Superior Group Misses Q2 Estimates as Healthcare Sales Slip

Superior Group of Companies (SGC) reported second-quarter earnings that missed analyst estimates, dragged lower by a decline in its healthcare apparel segment and rising costs tied to its uniform-direct operations.

The company posted adjusted earnings of $0.26 a share for the quarter ended June 30, below the $0.31 consensus compiled by FactSet. Revenue came in at $146.6 million, also short of the $148.7 million analysts had expected, though it rose 5.6% from the year-ago period.

Shares fell 2.3% in early trading after the print.

The healthcare segment, which makes up roughly a third of revenue, saw sales slip 2.5% to $47.1 million. Michael Koempel, the company's president and CFO, said on the call that the unit was squeezed by inventory destocking at large hospital systems. “We are seeing a normalization of demand patterns after several quarters of elevated ordering,” Koempel said.

The branded products segment, which sells custom uniforms and promotional merchandise, grew 12% to $67.5 million, helped by a handful of new customer wins in the food-service and hospitality verticals. Jake Himelstein, president of that segment, said the pipeline of large-bid opportunities remains “as strong as it's been in two years.”

Gross margin narrowed to 36.2% from 37.1% a year earlier, reflecting higher cotton costs and expedited freight charges tied to rush orders in the uniform-direct business. Koempel said the company expects some of those cost headwinds to ease in the second half as cotton futures have pulled back from their June highs.

Selling, general and administrative expenses rose 7% to $45.3 million, partly from higher incentive compensation accruals and investments in a new enterprise resource planning system. The company said the ERP rollout is on track for completion by year-end.

For the full year, Superior Group maintained its revenue guidance of $610 million to $630 million, implying organic growth of roughly 9% at the midpoint. It did not update its earnings forecast.

The company ended the quarter with $11.2 million in cash and $82 million drawn on its revolving credit facility. Free cash flow was negative $2.8 million in the quarter, driven by higher inventory levels tied to the uniform-direct segment's order backlog.

The stock is down about 18% year to date. At current levels, it trades at roughly 14 times the midpoint of the company's adjusted earnings guidance, a discount to the broader apparel group.

Michael Benstock, the CEO, said the second-half outlook hinges on the pace of hospital restocking and the timing of several large uniform-direct orders that slipped from the second quarter. “We have line of sight to those orders,” Benstock said. “The question is whether they fall in Q3 or Q4.”