What's In Store For Delta Apparel (DLA) In Q3 Earnings?

Delta Apparel Inc. (NYSE:DLA) is set to report third-quarter fiscal 2016 results on Aug 8, after the market closes. Last quarter, the company posted a positive earnings surprise of 4.88%. In the trailing four quarters, the company delivered positive surprises in two quarters and negative surprises in other two resulting in an average beat of 28.49%.

Let's see how things are shaping up for this announcement.

Factors to Consider

We note that Delta Apparel has been posting decent results over the past few quarters on the back of its strategic initiatives to boost sales as well as margins. The high-margin products that the strategy focuses on should favor fiscal third-quarter margins as well.

During the fiscal second quarter, the company’s Honduran textile facility – Ceiba Textiles – became operational. The use of open-width fabrics reduced the company’s reliance on fabric purchased from outside, thus helping it expand product offerings. Such initiatives are expected to boost the top line in the to-be-reported quarter.

The company also retrenched work force and shut down underperforming facilities to reduce cost. These efforts should boost margins in the quarter.

However, challenging operating environment, macroeconomic uncertainty and unfavorable inventory level may pose problems for the company in the to-be-reported quarter.

Further, unfavorable currency fluctuations have been hurting revenues over the past few quarters and the trend is likely to persist in the fiscal third quarter as well.

Earnings Whispers

Our proven model does not conclusively show that Delta Apparel is likely to beat on earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to surpass earnings estimates. However, that is not the case here as you will see below:

Zacks ESP: The company’s Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 45 cents.

Zacks Rank: Delta Apparel holds a Zacks Rank #3. Although a favorable Zacks Rank increases the predictive power of ESP, the company’s negative Earnings ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the broader consumer discretionary space that have the right combination of elements to post an earnings beat this quarter:

Tegna Inc. (NYSE:TGNA) with an Earnings ESP of +1.75% and a Zacks Rank #3.

Pool Corporation (NASDAQ:POOL) with an Earnings ESP of +1.00% and a Zacks Rank #2.

CBS Corporation. (NYSE:CBS) with an Earnings ESP of +1.16% and a Zacks Rank #2.