GREENVILLE, S.C. — May 12, 2016 — Delta Apparel Inc. today reported that for its fiscal 2016 second quarter ended April 2, 2016, expanded gross margins drove net income to $3.4 million, or $0.43 per diluted share. Net sales, impacted to some degree by the bankruptcy of a large retail customer, were $109.2 million for the quarter compared with sales of $109.6 million in the prior year second quarter after adjusting for sales of $5.4 million in the since-divested The Game business and under the Kentucky Derby license that the Company did not seek to renew for 2016. Overall gross margins expanded 510 basis points over the prior year period and 270 basis points sequentially. Operating profit was $5.9 million, or 5.4% of sales, resulting in earnings of $0.43 per diluted share compared with $0.03 per diluted share in the prior year second quarter after adjusting to exclude the gain on the sale of The Game business realized during that quarter. Prior year second quarter earnings including that gain were $0.46 per diluted share.
For the first six months of fiscal 2016, net sales increased to $199.3 million from $197.6 million in the prior year period adjusted for sales attributed to the since-divested The Game business and the since-discontinued Kentucky Derby license. Net income was $4.1 million, or $0.52 per diluted share, in the first six months of fiscal 2016 compared with a net loss in the prior year period of $565 thousand, or $0.07 per diluted share.
Manufacturing Realignment
During the past two years, the Company has been expanding its manufacturing capacity and improving its flexibility to better serve its customers while also focusing on process improvement and cost reduction to remain competitive in the apparel marketplace. In furtherance of these goals, the Company is initiating a manufacturing realignment that will result in the closure of its textile manufacturing operation in Maiden, North Carolina and the transition of production to its Honduran textile facility. This realignment is intended to maximize production at the Company’s lower-cost facility and eliminate duplicative fixed costs. The Company expects to support its Mexicosew and screen-print production with in-country sourced fabric. In addition, the Company will source domestic fabric with current suppliers that will be sewn in the Company’s Rowland, North Carolina plant to support its Made in the USA programs.
Once completed, the realignment is expected to significantly lower production costs, thereby improving gross margins and increasing earnings by up to $0.70 per diluted share. The Company is investing approximately $7 million in new equipment for its offshore manufacturing operations that should be installed this quarter to expand output in those facilities. Expenses of approximately $3 million, or $0.28 per diluted share, are expected in fiscal 2016 as part of this realignment, including severance, shutdown and start-up inefficiency and other expenses, with the majority of this expense in the fiscal 2016 third quarter. The realignment should be completed by the end of fiscal year 2016 and the Company expects to begin realizing the associated cost benefits in the first half of fiscal 2017, with the savings in the back half of fiscal 2017 expected to annualize at approximately $8 million.
Basics Segment Review
Basics segment gross margins in the fiscal 2016 second quarter expanded by 810 basis points over the prior year period resulting from a stronger product mix, continued manufacturing efficiencies, and lower raw material costs. Net sales in the basics segment were $69.8 million, off 2.2% from prior year second quarter net sales of $71.4 million. Activewear sales were down 1.5% from the prior year period due to a 7% decline in unit sales of basic tees that was partially offset by strong growth in fashion basics, which exceeded 250% year-over-year growth, and catalog full-package growth of 15%. Private label sales improved 4%, with growth coming from regional, trendy brands as well as new customers acquired in 2015. Art Gun experienced solid year-over-year growth in March but an overall sales decline of approximately $500 thousand for the full second quarter as it made necessary adjustments to correct inefficiencies that surfaced during the extremely high-volume 2015 holiday season.
Branded Segment Review
Adjusted for The Game and Kentucky Derby sales in the prior year second quarter, branded segment net sales grew 2.8% to $39.3 million in the fiscal 2016 second quarter while achieving margin expansion of 110 basis points. Salt Life experienced year-over-year sales growth of 23% in the second quarter and nearly 120% sequentially, with its ecommerce website, www.saltlife.com, growing 48% over the prior year second quarter and 68% year-to-date. Strong demand for the Salt Life brand continued with a robust sell-through of the Spring 2016 product line. Salt Life’s new distribution center is functioning well and proven capable of handling the record shipment volumes Salt Life is experiencing. The Salt Life store in San Clemente, California is progressing and scheduled to open in mid-Summer this year.
The Soffe business was negatively impacted by a large customer bankruptcy and otherwise would have achieved sales growth of 5% over the prior year period. Soffe has enhanced its service levels to the independent sporting goods channel and recently launched a new business-to-business website that should further strengthen Soffe’s recent double-digit sales growth in that channel. Soffe’s new products and improved customer service and in-stock position should also help fuel growth across other sales channels going forward. While the www.junkfoodclothing.com ecommerce website achieved growth of 26% for the second quarter, overall Junkfood sales were down $1.9 million from the prior year period. The decline is primarily attributed to unsettled conditions in the retail marketplace and management changes at several specialty apparel customers that led to more deliberative buy decisions and slower order placement during the transitions.
Robert W. Humphreys, Delta Apparel, Inc.’s Chairman and Chief Executive Officer, commented, “The strength that Delta Apparel has shown in the first half of this fiscal year is a testament to the effectiveness of the strategic initiatives we announced 18 months ago and the ability of our team to successfully implement them. While conditions in the retail apparel marketplace have shown little improvement, we have made significant progress both financially and operationally. Delta Apparel is now more streamlined and focused on areas that offer the greatest potential for profitable growth. We have significantly upgraded our manufacturing capabilities, improved customer service and expanded our product offerings. As a result, we have seen higher demand for Delta Apparelproducts, lower manufacturing costs, and significant margin expansions in each of the last four quarters, along with increased profitability.
“Over this time, we have made changes to our manufacturing platform that have reduced costs significantly and give us the ability to produce open-width fabrications that should lessen our reliance on sourced fabric. Our manufacturing realignment and the expansion and modernization of our facilities should allow us to further increase efficiency, reduce fixed costs and ultimately better serve our customers through shorter lead times. The decision to close the Maiden plant and eliminate the jobs of approximately 160 employees who have contributed significantly to our growth and success over the years was extremely difficult. However, we believe these steps are necessary to be cost-competitive with other global competitors.
“We also recently entered into a new loan agreement that extends our current $145 million credit facility for five additional years and lowers our interest expense by approximately 50 basis points. We believe this underscores the excellent financial and operational positioning of Delta Apparel and the recognition of that strength by the financial community.
“Looking ahead to the second half of our fiscal year, even with continued sluggishness in the retail marketplace we expect continued gross margin expansion and modest top line growth driven by anticipated market share gains and trends we are seeing toward a more profitable sales mix. We also expect to build on the high double-digit growth of our B2B and B2C sites in our second quarter and see continued strong growth in our ecommerce business. These expectations, combined with our ongoing fixed-cost reduction efforts, point us toward a solid second half of the year and a bright future for Delta Apparel.”
Posted May 12, 2016
Source: Delta Apparel, Inc.
