Delta Apparel reported earnings in its fiscal fourth quarter declined slightly due to the sale of its Junkfood business, but continued to see underlying improvement in most of its core businesses.
The year was essentially a transition year for the company with Junkfood divested so Delta Apparel could focus more greatly focus on businesses “with higher growth and earnings potential,” said Robert Humphreys, CEO, on a conference call with analysts.
The sale enabled the company to deleverage, fund additional share repurchases and improve its investment in acquisition flexibility.
The company also implemented numerous steps to reduce fixed cost and realign its manufacturing platform to support greater operational flexibility and a manufacturing realignment was fully implemented during the year.
Those efforts helped offset “persistent weakness in the retail sector” and the impact of Hurricane Matthew at the start of the year and two additional storms that impacted shipments in the fourth quarter to support a 19 percent in earnings for the year.
“Despite these hurdles, it was a good year for Delta Apparel with strong improvement in profitability and substantial momentum building within several of our businesses,” said Humphreys. “In addition, the divestiture of Junkfood and the harvesting of the accumulated profits in that business to redeploy into higher return investments was an important milestone for our company.”
Earnings declined 8.7 percent in the fourth quarter ended September 30, to $2.1 million, or 27 cents a share. Sales slumped 20.2 percent to $91.3 million.
Junkfood, which generated sales of nearly $17 million in the prior-year fourth quarter, principally drove the decline. Having been the brand’s seasonally strongest quarter, Junkfood also recorded operating earnings of $1.8 million in in the year-ago quarter, challenging comparisons in the current quarter.
Despite solid margin growth in Salt Life and Activewear businesses, overall gross margins were down in the quarter at 18.2 percent versus 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. The gross margin decline and the SG&A improvement both resulted primarily from the Junkfood divestiture.
For the full year, net income increased 19 percent to $10.5 million or $1.33 per share. Sales slid 9.4 percent to $385.1 million. Excluding Junkfood, sales were down 1.4 percent, primarily due to the severe weather-related disruptions and continued retail softness coupled with the significant loss of revenue from the prior year bankruptcy of the Sports Authority as well as other customers in the sporting goods channel.
Gross margins in the year improved in both Basics and Branded segments. Due to a higher mix of sales in the basics segment, overall gross margins declined 100 basis points from the prior year. This decline was partially offset by lower SG&A expenses, which improved to 17.5 percent of sales versus 18 percent of sales in the prior year.
In the Basics segment, fourth quarter sales in Basics segment were down 5.6 percent to $69.6 million with the decline driven from the soft sales in retail licensing and the impact that Hurricane Irma had on its Florida operation.
Sales for the full-year in the Basics segment increased to 1.1 percent to $280.3 million. The increase stems from continued strength in its Activewear business, where its FunTees private label business achieved record revenue. Solid gains were also seen in the ad specialty and regional screen print channels, offsetting continued challenging conditions in the retail licensing channel.
Revenue growth, along with gross margin expansion, resulted in Basics segment operating income of $24.2 million for the year, an 8.4 percent improvement from fiscal 2016.
Humphreys said Activewear continued to benefit from the continued expansions of its fashion basics line and the introduction of the Delta Platinum collection. Added Humphreys, “The contemporary styles and fabrics utilized in our premium product lines are resonating in the marketplace as indicated by the high double-digit sales growth we’re seeing with these products.”
Art Gun “began and ended the year strong,” but were down 1 percent for the full year with new customer launch and in severe weather challenges. Deborah Merrill, CFO, said, “We are excited about the new opportunities we have for growth in fiscal year 2018. Art Gun’s planned geographic expansion and associated enhancements to service levels through quicker customer deliveries should further bolster momentum as 2018 unfolds.”
Humphreys also noted that the Basics segment elevated its service capabilities through the recent opening of a state-of-the-art integrated digital print and distribution facility that provides a seamless fulfillment solution for customers in both the Activewear and Art Gun businesses. The larger facility expands its product distribution capacity in the important Florida market.
In the Branded segment, fourth-quarter sales were cut almost in half to $21.7 million, compared with $40.7 million in fiscal 2016 fourth quarter with the Junkfood divestiture responsible for most of the decline.
For the year, sales in the Branded segment were $104.8 million compared to $148.1 million in the prior year. Excluding Junkfood, net sales declined 8.7 percent over the prior year. Gross margins in the Branded segment improved over the prior year resulting in operating income of nearly $4 million for the year.
Soffe sales were down $7.9 million year-over-year, primarily due to the loss of the comparable sales in fiscal 2017 associated with the bankruptcies of the Sports Authority and other customers. Said Merrill, “The Soffe team continued to build new relationships with strategic and independent sporting goods retailers and e-retailers throughout the year, and these growing relationships, along with Soffe’s military and unique made-in-the-USA programs, should provide a strong foundation for growth.”
E-commerce also continued to show momentum, up 21 percent in the year for the brand.
Said Humphreys, ”Soffe is benefiting from growth in its military channel and Made in America programs. The brand is enjoying strong growth in e-commerce and remains a go-to brand for established retailers.”
Salt Life saw sales climb 6.9 percent for the fourth quarter and 6.3 percent for the year as the expanded product offerings and strength in direct-to-consumer sales drove offset major hurricanes impacting key market.
Salt Life’s achieved record revenue in its e-commerce business in the year, which grew nearly 40 percent over the prior year.
Salt Life turned in another year of strong operating performance and continues on its path of growth. Further expansion into performance products and new retail doors were the primary drivers of Salt Life’s success as well as its ability to overcome the loss of doors resulting from customer bankruptcies and the general slowness in retail, not to mention the impact of major hurricanes in Salt Life’s primary markets.
During the year, Salt Life won additional business with large-scale retailers, expanded its door count with established retailers and added important new customers such as the Buckle to our list of retail partners. Salt Life products will be available in most Buckle locations for spring of 2018.
Salt Life’s branded stores in California are growing, and we expect the new retail stores in Daytona Beach, Florida and Columbus, Georgia to serve as valuable customer touch-points in fiscal year 2018. Salt Life’s consumer reach also continues to run through its social media and team and vascular programs, which provide a platform of over eight million followers for Salt Life’s brand messaging and grassroots marketing initiatives.
“Salt Life turned in another year of strong operating performance and continues on its path of growth,” stated Humphreys. “Further expansion into performance products and new retail doors were the primary drivers of Salt Life’s success as well as its ability to overcome the loss of doors resulting from customer bankruptcies and the general slowness in retail, not to mention the impact of major hurricanes in Salt Life’s primary markets.”
During the year, Salt Life won additional business with large-scale retailers, expanded its door count with established retailers and added important new customers such as The Buckle to its list of retail partners. Salt Life products will be available in most Buckle locations for spring 2018.
Salt Life’s branded stores in California are also growing, and new stores in Daytona Beach, FL and Columbus, GA will open this fiscal year.
“Salt Life’s consumer reach also continues to run through its social media and team and vascular programs, which provide a platform of over eight million followers for Salt Life’s brand messaging and grassroots marketing initiatives,” added Humphreys. “These branding and marketing strategies drove e-commerce sales of nearly 40 percent in fiscal 2017 on top of nearly 70 percent growth we had achieved in the prior year.”
Inventory levels increased to $174.6 million from $164.2 million with the increase due to increased cut on costs in inventory and higher units in inventory to support the expanded product lines in Activewear and Salt Life. Total debt was reduced to $92.9 million at year end, compared to a $115.8 million in the prior year.
Humphreys said the company expects to achieve additional performance gains in fiscal 2018.
He said, “We expect marketplace challenges to continue in the upcoming year, but expect to see organic growth of sales in each of our business operations led from strong growth at Salt Life, Art Gun and our e-commerce sites. While we’ll be shipping product with higher cost cut in the first half of the year, more traditional cut on costs should flow out in our third and fourth quarters.
“Continued profit improvement driven from higher sales in our cost-reduction efforts, coupled with anticipated lower inventory levels, should drive strong free cash flow for the full-year. We anticipate using the cash flow to lower debt and continue our share repurchase program. We will also take advantage of other business opportunities that may arise that would provide further value to our shareholders.”
Photo courtesy Salt Life