Delta Galil Reports Second Quarter 2023 Results

Second Quarter Results Reflect Initiatives Focused on Enhancing Gross Margin, Reducing Inventory, Driving Operating Cash Flow and Strengthening the Balance Sheet

Second Quarter Gross Margin Increased 190 basis points compared to last year to 40.4%

Operating Cash Flow Excluding IFRS 16 was $58.4 Million for the Second Quarter

Declares a $7.0 Million Dividend for the Second Quarter of 2023

2023 Full Year Guidance Reiterated, and Management Expects to End 2023 with Meaningfully Higher Gross and Operating Margins, Lower Inventory and Reduced Debt

Delta Galil Industries, Ltd. (DELG/Tel Aviv Stock Exchange), the global manufacturer and marketer of branded and private label intimate, activewear, loungewear and denim apparel for men, women and children, today reported financial results for the second quarter and first half ended June 30, 2023.

Second Quarter 2023 Highlights (comparisons are to prior year period unless otherwise noted)

• Sales decreased 10% (9% in constant currency) to $443.6 million, driven by the macro slowdown in global consumer spending
• Gross margin improved 190 basis points to 40.4%
• EBIT before non-core items was $30.9 million, or 7.0% of sales compared to last year at $44.0 million, or 9.0% of sales
• EBITDA excluding IFRS 16 impact was $38.0 million, a 27.1% decrease from last year and a 33.3% increase from first quarter 2023
• Inventory decreased for the third consecutive quarter, reflecting an aggregate reduction of $85.7 million since September 30, 2022
• Operating cash flow excluding IFRS 16 improved $74.1 million to $58.4 million compared to the same period last year
• Equity at June 30, 2023 was at a record level of $713.6 million, up 11% from June 2022
• Dividend declared of $7.0 million, or $0.272 per share, which will be distributed on August 30, 2023, with a record and “ex-dividend” date of August 17, 2023
• The Company reiterates its 2023 full-year guidance

Isaac Dabah, CEO of Delta Galil, stated, “As the global apparel industry navigates a period of normalizing trends, we are pursuing strategic actions aimed at reducing inventory levels, enhancing gross margin, and optimizing our production capabilities. Additionally, we are focused on growing our direct-to-consumer channels, while simultaneously developing new and innovative products for our customers. During the quarter, most of our owned brands increased direct sales across both e-commerce and brick and mortar retail channels.

Additionally, we managed to achieve a strong second quarter gross margin despite a heavily promotional retail landscape, while simultaneously reducing our inventory for the third consecutive quarter, netting a cumulative reduction of $85.7 since September 2022. These factors drove a $74.1 million improvement in operating cash flow compared to the prior year period, further strengthening our balance sheet. Finally, we announced another measure to streamline our operations by reducing our operational footprint in China.”

Mr. Dabah continued, “As we enter the second half of 2023, we remain confident in the direction we are headed and in the meaningful opportunities we are pursuing to drive shareholder value. For the remainder of 2023, we expect sales and profitability growth led by strong direct-to-consumer performance, favorable customer mix, improving margins, and higher utilization across our factories. We expect to meet our prior 2023 full-year guidance while further strengthening our balance sheet through continued reductions in both inventory and debt levels.”

Sales

The Company reported second quarter 2023 sales of $443.6 million, a 10% decrease (9% in constant currency) from $491.3 million in the second quarter of 2022. First-half sales were $886.0 million, a 9% decrease (8% in constant currency) from $975.1 million in the prior-year period.

Gross Margin

Gross margin in the second quarter of 2023 increased to 40.4%, compared to 38.5% in the second quarter of 2022. The 190-basis point expansion was due primarily to better customer, channel and segment mix, and lower freight costs, partially offset by higher discounts and lower factory utilization. Gross margin in the first half of 2023 increased by 150 basis points to 39.7%, compared to 38.2% in the first half of 2022.

EBIT

EBIT in the second quarter of 2023 was $28.2 million compared to $38.5 million in the prior-year period. EBIT before non-core items (detailed below) in the second quarter of 2023 was $30.9 million, or 7.0% of sales, compared to $44.0 million, or 9.0% of sales, in 2022.

EBIT in the first half of 2023 was $42.7 million, compared to $72.7 million in the same period last year. In the first half of 2023, EBIT before non-core items was $50.7 million, or 5.7% of sales, compared to $78.2 million, or 8.0% of sales, in the first half of 2022.

The reduction in EBIT margin before non-core items was mainly due to deleverage of SG&A expenses, which could support higher sales levels.

Non-Core Items

As part of a strategic focus to further streamline its operations, the Company decided in the second quarter of 2023 to further downsize its China operations.

For the first quarter of 2023, non-core items included the following operational measures:

- closed the Bare Necessities distribution center and transitioned to a third-party fulfillment center in Mexico

- relocated Egypt cut and sew operations from Cairo to El-Minya

- closed the socks production facility in Bulgaria, and moved production to a new facility in Egypt

- implemented efficiency measures in the Company’s 7 for All Mankind segment

In the second quarter and first half 2023, expenses associated with the realignment plans were $6.0 million and $11.4 million, respectively. The Company estimates annual cost savings from the realignment plans of approximately $12.5 million, a portion of which will be realized in 2023.

Non-core items in the second quarter and first half of 2023 also include, a $4.0 million benefit associated with a reversal of earn-out liability with respect to Bogart's acquisition, and $0.7 million related to deal costs.

Net Income

Net income in the second quarter of 2023 was $15.1 million, compared to $22.7 million in the second quarter last year. Net income excluding non-core items, net of tax, was $16.6 million, compared to $28.1 million in the second quarter of 2022.

Net income in the first half of 2023 was $18.1 million, compared to $41.6 million in the first half last year. Net income excluding non-core items, net of tax, was $24.3 million, compared to $47.1 million in the first half of 2022.

Diluted Earnings Per Share

Diluted earnings per share in the second quarter of 2023 were $0.53, compared to $0.80 in the second quarter of 2022. Diluted earnings per share, excluding non-core items, net of tax, were $0.59, compared to $1.01 in the second quarter of 2022.

Diluted earnings per share in the first half of 2023 were $0.61, compared to $1.47 in the same period last year. Diluted earnings per share, excluding non-core items, net of tax, were $0.85 compared to $1.68 in 2022.

EBITDA, Cash Flow, Net Debt, Equity, and Dividend

EBITDA excluding IFRS 16 impact in the second quarter of 2023 was $38.0 million, compared to $52.1 million in the second quarter of 2022. In the first half of 2023, EBITDA excluding IFRS 16 impact was $66.5 million, compared to $94.7 million in the first half of 2022.

Cash flow generated from operating activities, excluding IFRS 16, increased to $58.4 million in the second quarter of 2023, compared to cash flow used in operating activities of ($15.7) million in the second quarter of 2022. Cash flow generated from operating activities, excluding IFRS 16, increased to $69.3 million in the first half of 2023, compared to cash flow used in operating activities of ($68.3) million in the first half of 2022. The significant year-over-year improvement in operating cash flow can be primarily attributed to the reduction in inventory levels.

Net financial debt, excluding IFRS 16, at June 30, 2023, was $189.5 million, compared to $217.4 million at December 31, 2022, and $218.4 million at June 30, 2022. The year-over-year reduction in net debt is primarily due to operating cash flow, partially offset by capital expenditures and dividend payments.

Equity on June 30, 2023 was $713.6 million, up 11% from $641.6 million on June 30, 2022.

Delta Galil declared a dividend of $7.0 million, or $0.272 per share, to be distributed on August 30, 2023. The record and “ex-dividend” date will be August 17, 2023.

2023 Financial Guidance

Delta Galil reiterates its 2023 full-year guidance, including the expectation of meaningfully higher gross and operating margins in the second half of 2023 and with lower inventory and debt levels. The Company’s guidance excludes non-core items and includes IFRS 16.

These forward-looking statements are based largely on the expectations of the Company and are subject to uncertainties including macroeconomic trends. Actual results may differ materially from those included in the guidance as result of risks and uncertainties which cannot be fully predicted. There is no certainty that the aforementioned conditions will occur, and actual results may be significantly different from those forecasted or implied below.

Constant Currency - Excluding the Impact of Foreign Currency

This release refers to “reported” amounts in accordance with IFRS accounting principles (“GAAP”), which include translation and transactional impacts from foreign currency exchange rates. The release also refers to “constant dollar” amounts, which exclude the impact of translating foreign currencies into U.S. dollars, and are considered a non-GAAP financial measure.

These constant currency performance measures should be viewed in addition to, and not in lieu of, or superior to, Delta Galil’s operating performance measures calculated in accordance with GAAP.

About Delta Galil Industries

Delta Galil Industries is a global manufacturer and marketer of branded and private label apparel products for men, women and children. Since its inception in 1975, the Company has continually endeavored to create products that follow a body-before-fabric philosophy, placing equal emphasis on comfort, aesthetics and quality. Delta Galil develops innovative seamless apparel including bras, shapewear and socks; intimate apparel for women; underwear for men including under its owned brands Schiesser, Eminence, and Athena; babywear, activewear, sleepwear, and loungewear including under its owned P.J. Salvage and Delta brands. Delta Galil also designs, develops markets and sells branded denim and apparel under the brand 7 For All Mankind®, and ladies’ and kids’ apparel under the brand Splendid®. In addition, it sells its products under brand names licensed to the company, including adidas, Wolford, Wilson, Columbia, Tommy Hilfiger and others. For more information, visit www.deltagalil.com.

Safe Harbor Statement

Matters discussed in this press release contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this press release, the words "anticipate," "believe," "estimate," "may" "intend," "expect" and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein, and while expected, there is no guarantee that we will attain the aforementioned anticipated developmental milestones. These forward-looking statements are based largely on the expectations of the Company and are subject to a number of risks and uncertainties. These include, but are not limited to, risks and uncertainties associated with: the impact of economic, tax rates in the various countries the company operates in, competitive and other factors affecting the Company and its operations, markets, product, and distributor performance, the impact on the national and local economies resulting from terrorist actions, and U.S. actions subsequently; and other factors detailed in reports filed by the Company.

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