Superior Group of Companies, Inc. (SGC) Earnings Call Transcript & Summary

Hello, everyone. I'm Keegan Cox, the consumer analyst at D.A. Davidson. Today, I am proud to have Superior Group of Companies with me. We have CEO, Michael Benstock; CFO, Mike Koempel; and President of the Office Gurus, Dominic Leide. Just a brief overview on Superior Group of Companies. It's a diversified business model with 3 operating segments: Branded Products, Healthcare Apparel and Contact Centers. With that, this is a fireside chat. Feel free to ask any questions. I'll be leaving the Q&A.

So I guess I'll start with the first question. And I guess my first question to you, Michael, is like, could you just give us a more in-depth overview of each of your segments, who your customers are, who you're serving in those channels?

Okay. We'll try to get that done in the time allotted. So we are in 3 businesses. We started out in 1920 as a Healthcare Apparel business. To this day, we still have an Healthcare Apparel segment to our business that sells across all the different ways people would buy healthcare apparel, both institutionally from a consumer standpoint and retail, digitally. However people want to buy healthcare apparel, we're the only company out there that sells in every single channel available. Again, our oldest segment going back to our roots of Superior Surgical that was founded in 1920. On top of that, we have -- when we went public in 1968, the goal was to diversify ourselves beyond Healthcare Apparel and get into all the other lines of workwear that were out there and also to increase our national footprint across the geography of the United States. We were primarily a Northeastern-based company at that point. And we did just that. We became a supplier of uniforms to hospitality and transportation. We do some of the largest airlines in the country, some of the -- a lot of food service as well as many other types of customers -- starting to encroach on the branded uniform side of our business, the identity side of our business. And so we decided in early 2000s to begin our own journey in the branded merchandise business -- 2016 of a branded merchandise business, small branded merchandise business that really we felt were the greatest experts in that business in what is a very, very fragmented business. And today, that's our largest segment. And we've taken our branded uniform side of our business or identity side of our business. We've merged that with the branded product side, branded merchandise side of our business to form a segment that we call Branded Products. On top of that, I'll let Dominic speak about our journey in the Call Center business, which came by accident. So Dominic, why don't you jump in at that point?

Sure. I'd love to share the journey. It's not a 105-year-old journey, but it's a successful journey. So our genesis as a BPO really grew from the need of our sister divisions to find higher [indiscernible] lower cost solution to support their customers back in 2005. We chose El Salvador to launch this captive center because of the availability of high-performing, educated, great English-speaking labor. And what we created over 3 years was a true extension of Superior's brand and culture in our captive center. In 2008, we realized we had a business model that we could take on the road that would resonate with external customers. So we started selling our services to external customers in 2009. If you fast forward to today, we operate out of 5 countries, all nearshore. We're still in El Salvador where we started. We're in Belize, Jamaica, Dominican Republic, and we have a presence here in the U.S. also. We support more than 60 customers, all U.S.-based customers in about 13 different industries. So if there's an interaction that needs to be supported, whether it's voice, e-mail, chat, SMS, we can handle it. It's a very exciting business for sure.

Thanks for the background. Just to dive in a little bit more on the Office Gurus. It's your fastest-growing segment, and that was before you guys even had a sales team. So can you just tell me how excited you are that you have an outward actively soliciting clients now?

Absolutely. Yes. When we started the business, we've had no sales team. We added our first salesperson a little over a year ago. And then last front of more and more prospective customers. So adding a sales force, investing in a sales force for the first time since our inception, investing in marketing to get out in front of prospective customers is something that we're really, really excited about.

Awesome. And then this is a very popular topic at the moment, AI. How do you think about AI in the contact center business? And how can you use it to your advantage?

You're right, it's very popular. You can't go to read an article about the BPO industry where AI doesn't dominate the conversation. We're extremely excited about AI. Like I said, our value proposition from our inception was lower-cost labor, high performing, where we could provide our customers with a higher performing, lower-cost solution. What AI has been able to do is now we add a tech stack component where we can really talk with our customers about their ideal customer journey, and we can deliver that journey through technology. We're not only using technology as customer -- AI is customer-facing. We also use just about every aspect of our business to make us to deliver on our brand promise, which is better, faster, more efficient. So we're using AI throughout our business, but the customer-facing piece is definitely the most exciting. We have AI now that sits on top of every interaction, serving up to our agents real-time next best action suggestions so they can take care of customers' inquiries faster, give a better customer experience. It's also delivering to our managers real-time analytics about successes that are happening intraday, opportunities that can be addressed in real time. We couldn't do that before as fast as we do it today. And then on the back end, it's listening to every single interaction. And we can prompt it with questions so we can get really granular and provide our customers with insights innovation testing different products all the time, beta testing them, implementing them. It's an exciting time. It's awesome.

Sweet. And then just to get into the financial side of the business more. You guys have historically done M&A and grown through M&A. You've cleaned up your balance sheet from 4x leverage a couple of years ago. Now you're down to about 1.5x leverage. I was just thinking what are your capital allocation priorities from here?

Sure. As you mentioned, we've made a lot of progress in the last [indiscernible] availability in our facilities today. So from a capital allocation priority standpoint, we'll continue to remain focused on dividend to our shareholders. We recognize that's an important value proposition. We've paid an uninterrupted dividend since 1977. In 2024, we saw an opportunity with the price of our stock where we felt it was at a very value price that we initiated a share repurchase. So our Board approved a $10 million share repurchase. And in 2024, we spent about $7.5 million in a share buyback. We'll continue to monitor that and take advantage of where we see pricing opportunities to continue that buyback. We'll also continue to invest in the organic growth of our business. We see growth opportunities across all 3 channels. We invest on a normalized basis, about 1% to 1.5% of sales in capital expenditures. Every, I would say, 4 or 5 years, we might see a more significant opportunity for investment where we see a significant return on investment. For example, in 2021, we made significant investment in our largest distribution center in Eudora, Arkansas with robotics, which has really helped us create efficiencies and minimize reliance on labor. And then lastly, we just touched on from an M&A perspective, given the capacity that we have, we can certainly take advantage of strategic opportunities that would be complementary to the segments that we have today.

Awesome. And then is there a certain segment you would lean more towards for a merger? Or would it be just something that's immediately accretive?

It's -- immediately accretive is really important. But the fact of the matter is in the Branded Products business, we have 25,000 competitors. So it's a very rich field of opportunity there as opposed to the other segments we're in where there just isn't that kind of opportunity. We're looking in the Call Center business, particularly if it gets us into a line of business that we're not currently servicing. Dominic talked about us servicing 17 different verticals, but there are certain verticals that we really want to be heavier in that we haven't made much headway in. So that could be interesting as well as a geography that may be lower cost than the ones we're currently operating in, which might mean that we won't always be just nearshore. We may be a little further offshore as well. But the Branded Products business, definitely with 25,000 competitors, there's -- at any given time, we're talking to a half a dozen or so of those competitors. But again, it's got to be a great culture fit. It's got to be immediately accretive. It's got to be easily integratable. We don't want it to be -- any of these to be a distraction to our current organic growth plans.

And then moving on to your longest-standing business, the Healthcare Apparel business. I was just wondering, could you dive into your distribution channels a little bit more, talk about like the institutional versus retail side of it and then also your direct-to-consumer brand, Wink.

Great. Well, we started in 1920 by selling our products primarily to laundries as well as we also made straight jackets, which we don't make anymore and aren't sold anywhere anymore. But 1920, my great grandmother had this vision for the business. And we were a Healthcare Apparel company selling to laundries primarily until we went public in 1968 and diversified into other uniforms. But to stick with the Healthcare Apparel, we were -- until 2018, that was really our main channel, selling into laundries. And in 2018, we bought a small brand called Wink. At the time, it was called Wonder Wink. We've since rebranded it. And that is a brand that is sold to retailers. Last April, we launched our own direct-to-consumer website. So we're selling across all the channels. We're selling scrubs, the value scrubs that can be launderable in a commercial laundering setting that a doctor would wear under an operating room gown that he might change 8 or 10 times a day as he's doing multiple surgeries during the day as well as the fashion scrubs that nurses are wearing to the offices that they work in or the non-acute areas of the hospital that they work in. And our value proposition in that area is that on the fashion scrubs is that we sell in the good, better, best categories. There are those -- everybody is familiar with them, who sell in the luxury category, and that's a very limited marketplace. And I feel like the people who are selling in that market have pretty well hit a wall at this point. And then there's those who sell at the value price, we're not at the value price either. So we're the good, better, best, which is where about 70% of the sales are garnered. And we're fighting out day-to-day with what today is a pretty weak customer base -- a competitive base, I should say. We have a lot of competitors in trouble. And I would say that our strength today is our balance sheet. We have the ability and we have made investments in our health care business, both in marketing and talent that will pay off in the future as we begin the progression of accelerating the growth in that business.

Sweet. And then I guess to another financial question is on the margins. You achieved a 40% consolidated margin in the third quarter. I was just wondering how sustainable is that level? Is that the target for your margins? Or if you could elaborate.

Sure. And you're speaking with respect to gross margin in the third quarter. So the gross margin in the third quarter was our peak margin for the year. And I think we had a lot of favorable sales pointing all in the right direction led to that peak rate. I wouldn't expect that peak rate to be sustainable going forward, but our rates overall this year have been up every quarter. So I think we've been very happy with the gross margin rate improvement overall this year. We would expect to sustain strong margins from a gross margin perspective going forward. There's obviously questions about tariff and how that might impact us, and I could defer to Michael on that. But I think that -- again, we've been happy with the margins. And we feel as aside from just the gross margin, as you also think about just our operating margin overall, as Michael and Dom have mentioned, we've made investments in selling capabilities across all of our segments, which understandably have put some pressure on our expense rate this year, but we certainly expect that to return to us going forward with strong sales growth, so we can begin to leverage those G&A investments that we've been making.