Delta Apparel Inc. reported net earnings increased slightly in the second quarter ended March 31 on a 2 percent revenue gain. Gross margins in the company’s branded segment and DTG2Go business offset the impact of higher raw materials on the company’s activewear business.
Net sales for the second quarter ended March 31 were $100.0 million, up $1.9 million, or 2 percent, from the prior year period’s net sales of $104.1 million after excluding $6.0 million of sales in the prior year period from the company’s since-divested Junkfood Clothing business.
The company achieved net income for the second quarter of $3.6 million, or 48 cents per diluted share, an increase over the prior year period’s 47 cents per diluted share after excluding the approximately 11 cents per share gain realized in the prior year period on the sale of the Junkfood Clothing business.
Gross margin expansion in the branded segment and the DTG2Go business (previously Art Gun) was offset by a gross margin decline in the Activewear business attributable to higher raw material and other input costs, resulting in overall gross margins of 22.2 percent compared to 23.3 percent in the prior year period.
For the first six months of fiscal year 2018, net sales increased to $190.3 million from $189.5 million in the prior year period and were up 9 percent year-over-year excluding prior year sales in the Junkfood Clothing business of $15.4 million.
A discrete provisional tax expense of $10.6 million associated with the recent United States tax reform legislation drove a net loss for the fiscal year 2018 first half of $6.3 million, or 87 cents per diluted share. Excluding the first quarter discrete impact of the tax reform legislation, first-half earnings were $4.2 million, or 56 cents per diluted share, a 12 percent increase over prior year period net income of $3.9 million, or 50 cents per diluted share, and a 36 percent increase over the prior year, excluding the prior year gain on the sale of the Junkfood Clothing business.
Basics Segment Review
Basics segment revenue increased by $2.9 million, or 4 percent, to $73.7 million for the fiscal 2018 second quarter. Activewear sales increased 2 percent for the quarter, with 15 percent growth in catalog sales offset by a decline in private label sales impacted by requests from customers in the December quarter to pull forward shipments to meet holiday demand. Catalog sales benefited from solid demand across all sales channels, with particularly strong demand in the retail license and regional screen print channels. The growth in Catalog’s high-margin fashion basics t-shirt and fleece products seen in prior periods continued during the quarter, especially in the premium Delta Platinum line, with sales more than doubling year-over-year.
The fiscal year 2018 second quarter was particularly exciting for the company’s digital print and fulfillment business with the March 9, 2018, acquisition of the DTG2Go business. The combined DTG2Go business (previously Art Gun) achieved sales growth of nearly 60 percent over the prior year period, including approximately 20 percent organic growth. DTG2Go’s outstanding holiday service levels led to strong growth with nearly all customers during the March quarter. Gross margins strengthened within the DTG2Go business through improved efficiencies and the leveraging of increased sales volumes across the DTG2Go platform.
Branded Segment Review
Second quarter revenue in the Branded segment was $26.3 million compared to $33.3 million in the prior year period, which included sales from the company’s since-divested Junkfood Clothing business. Salt Life revenue increased almost 7 percent for the quarter, with sales growth in most channels. The increasing demand for Salt Life performance products and other new categories continued, and strong momentum within Salt Life’s direct-to-consumer channel, including robust eCommerce sales growth, also contributed to the top-line growth. Salt Life’s gross margins were consistent with the prior year period and drove solid profitability for the quarter.
Soffe sales for the quarter declined slightly to $12.4 million from $12.8 million in the prior year period, but sales for the first six months were up approximately 10 percent year-over-year. Increases in eCommerce sales on soffe.com and in Soffe’s core business, with expanded sizing in the iconic Soffe short contributing significantly during the quarter. Soffe’s gross margins expanded 130 basis points year-over-year due to cost structure improvements and a more profitable product mix.
Robert W. Humphreys, Delta Apparel, Inc.’s chairman and chief executive officer, commented, “Our fiscal 2018 second quarter was both productive and profitable, with year-over-year organic sales and earnings growth in market conditions that remained challenging. The combination of our Art Gun business with the recently-acquired digital print business is a game-changer from our perspective. The combined business, which we now market under the DTG2Go trade name, gives us the most comprehensive on-demand solution in the high-growth digital print space. DTG2Go’s multi-location footprint offers customers quick-turn shipments to any part of the United States as well as market-leading international shipping competency.
“Activewear sales were up for the quarter, with further sales acceleration in catalog fashion basics products. We expect the strong market response to these higher-margin products to continue in the back half of the year as our 2018 product expansions, including additional fashion-forward fabrications, styles and colors, hit the market. We also expect to broaden our private label customer base in connection with a shift we are seeing in customer sourcing strategies back to the Western Hemisphere.
“Sales at Salt Life grew nicely year-over-year and both gross margins and profitability held strong. Salt Life continues to expand its account base, with a new national account positively impacting second quarter results and another national retailer launch happening in our third quarter. Salt Life’s new branded craft beer line is scheduled for roll-out in Florida during the fourth quarter and several other new product extensions are planned for fiscal 2019.
“Despite an uneven retail environment and cost pressures in a number of areas, our overall first-half performance was solid and our team is focused on strategies that should meaningfully impact both the top and bottom lines. We expect to see incremental benefits from our new products and category extensions, broadening customer base and investments in the digital print and fulfillment model. Our manufacturing platform continues to operate efficiently and we are excited about our opportunities to increase volumes and further capitalize on our additional capacity and functionality. All things considered, we believe that Delta Apparel is well-positioned for more organic growth and a strong finish to fiscal year 2018.”
