Everyone, I'm Keegan Cox, the Consumer Analyst at D.A. Davidson. Today, I am proud to have a 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 three 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 leading 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 three businesses. We started out in 1920 as a healthcare apparel business. To this day, we still have a 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 work 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, a lot of food service, as well as many other types of customers and logistics and otherwise. Over the years, we found that the ad specialty business was starting to encroach on the branded uniform side of our business, the identity side of our business. And so we decided in the early 2000s to begin our own journey in the branded merchandise business, and that led us to an acquisition in 2016 of a branded merchandise business, a small branded merchandise business that really we felt were the greatest experts in that business and 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, our 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 a higher-performing, 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 three 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 late 2008, early 2009. If you fast forward to today, we operate out of five 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, email, chat, SMS, we can handle it. It's a very exciting business, for sure.
Sweet. 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. Yeah, 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 year we added two more. We know we have an incredible value proposition to share with customers, and we have to get in front of more and more prospective customers, so adding a salesforce, investing in a salesforce 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 a trade show or conference or listen to a podcast or 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 or AI as customer-facing, we also use it just about in 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. It's 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 daily about how they can improve their business, how they can improve their overall customer experience. So we're leaning into it heavy.
We have a team dedicated towards AI and 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 one and a half times 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 12 to 18 months in creating a leaner balance sheet and really significantly reducing the debt outstanding. So we have over $100 million of 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. I also point out this year, or in 2024, we saw an opportunity with the price of our stock where we felt it was at a very attractive 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 three channels. We invest on a normalized basis about 1%-1.5% of sales in capital expenditures. Every, I would say, four or five 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?
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 the 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 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 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 strait jackets, which we don't make anymore and aren't sold anywhere anymore, but in 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 WonderWink. We've since rebranded it, and that is a brand that is sold to retailers, sold digitally to Amazon.com, Walmart.com, and 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 eight 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. 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's 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. Then there's those who sell at the value price.
We're not at the value price either. So we're in 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, or 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 healthcare 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 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.
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 directions, which led to that peak rate. 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.
We feel, 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.
Yeah. And to stick with the tariffs, how do you guys defend against tariffs, or how sensitive are you to tariffs?
We're excited. In the last round of tariffs during the last Trump administration, we were able to raise prices on the two products that basically were impacted, baseball caps and aprons. If it becomes everything, we have contractual relationships that allow us to raise prices concomitant with whatever tariffs might be put in, and so we look at it as an opportunity to actually grow our business organically. Granted, it will be because of some serious price increases that will have to take place. I mean, we've looked at the impact to our business. There's very few places where we won't be able to actually raise prices, and we'll be able to more than offset that by the places we are able to. A lot of our branded products, branded merchandise business in particular, is done on an ad hoc basis. Every deal is priced on its own.
If there are tariffs in place, even if somebody ordered three months before the tariffs went into effect, but the product is on the water coming to us and we're going to pay a tariff when it comes to it, we can pass it on to our customers by contract. So bring it on.
Nice. And then, looking at the macro situation, I guess jobs have continued to be strong. Your branded products business is sort of reliant on customer budgets every year. I was wondering if you could give an update on your outlook for those customer budgets, what you've been hearing maybe?
We're kind of in a quiet period now, so we're not going to give much with respect to that, but Baird came out with their report the other day, which is kind of the, at least for us, when we look at healthcare and we look at the uniform portion of our branded products business, we rely heavily on that report. And it's got more to do with what's happening at rental than what's happening in direct sale, but there's still a correlation between them. And their take on it was that, and the take of their largest people they follow, Cintas and UniFirst and so on, is that the net impact of the jobs reports that we're seeing are not uniform jobs, unfortunately.
So we're not seeing great increase in uniform jobs where normally we'd see on a monthly basis 50,000-80,000 uniform jobs created in any given month. The latest figures show that's only 30,000. So still somewhat depressed. We're looking forward to uniform jobs finding their way over the next year. So there's still a lot of caution. We're seeing a lot of our customers actually dumbing down product to get to lower-cost products to decrease the size of their basket, lowering the pars they're giving to employees, the number of uniform sets they're giving to employees to lower their costs. I mean, inflation has hit them all over the last couple of years, and they're trying to offset that in ways that you can imagine. But there's only so much runway to doing that.
There does come a path at which they've got to start spending as they spent before, and we believe that's coming. We believe in a better economy, in a stronger economy with less uncertainty around it, even around interest rates and everything else. We should see the path to be very clear and prosperous for us.
Sticking with the macro theme, talking about labor and wages, you guys had previously mentioned a couple of quarters ago that you saw some wage hikes in your contact center segment. Is that kind of the reason to maybe explore offshoring more, and what are you doing, I guess, to combat wage inflation?
So great question. What we found is a lot of our partners are first-time outsourcers, so they saw a big decrease in cost and an increase in performance by outsourcing to us nearshore whenever we started the engagement. Over time, they need to save more money, so we need to provide them with a lower-cost solution. There's also, because of the performance of nearshore BPOs, there's a high demand for labor in the nearshore markets. So we got to make sure we provide our people with a great experience, which is why I think we mentioned a couple of quarters ago we did a wage increase in El Salvador to be really competitive, make sure we hire the right type of talent. But yeah, that's why we're looking offshore today to provide a lower-cost solution to our partners when they need to save even more.
Perfect. And then does anyone in the crowd have a question?
I've got a question here. So Michael, you've referenced publicly in the past the idea that this could someday be a billion-dollar company, and that is in fact a goal of yours. You're obviously in three very attractive end markets that can help get you there. Beyond M&A, do you view it more as these markets are growing, the industry is growing, that's going to get you the lion's share of the way there, or is it more about taking market share? You still have a very tiny market share across all these end markets. And if it's more of the latter, taking market share, what's the secret sauce? How are you going to do that across each of your three end markets?
Yeah, the first time I said that was in, I believe, February of 2020, and we all know what happened the next month, and our business actually, the first reaction was everybody stopped buying, and then everybody needed two things. They needed healthcare apparel, all right, exploded, and our branded products shifted to selling PPE, and we sold, I think, $160 million of PPE over the next 12 months, so it looked like we were headed towards that a lot faster towards that billion dollars. The fact of the matter is that that is an overall goal. I think it puts us in a whole other mindset, a whole other class of small cap once we get to that billion dollars. I think the path there is pretty clear.
A lot of it's going to be organic, and the guidance that we've given on the street of how we believe our business is going to grow over time would indicate that about half of that will be organic and half of that will be acquisitive, and the acquisitive side will come from mostly the branded products business unless we're lucky enough to find the right partner in the call center business who can take us into geographies or, as I said earlier, into lines of business that we're not currently in. Pretty agnostic about how we get there. It's just a question of making sure we get there in the right way. We will not suffer short-term profitability in order to get there sooner.
Hi, thanks. You alluded to, I don't know, weaker competitors in the healthcare space, I think is what you said. Can you remind us what's going on there with some of your competitors, why you see a market share opportunity?
One of the largest competitors, as you know, who sells only direct to consumer has pretty well hit a wall in terms of their sales and profitability. And we won't mention names here. Everybody knows who they are. We get asked about them in every single investor conference. So besides that, we talked about one of the largest, the largest wholesaler of products who owns about seven brands and coming out of bankruptcy recently and leaving a huge void of revenue out there for hopefully we can get more than the lion's share of over time. There's another company that's owned by private equity that has gone through its ups and downs over the last four years. It was a consolidation of private equity of retailer and brands that was brought together. It has not been done very successfully. I think they've got a good CEO now.
They happen to be a customer of ours as well for part of their retail business, but their brands are not doing well, and we're taking market share from them. You see the noise of two of our largest customers, Cintas and UniFirst, perhaps consolidating. I don't likely think it's going to happen, but whether it does or not, they're both very, very focused on growing their healthcare businesses, which is great for our healthcare apparel business, and they're both very, very loyal customers of ours for our Wink product and our Fashion Seal Healthcare product.
Perfect. And I think we have time for maybe just one more quick question. I was just wondering, you had some weakness in technology customers in the branded product segment. You'd mentioned that before. Are there any green shoots you're seeing there or industries you think could do better in the future?
Technology has come back, fortunately, so they're spending again. Particularly now, we're seeing budgets opening up. The budgets for 2025, we're being told by most of our customers, not just technology customers, look much more favorable to us for employee gifting and customer loyalty gifting than they did in 2024. Not quite as favorable. I mean, there's still some noise around what's going to happen with tariffs and how that's going to affect people's businesses and how that might affect our business. But for the most part, I think we're looking at very favorable conditions going forward.
Awesome. Sweet. Well, that'll do it for our time today.
Thank you.
I want to thank everyone for joining me.