Superior Uniform Group Inc. (SGC) is a leading uniform and image apparel company. Established in 1920, it had its first public offering in 1968. Over the years, it has broadened its capabilities to include a wide range of specialized markets. Its signature brands include Fashion Seal Healthcare, Fashion Seal, Martin’s, UniVogue and Worklon. SGC is comprised of two reportable business segments: uniforms and related products and remote staffing solutions. In excess of 95% of SGC’s uniforms and related products segments’ net sales are from the sale of uniforms and service apparel, and miscellaneous products directly related thereto. SGC services its remote staffing solutions segment through its The Office Gurus subsidiaries in El Salvador and Costa Rica.
SGC is currently trading at a trailing twelve months P/E of 21.71 and a trailing 12 months EV/EBITDA of 9.60. Current P/B valuations at 1.12x represents a five-year historical peak for SGC and is close to the 2006 and 2007 P/B at 1.2x. SGC delivered a ROE of 5.2% over the past 12 months and a five-year average ROE of 5%.
Financial and Business Risks
SGC is debt free with cash and cash equivalents of $4 million representing 5% of its current market
capitalization of $70 million. As of Dec. 31, 2011, SGC had approximately $8.1 million in unfunded or underfunded obligations related to its pension plans. Its available cash flow may be adversely affected in the event that payments become due under any pension plans that are unfunded or underfunded.
SGC competes in its uniforms and related products segment with more than three dozen firms, including divisions of larger corporations, local firms in most major metropolitan areas, national and regional manufacturers which include publicly held companies such as Cintas Corporation, Unifirst Corporation and G&K Services, as well as ARAMARK – a division of privately held ARAMARK Corporation.
The raw materials that SGC uses in its business — cotton, wool, silk, synthetic and cotton-synthetic blends
— are subject to price volatility caused by weather, supply conditions, government regulations, economic conditions and currency exchange rates.
At all times, SGC carries substantial inventories of raw materials, principally piece goods and finished garments, which require substantial working capital. This is reflected in inventory days exceeding 180 days.
In 2011 and 2010, 52% and 54%, respectively, of SGC's products were obtained from suppliers located
in Central America. Despite the concentration of its purchasing from a few sources, SGC is not dependent upon any of its suppliers, because other suppliers of the same or similar products are readily available.
Business Quality and Capital Allocation
SGC focuses on its own niche and is one of the leading suppliers of garments to hospitals and industrial clean rooms, hotels and motels, food service establishments and uniforms to linen suppliers. SGC is profitable for the past 10 years, with gross margin consistently above 30%. SGC has also achieved a five-year operating income CAGR of 6.97% and a five-year EPS CAGR of 16.27%.
Outside of its bread-and-butter business, SGC is exploring opportunities in cooperative advertising and
remote staffing solutions.
SGC was awarded 2011 Top Innovator Status by Apparel Magazine for its launch of everyBODY media.
everyBODY media combines smartphone technology with unique on-garment brand messaging, turning
uniforms into interactive, eye-catching advertisements. For example, employees can wear garments with Switch-It fabric panels that feature advertisements. Customers can scan the EI Tag on the fabric panel with their smartphones, and link to a relevant website.
SGC's Remote Staffing Solutions segment, which represents 5.8% of 2011 sales, delivered a EBIT margin of 27%, compared with a EBIT margin of 4.8% for its Uniforms and Related Products segment. SGC runs its Remote Staffing Solutions via The Office Gurus, a near-shore premium provider of cost effective bilingual telemarketing and total office support solutions. Revenue for Remote Staffing Solutions grew by 64% in 2011 and EBIT from this segment now accounts for more than one quarter of 2011 EBIT.
SGC paid dividends in every single year since 1977 and currently sports a dividend yield of 4.7% with a dividend payout ratio of 99%. Dividends are paid quarterly.
A strong balance sheet and a long history of profitability and dividends are among the first things
I look for in a stock. SGC certainly fits the bill, but current valuations are unattractive.
The author does not have a position in any of the stocks mentioned.