a lot of the inventory is blank T-shirts, and this is going to come out a lot in the pushback, but when you say that 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 5 different companies that would be like, "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 pushback will be okay, cool.
They're selling blank T-shirts in DTG2Go, which is where I really want to spend more time. Yeah, they're doing stuff on demand, but they're also just screen printing T-shirts and selling them. What's the real edge here? This is never going to be a business that is worth more than the tangible book or a lot more than the tangible book because it's about the most competitive, least advantaged business I can imagine, and you can kind of see this. I was just flipping through the proxy statement the other day. So I'm looking over here.
They pay awards based on return on capital employed, or ROCs is I believe what they call it, and their target to get your bonus is 10%. Ten percent is fine. It's a little bit above the cost of capital. 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, 1.5 times normal book. 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?
Chris: Yeah, I think it's a very bare pushback, for sure. I think on the legacy activewear business. There is a couple of things I would mention. 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 primarily located in Central America and the U.S. has an advantage in terms of nearshoring, because the security that it provides their customers is one, I guess, advantage.
The second thing that this does is that the Central America labor market is quite good for Delta through the pandemic in talking about the management. It's not like they're having labor shortages. People wanted to work, and they're happy to work at Delta. That's a good job for the workers there. So from a manufacturer standpoint, stability and labor are good. Again, not huge advantages, but they are definitely advantages. How it fits with DTG and even with Salt Life blank business, I will say that the vertical integration in this arena actually does matter.
So the digital print business, they're leveraging the ecosystem of the activewear business and having high availability of those blanks they can print on. I don't know the exact numbers, but they've shown over time how most of the T-shirts they're printing on or internally produced versus outside. So it's kind of like there's a little bit of an ecosystem effect there. Again, not a huge competitive advantage, but I will say that on the digital print side, if you look at the competitors, it's really like Amazon has a business that's it's hard to get a read on who I guess the [crosstalk]
Andrew: Yeah, shockingly, the Amazon digital T-shirt printing business isn't exactly the number one thing they're talking about with investors.
Chris: Exactly, exactly. 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. So let's think about deciding between going on Amazon or Delta. Well, Amazon's going to have all your data as a brand, and you might not want that, right? They're not vertically integrated, which Delta is, and Delta can still deliver to the US within 2 days, which is a capability Amazon picked out as well. So I think just looking at the landscape, they're positioned okay in that regard.
Andrew: Let's actually come at it from a different track because they've announced two big people who are using their digital print budget, DTG2Go or whatever it is. The first one was Hot Topic, about 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 retelling there. But the second one was Fanatics. Anyone who's studied the sports business or anything knows that Fanatics is a multi-billion dollar company. They're eating share like crazy. They took over the top's trading card business. This is the behemoth of sports apparel and sports memoirs.
So that is a real partner. 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." So you could see how not only is Fanatics a real company, but you could see how perfect this is for their business. So can you just walk me through, not the economics of the partnership, but why does Fanatics partner with them? What are they doing for Fanatics? 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-housing it, and going with 50 different partners across the country for every local market, all that type of stuff?
Chris: Yeah, I think DTG offers an end-to-end solution for a company like Fanatics. So talking about technology, on the surface, it doesn't seem that hard. They buy a digital printer, they print it, they fulfill orders, and that's pretty much what they do. But they've actually worked with the company 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 in the most efficient manner. So there's some technical know-how that DTG brings, and they've also worked with large customers such as Hot Topic, where they've been able to integrate into their customers' supply chains and fulfill those orders.
So Fanatics to me is a little bit of a game-changer for the company because, actually, it's likely going to be the largest customer for Delta Apparel as they ramp up. They only started recently. Their Q4, which they're assuming to report this month, will be the first quarter where they have a full quarter of Fanatics business in the books. But I think Fanatics understands that Delta has an intense solution. They've done it with big customers for big retailers before, and they're building specific capacity and technical processes for Fanatics.
Coordinate, which is a digital printing machine manufacturer, is widely seen as the industry leader in digital garment printing. Delta's not using their machines for Fanatics. They had to work with a different company that came up with a process that met the requirements that Fanatics had from a quality standpoint. So actually, I do think quality here is a selling point, as is the fact that they've been able to do it with large customers. So that's kind of Fanatics side.
But for Delta, it's great because now you're getting a sports-based customer high growth that's not as tied to your traditional fashion cycles and all end-of-the-year holiday rush. Fanatics gives them a little bit more diversification in terms of when the peak time is all right. So the sporting events have different Super Bowls. It's not all holiday mercies. It could be February the Super Bowl, or could be March Madness. It's kind of consistent throughout the year, so that's kind of what's in it for Delta.
Andrew: So in many ways, 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, which is going to be massive, the returns to team sports is going to be massive for athletic-apparel focus business, and Christmas is going to be massive." But guess what? Fanatics has almost a completely different peak season, right? The Super Bowl is obviously their peak. As you said, March Madness. You could have imagined NBA playoffs, that type of stuff. So, 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 already have the capacity. This Fanatics partnership just lets them kind of smooth it over. Am I thinking about that correctly?
Chris: Yeah, I think so. 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, was meant for Fanatics, and they still have a lot of full[?] player improvement. They don't even have all the Fanatics business. They don't have a slice of pie. It's hard to triangulate how much the full-time is. But based on my research and following the company, there's a long runway of just Fanatics business. On one of the conference calls, I think the CEO mentioned, "Hey, we're not going to onboard new customers," and people started getting worried about that, but listen, they have so much. I think what his point is that there's so much Fanatics growth alone that can carry them without onboarding smaller customers.
Andrew: Yep, yep, perfect. Okay, I think it's good on the DTG side. Let's just talk about—I think the interesting piece here is the Salt Life side. Because, as you can probably tell, I'm a little skeptical of the base business in DTG2Go. But again, your pain is about the under tangible book value, so the market is clearly experiencing 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 are tons of [inaudible]. But this is the type of thing I've seen companies grow to be billion-dollar brands; it's a hundred million market-cap. I'll pause there. I'm ramping a little bit. What is Salt Life? Why am I so interested in the possibilities there?
Chris: Yeah, so Salt Life. I mean, if you live under a rock and have never been to a beach, then you might not have seen Salt Life. I mean, Salt Life is essentially a lifestyle brand that celebrates the outdoors, fishing, and just being on the beach. It's different than the rest of the Delta business; it's branded, and they own their own retail locations. And so what gets me excited is a couple things.
First of all, the retail buildout. So they started the year with 13 stores, and they're up to 21 now. That's a large growth there. But the unit economics are quite strong in terms of the buildout, where 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 are plenty of opportunities in terms of potential locations. So this is a brand that's most well-known in the Southeast, those beach towns, but there's no reason why they can't expand into it all in the north east, on the west coast, and things like that.
So at 21 stores currently, you could probably, over a decade, have 5 times that number and still not reach saturation. Currently, Salt Life on its own generates around 10 million in EBITDA for FY 22. And it's not crazy to kind of assume a seven-day times multiple on that. Its comparables were in that range. And so to me, this is kind of an early growth story in terms of the retail buildout. But then also the e-commerce side, again, is margin accretive to the overall business, leveraging the blank T-shirts from the Delta activewear side.
So there are definitely a lot of synergies in the ecosystem. But a decent amount of the revenues will come from e-commerce. The retail and e-commerce are, like I said, margin accretive to have a wholesale business. So there are lots to be excited about, but it's mostly kind of this maybe spin-off potential. They are reporting Salt 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 Salt Life alone is worth two-thirds or even almost all of the value today.
Andrew: No, I'm completely with you. Look, this has been, I think, the most interesting part of the story. As you said, it's in the first 9 months of the fiscal year, 46 million. So they're probably going to do what, 60 million. I think you said it in FY 22: about 10 million in EBITDA. That's growing really quickly. It's growing 20% plus revenue per year, and margins are expanding as they kind of get over the buildout source. That's the type of thing. It's almost fun with numbers, right? But 2 or 3 more years of 20% growth, all of a sudden you have a hundred million-dollar revenue brand doing 20 million plus in EBITDA.
That's the type of sexy small-cap mid-cap 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 it out and using it. So, that's why it's so interesting to me. And everything you said about margin accretive, all that type of stuff, I 100% agree. I don't disagree, and I think the back door to that is it's just a better business to own the brand and have a brand that people are searching for than it is to just produce all these different things.
[Inaudible] some pushback on Salt Life. I think the first pushback will be looped, 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. This stock hasn't done great, but it hasn't done terrible. It's like 3x since they IPOed. It's actually beat the market since the IPO though. It's pretty much flat over 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 on-demand apparel athletic kind of commodity shop, the right management team and company to build out this lifestyle brand?
Chris: Yeah, that's a fair pushback, I think. So the company IPOed and it was a spin-off, and the CEO has been there ever since then. He owns a sizable percentage of the shares. So I think the first thing I'll say is that there's definitely strong alignment with management there. The CFO is relatively new. She's been there for a little bit over a year. So it's hard to say kind of how she fits in the longer term. But listen, I mean, they're good at what they do in terms of making blank T-shirts. Salt Life is running as its own segment, so there's leadership there. I'm not too familiar with whoever heads up that division.
But I would just say that for me, I look more at the execution. So when they started FY 22, they said, "Hey, we're going to build out 7 new stores," and they did that. So from that standpoint, 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 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 and picking the right locations, so it's kind of like I'm not worried about it until something goes wrong.
And in recent history, Salt Life has been firing on all cylinders. So I just go back to having that alignment with management, which helps me sleep a little bit better. But in the past, Salt Life's been trying to do all sorts of different things, like make sunglasses and things like that. Like, listen, you guys are good at selling your brand, opening stores, and selling apparel. Just focus on that. I think they're doing that.
Andrew: 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 if I remember correctly, the shirts are like $25 shirts. With $300 sunglasses, it doesn't really make a lot of sense to me on that dimension.
Chris: Those are match up.
Andrew: Yeah. No, it's really interesting. I think of this almost... I don't know if they're still a popular brand, but I remember back when I was kind of just coming out of college stuff, everybody talked about the Life is Good Company. Do you know them?
Chris: Yeah, I'm familiar with them. The comparables I had in mind were Tommy Bahama and Vineyard Vines, which are doing like half a billion in sales and more than that. So to me, I don't know what Life is Good sales numbers are, but there's no reason... Like, Salt Life, in my opinion, can't be something like that in the half volume range longer-term. I mean, 2 million decals have been sold. So there are 2 million cars in the United States rolling around these decals. And they definitely punch above their weight in terms of their social media following. So, I definitely think this is like a regional to national story, maybe even international.
Andrew: I did think of Vineyard Vines when I was looking at this company as well. But Vineyard Vines is just a little more upscale. Salt Life isn't going to be more upscale. But the funny thing is, I was going to say, Vineyard Vines is bigger. It's like, yeah, they're bigger because they grew and expanded into lots of little different things. That's what Salt Life could do over time. Though, at the same time, the beach lifestyle, I'll wear it on the podcast. You can wear it casually, but I don't know if it offers quite as many growth opportunities as Vineyard Vines, as people started using some of them for a lot more occasions.
But yeah, I think it's a really interesting company. One of the things I love is that if you go on the website, all the male models are actual guys. I'm sure they are models, but it's a middle-aged man who's in okay shape, but it's not like he's sporting a 17-pack or something. 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 kind of interesting for authenticity and everything. Anything else we should be talking about on Salt Life?
Chris: No, I think we covered that one pretty well.
Andrew: Obviously, they reported as a separate segment. I think it's really early; they're growing stores. I'd almost like to see them grow the storebase a little bit faster and lean into that. But what do you think the endgame for Salt Life is? There are 3 options. Salt Life grows 20% per year for the next 5 years, becomes bigger than the Delta Run, and they re segment themselves. Monster Energy Drink used to be a different company, and then Monster grew so big. They rebranded themselves as Monster. Salt Life grew so big that they rebranded the whole thing as 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 its success, but which one of those three do you think would be the most likely?
Chris: That's tough. I mean, I think a spin-off or a sale makes sense to me. I guess, as a shareholder, those two options would unlock the most value. On the flip side, though, I do think there is a benefit to being in the, I guess, Delta Apparel ecosystem, just from a blank T-shirt standpoint. I honestly don't have any point of view on this. I do think the spin-off and the sale would unlock value, and so I guess I am more voting for that, but I see the other side.
Andrew: You're a true investor. Rooting for you would be bright[?]. You know what? It'd be nice to take the mark. Let's sell this thing. I like it.
Chris: Exactly.
Andrew: 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 DTG2Go or whatever you said, hey, they don't really provide disclosures. And one of the things I was impressed with in your write-up is that you went through a lot of the old things they said. I think you had something at the 2020 annual meeting. You used that to kind of back into the revenues for DTG.
But I looked at the companies and said, "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 going to grow rapidly; they're taking share of Fanatics. When I see a company being cagey about disclosures with a segment like that, the first thing that pops into my 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.
Chris: Yeah, I think it's fair, and it's a frustration I know other investors have, that they've kind of barbed[?] with the company. I think the long assure[?] of is that basically they were disclosing the revenues and rough margins or targeted margins when things were going well, which was kind of 17 through 20. And then, based on piecing things together, either from transcripts, old disclosures, old investor decks, or talking to other investors, I believe that the revenue actually dropped in FY 21. And so obviously we might not want to disclose a high-growth segment that's all of a sudden facing tough caps and headed down here.
The second piece is on the profitability. I do think the Fanatics' ramp up is hurting margins, and this is not something they're being cagey about. The CEO, Bob, mentioned on the call the last conference call, saying, "Hey, listen. We're running at an essentially flat breakeven operating margin." But once we ramp up our throughput, which can increase by 40% or higher on the Fanatics line, they're going to get in line with 15% whole operating profit margins and closely 20% [inaudible] margin. So I think it's a combo of the fact that basically DTG did have a down year in 21, and that there are short-term profitability concerns. In my opinion, those will be alleviated once they exit the startup phase.
But yeah, listen. I talked to professional investors, and I asked them, "What are the numbers you got for DTG?" and they're like, "Oh, living with the hills. I don't have it." There are people that own the stock who don't even know the revenues by year for this segment, which is kind of scary. But, like you said, if this is a high-growth segment that can do 20% plus, 25% EBITDA margins long term, and should, in a normalized environment, be grown from 15% to 25%.
Listen, that multiple is much more than what the legacy business deserves. And so, I think if they want to realize the value of this segment, they have to do a better job with their disclosures. I think the new CFO recognizes that, and then 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 yes, it's definitely an issue.
Andrew: Perfect. And then the last question I just want to talk about. I know you've talked to management a little, it sounds like, but I just wanted to ask about management because they seemed good to me. Obviously, I think seating Salt Life, which, as you can tell, is what I'm most excited about. I think it has the most potential, getting through COVID and into a kind of commodity business that has some leverage. 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, has been here for 20 years. The stock's been flat over the past 10 years. It's a hundred million-market-cap company. They are a little promotional. I think, as you mentioned in your write 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. I was just flipping through their website in their investories.
He went on the TD Ameritrade Network to talk about Delta a couple months ago. 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 screams me a little bit of a company that's trying to be promotional. I just wanted to discuss that. I don't want to say red flag, but it was a little bit to me.
Chris: It's funny that you say that because I actually 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. So the sponsored research. It gives you a little bit of tension. I don't think that's necessary or something you can knock them on. I think historically, the last couple 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 are hitting the micro-cap at all the conferences and doing all that kind of stuff.
The TD Ameritrade one is interesting because that was a step out of what they normally do from an outreach standpoint. If you listen to the interview, though, the guy didn't say anything that investors would take as bullish because, when they were talking, their conversations focused on inflation and passing through pricing. So I was excited when he went on because getting the word out on this name is good, but he didn't say anything that could be construed as bullish in my opinion. And that was the first kind of retail outreach. I mean, it's a retail-focused oriented platform, right?
Andrew: I'm with you because the TD Ameritrade thing is a professional network. It's a professional anchor. Obviously it's not CNBC or something, but they invite you to come on. 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 like anchored on them, but it just kind of built into the thing.
So one more point of pushback here. It's a 100 million market-cap company. You even said that they have one analyst. It's a sponsoring analyst, but that's because no other analysts is going to care about 100 million market-cap company, which my answer is yes. But at the same time, you're a hundred million-market-cap company. You're doing a stock road show every year and a stock conference one or two every year. You're doing 4 earnings calls. You're paying for sponsored research. And most people estimate the cost of being a public company at a million to $2 million per year.
You throw it all together, and it's like, why are these guys public? Why don't they just go private, sell themselves to private equity managers, whatever it is, and spend that. Let's see, it's $2 million, all-in. A public company calls for the public company cost, 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 them out to dividends to your new private owners. I don't care, but just why?
Chris: I don't have a great answer for that, but I will say that there will be a value that's unlocked if they are sold to a larger company. So I think the competitors in this space see the digital printing capabilities. That's attracted. They see a fast-growing brand. That's attractive. 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 where you're coming from.
Andrew: Look, this isn't a Delta-specific thing, though the sponsored research does take a different angle. But this is the question I ask every two or three hundred million-market-cap company. Like why? If you're spending 3 million per year and you have a 300 million dollar market cap, just go private and put that money in your pocket or something.
Chris: Yeah, I think one potential catalyst is that the CEO is getting older and he's a career industry guy. 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.
Andrew: All true, and if I remember correctly, I'm trying to flip through the proxy really quickly as we talk. He owns like 6% or 7% of the company, 6.1% of them. When the stock was at $30, that was real real money there. Now that it's at $15, it's still a lot of money, but it's not quite as real money. But if you think it's worth $30 in a sale, that's real money, real value unlocked. Maybe split the company up in two, sell the commodity business to one person so the Salt Life sides the other. You can imagine a lot of value unlocking there; mint a pretty penny and keep all those public company costs in your pocket instead of paying them out to a bunch of different providers.
Chris, I think this has been great. I always like to ask for a wrap-up. Anything that we didn't hit that you think we should be talking about, anything we kind of glanced over that you think we should hit harder?
Chris: Yeah, I'll just kind of reiterate some of the key points I made because I don't want to touch on all of them. But the first one is that obviously inflation is on everybody's mind. This is, like you said, a commodity consumer [crosstalk]
Andrew: Cotton inflation has been a big driver here.
Chris: Exactly. So one of my points in the write-up was that cotton inflation was terrible this year. Essentially, they're short on cotton in perpetuity, right? But even with that, in the FY 22, they are probably going to finish with the highest operating margins in recent history for the company. And if you take a look at the chart in cotton, it's obviously come down quite a bit since its peak.
The second thing, which we kind of touched on, was Fanatics. 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 the points, just given how much more room they have for throughput improvements, which they can do without spending a lot of money. But in the long-term, and we touched on this throughout the conversations, this company is going from a very boring one where they generate 75% of revenues from a legacy commoditized activewear business to one where, in the near and long term, about half of the revenues will be from DTG and Salt Life.
So with that, internal investment opportunities have more of a moat. So, DTG, as I've mentioned, there is a technology moat, and being vertically integrated helps them. And Salt Life is a well-known brand, so there's a moat around that. If that mix changes long-term, I feel like it deserves a higher multiple as a result of that. So those were the 3 key points in my write-up. I think things like trading below tangible book value, trading four times earnings, Salt Life potentially being worth the entire market cap today, and potential spin-off 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 and long-term potential.
Andrew: That's another slogan I can take for many portfolio companies that I own or look at. It's not that crappy of a business.
Chris: It's not that crappy. And there's a line with management in terms of ownership and the Board.
Andrew: Well, Chris Lee, I really appreciate you coming on the podcast. Again, Chris is an MBA student at Duke, first year, so anybody who wants to read his write-up should get in touch with him, 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 too. Chris, thanks so much for coming on. I'm looking forward to chatting soon.
Chris: Thanks, Andrew. Hell out of fun. Thanks for going easy on me.
Andrew: I don't think I did, but you did great. Thanks, man.
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