Delta Apparel Inc. reported earnings slid 8.7 percent in its fourth quarter ended September 30. Sales fell 20.2 percent largely due to its sale of Junkfood. Sales were also impacted by severe weather disruptions and lower Soffe sales tied to last year’s bankruptcies.
Full Year Results
For the fiscal year ended September 30, 2017, net income increased to $10.5 million, or $1.33 per diluted share, compared with $9 million, or $1.12 per diluted share, in fiscal year 2016, a 19 percent increase. Net sales for the 2017 fiscal year were $385.1 million, compared to $425.2 million in the prior year. The divestiture of the company’s Junkfood business during the year was largely responsible for the sales decline. Adjusting for the Junkfood divestiture, net sales were down 1.4 percent year-over-year primarily due to continued retail weakness, customer bankruptcies and severe weather-related market disruptions. Despite gross margin improvement in both the basics and branded segments, overall gross margins declined 100 basis points from a higher mix of basics sales during the year.
For the fourth quarter ended September 30, 2017, net income was $2.1 million, or 27 cents per diluted share, compared to $2.3 million, or 29 cents per diluted share, in the prior year quarter. Net sales during the quarter were $91.3 million, compared with $114.4 million in the prior year fourth quarter. The divestiture of Junkfood, which generated net sales of nearly $17 million in the prior year fourth quarter, principally drove the decline. Severe weather disruptions, along with the general impact of retail door closings in the market, also contributed to the lower sales in the quarter. Despite solid quarter-over-quarter margin growth in the Salt Life and Activewear businesses, overall gross margins were down to 18.2 percent from 20.9 percent in the prior year period, while SG&A as a percentage of sales improved to 16.3 percent from 17.7 percent in the 2016 fourth quarter, both primarily resulting from the divestiture of Junkfood.
Basics Segment Review
Basics segment net sales increased 1.1 percent year-over-year for the year to $280.3 million due to strong growth in private label sales and solid gains in the ad-specialty and regional screen print channels, which were partially offset by continued softness in the retail licensing channel. Fourth quarter net sales in the basics segment were $69.6 million compared to $73.7 million in the prior year quarter. For the full year, revenue growth and higher gross margins led to operating income in the basics segment of $24.2 million, an 8.4 percent improvement from the prior year.
Activewear sales were up 1.3 percent year-over-year driven by record revenue in the FunTees private label business and continued strong growth in higher-margin fashion basics products. Art Gun began the 2017 fiscal year with a strong and well-executed holiday season and also finished nicely, with several previously delayed customer launches materializing in the fourth quarter. Despite these delayed launches as well as the operational disruptions caused by multiple hurricanes, Art Gun sales were down only 1 percent from the prior year. Art Gun’s momentum gains to close the year and its planned geographic expansion to enhance service levels through quicker delivery capabilities both point to solid growth opportunities for Art Gun’s digital print and fulfillment model, which supports the evolving trends shaping the future of retail.
Branded Segment Review
Branded segment net sales for the full year were $104.8 million, compared to $148.1 million in the prior year. Excluding Junkfood, net sales in the branded segment declined $8.5 million, a decrease of 8.7 percent year-over-year. Fourth quarter net sales in the branded segment were $21.7 million, compared with $40.7 million in the fiscal 2016 fourth quarter, with the Junkfood divestiture causing $17 million of the decline. Gross margins improved year-over-year in the branded segment and operating income was $3.9 million in fiscal year 2017, down from $7 million in the prior year due principally to the divestiture of Junkfood.
Product line enhancements and new retail doors carried Salt Life to another period of growth and expansion. Salt Life net sales increased by 6.3 percent for the year, including growth of 6.9 percent for the fourth quarter, despite the impacts of hurricanes in key markets. Salt Life’s eCommerce business grew nearly 40 percent year-over-year and achieved record revenue.
Sales in the Soffe business were down $7.9 million year-over-year primarily due to a loss of comparable sales in fiscal year 2017 associated with the bankruptcies of The Sports Authority and other customers. Soffe continued to build new relationships with strategic and independent sporting goods retailers and e-retailers throughout the year and expects its military programs and unique made-in-the-USA production capability to provide a strong foundation for future growth. Soffe’s B2C eCommerce business had a strong showing for the year, with 21 percent sales growth over the prior year.
Robert W. Humphreys, Delta Apparel, Inc.’s chairman and chief executive officer, commented, “Fiscal 2017 was a busy year for Delta Apparel. The year began with Hurricane Matthew and ended with Hurricanes Harvey and Irma, all three of which disrupted some of our key markets. In the months between, the retail sector and consumer demand remained weak, resulting in less apparel retail doors in the market. While our net sales reflected the impacts of those events and the Junkfood divestiture, our margins held strong and we ended the year with a 19 percent increase in earnings.
“Delta Apparel’s ability to navigate challenging market conditions is the product of several factors, one of which is our efforts to rationalize our business and focus our resources on areas with higher growth and earnings potential. The sale of the Junkfood business resulted from those efforts. While that transaction reduced our revenue for the year, it enabled us to lower our debt, fund additional share repurchases and improve our investment and acquisition flexibility.
“Our resilience also stems from our diversified distribution channels and our proactive measures to reduce fixed costs, realign our manufacturing operations and focus on our omni-channel marketing efforts to reach our end consumers. The benefits of our manufacturing realignment are apparent in our profitability for the year and we actually exceeded our incremental cost-reduction goals for that initiative. We expect the bottom line effects of the realignment to become more visible as our manufacturing output increases.
“Salt Life again turned in strong operating performance and continues its growth trajectory. Its branded stores in California are growing and we expect our new stores in Daytona Beach, Florida and Columbus, Georgia to further serve as valuable consumer touch-points. Salt Life continues to broaden its consumer reach through the expansion of its social media and team ambassador programs, which provide a platform of over eight million “followers” through which it can amplify its lifestyle brand message.
“All in all, it was a good year for Delta Apparel and we expect the major initiatives we completed to benefit us in fiscal year 2018 and beyond. Although the retail environment is likely to remain challenging, we believe we are off to a good start as we move into our new fiscal year.”
Photo courtesy Soffe