Business Overview and History

Superior Group of Companies, Inc. (NASDAQ:SGC) is a diversified manufacturing and service provider that has been in operation since 1920. The company is comprised of three distinct business segments – Branded Products, Healthcare Apparel, and Contact Centers – each serving large and fragmented markets. Superior Group has demonstrated resilience and adaptability, navigating the ebbs and flows of the economy to deliver consistent financial performance.

Superior Group traces its origins back to 1920 when it was founded as Superior Surgical Mfg. Co., Inc. in New York. In 1998, the company changed its name to Superior Uniform Group, Inc. and redomiciled to Florida. In 2018, the company underwent another name change, becoming Superior Group of Companies, Inc., reflecting its evolution into a diversified enterprise.

The company’s journey has been marked by significant transformations and strategic decisions. In the early 2000s, Superior Group faced challenges in its core uniform business due to excess capacity and pricing pressures. In response, the company diversified into the healthcare apparel and promotional products markets through strategic acquisitions, which helped position it for long-term growth.

During the global financial crisis of 2008-2009, Superior Group demonstrated its resilience by maintaining profitability through cost-cutting measures and capitalizing on opportunities in the healthcare sector. The company also expanded its geographic reach, opening sales offices in Canada and Brazil, and establishing support services in China and India to better serve its global customer base.

Over the past decade, Superior Group has continued to evolve, investing in technology and expanding its service offerings to meet the changing needs of its customers. A significant milestone was the addition of the contact center business in 2018, which further diversified the company’s revenue streams and provided new avenues for growth.

The Branded Products segment, which accounts for roughly 62% of total revenue, produces and sells customized merchandising solutions, promotional products, and branded uniform programs to a diverse customer base spanning industries such as retail, food service, entertainment, technology, and transportation. This segment has a wide geographic footprint, with sales offices across the United States, Canada, and Brazil, supported by production and service capabilities in China and India.

The Healthcare Apparel segment, comprising approximately 21% of revenue, manufactures and sells a range of healthcare-related apparel, including scrubs, lab coats, protective wear, and patient attire. The segment’s key brands include Fashion Seal Healthcare, Wink, and CID Resources, which are sold primarily to healthcare laundries, dealers, distributors, retailers, and consumers in the United States.

The Contact Centers segment, known as The Office Gurus (TOG), accounts for the remaining 17% of revenue. TOG provides outsourced, nearshore business process outsourcing, contact, and call center support services to North American customers. The segment operates facilities in El Salvador, Belize, Jamaica, the Dominican Republic, and the United States.

Financial Performance and Ratios

Over the past three fiscal years, Superior Group has demonstrated a mixed financial performance. In 2022, the company reported annual revenue of $578.8 million, a decline of 6.2% from the previous year’s $536.9 million. This decrease was primarily attributable to the impact of the COVID-19 pandemic on the company’s operations. However, in 2023, Superior Group managed to bounce back, generating revenue of $543.3 million, a 1.2% increase year-over-year.

The company’s profitability has also been volatile. In 2022, Superior Group reported a net loss of $31.9 million, or a loss of $2.03 per diluted share, due to significant impairment charges and other unusual items. In contrast, 2023 saw a return to profitability, with the company reporting net income of $8.7 million, or $0.54 per diluted share.

Superior Group’s balance sheet remains relatively strong, with a current ratio of 2.86 and a quick ratio of 1.87 as of the end of 2023, indicating a solid ability to meet short-term obligations. The company’s debt-to-equity ratio stood at 0.42, suggesting a balanced capital structure. Additionally, the company generated $78.9 million in operating cash flow and $74.0 million in free cash flow during the 2023 fiscal year.

In terms of liquidity, Superior Group had $18.37 million in cash as of the third quarter of 2024. The company also has access to a $125 million revolving credit facility, with $19 million drawn as of Q3 2024, providing additional financial flexibility.

Segment Performance and Outlook

In the third quarter of 2024, Superior Group’s consolidated net sales increased 10.0% to $149.69 million compared to the prior year period, driven by growth across all three of its reportable segments. The company’s net income for the quarter rose 73.5% year-over-year to $5.40 million, while operating cash flow and free cash flow were $8.20 million and $7.26 million, respectively.

The Branded Products segment reported revenue of $92.6 million in Q3 2024, a 10.8% increase compared to the prior-year period. This growth was driven by expansion with existing customers and the addition of new clients. The segment’s gross margin rate improved to 36.2%, up from 34.6% in the prior year period, primarily due to improved sourcing mix resulting in lower product costs and pricing increases to existing customers. The segment’s EBITDA margin improved by 330 basis points to 11.6%, benefiting from both expanded gross margins and operational leverage.

The Healthcare Apparel segment generated revenue of $33.0 million in the third quarter of 2024, an 11.4% increase year-over-year. This performance was bolstered by growth in the segment’s online channels, both wholesale and direct-to-consumer, despite continued softness in the wholesale market serving healthcare retail stores. The segment’s gross margin rate increased to 41.8% from 38.7% in the prior year period, primarily due to lower supply chain costs. The segment’s EBITDA margin expanded by 110 basis points to 11.4%, driven by higher gross margins, partially offset by increased investments in marketing and talent.

The Contact Centers segment, through its TOG division, reported a 4.0% year-over-year increase in revenue to $25.0 million in the third quarter of 2024. This growth was fueled by new customer additions, partially offset by lower sales from existing customers. The segment’s gross margin rate decreased slightly to 54.9% from 55.5% in the prior year period, primarily due to increased employee-related costs. The segment’s EBITDA margin decreased from 16.8% to 12.1%, primarily due to increased agent costs and investments in talent to support the pipeline for future growth.

Superior Group’s consolidated gross margin rate improved to 40.4% in the third quarter of 2024 from 39.1% in the prior year period, primarily due to the improved performance in the Branded Products and Healthcare Apparel segments. Consolidated selling and administrative expenses increased to 34.9% of net sales in the third quarter of 2024 compared to 34.7% in the prior year period, primarily due to higher employee-related costs, increased third-party professional services, and greater expenditures related to marketing and advertising activities.

For the full-year 2024, Superior Group has reaffirmed its guidance, expecting revenue in the range of $563 million to $570 million and earnings per diluted share between $0.73 and $0.79. The company stated that they are comfortable achieving this guidance range based on the strong third quarter results.

Risks and Challenges

Superior Group operates in highly competitive and fragmented markets, which may pressure margins and make it challenging to maintain market share. The company’s operations are also subject to various macroeconomic and geopolitical risks, such as fluctuations in commodity prices, supply chain disruptions, and changes in consumer spending patterns.

Furthermore, the company’s healthcare-related operations are susceptible to regulatory changes and potential shifts in healthcare policies, which could impact demand for its products and services. Superior Group also faces the risk of labor shortages and rising labor costs, which could squeeze profitability if the company is unable to effectively pass on these increases to customers.

Conclusion

Superior Group of Companies has demonstrated its ability to navigate the dynamic business landscape, leveraging its diversified portfolio of operations to deliver consistent financial performance. The company’s strong balance sheet, coupled with its focus on operational excellence and strategic investments, position it well to capitalize on growth opportunities in its core markets.

Management has emphasized their long-term view and commitment to intelligent investment in people, services, products, and technology to gain market share in their fragmented end markets. This approach has allowed the company to see compelling growth opportunities across its three business segments.

The company’s recent financial performance, including the 10% year-over-year revenue growth and 73.5% net income growth in Q3 2024, underscores the effectiveness of this strategy. Additionally, Superior Group’s ability to generate positive operating cash flow, which allowed them to improve their net leverage ratio and repurchase approximately 452,000 shares for $6.3 million during the quarter, demonstrates their commitment to creating shareholder value.

However, Superior Group must remain vigilant in managing the various risks and challenges that come with operating in a complex, global environment. As the company continues to execute its growth strategy and navigate industry trends, its ability to maintain financial flexibility and adapt to changing market conditions will be crucial for long-term success.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.