Delta Apparel Inc. reported another quarter of impressive earnings gains. A realignment of its manufacture structure continues to feed efficiencies and cost savings that’s offsetting weakness in its Soffe and Salt Life brands in traditional sporting goods channels.
Earnings in its second quarter ended July 1 surged 75.8 percent to $4.5 million, or 57 cents a share. Excluding manufacturing realignment expenses of 18 cents per share in the year-ago period, earnings would have been ahead 14 percent against adjusted earnings of 50 cents in the year-ago period.
Sales were down 6.5 percent to $104.3 million due to the sale of its Junkfood business on March 31. Excluding Junkfood, sales increased 4 percent.
“Overall, we had a good quarter, particularly in light of the difficult retail conditions we continue to see,” said Robert Humphreys, chairman, CEO and president, on a conference call with analysts.
Sales for the Basics segment were $79 million, a 9.6 percent gain versus the year ago. Operating profit in the Basics segment expanded 44.2 percent to $7.5 million or 9.5 percent of sales, compared to $5.2 million or 7.2 percent of sales in the prior-year period. The year-ago period included a $1.8 million pretax expense related to the manufacturing realignment.
Sales in its Activewear business grew 11 percent, driven by single-digit sales growth in its catalog business and a 25 percent sales increase in FunTees private label goods. Catalog sales benefited from improving conditions in the retail license channel and continued success with its Fashion Basics line. The growth in Activewear was partially offset by a decline in Art Gun, driven by the loss of a customer and delayed new partner launches. New partners for Art Gun are in the pipeline and expected to support the holiday season.
Branded sales for the quarter dropped 35.9 percent were $25.3 million. Excluding $11.3 million in sales from the Junkfood business in the year-ago quarter, revenues were down 10.3 percent. Operating profit for the Branded segment declined 22.2 percent to $2.1 million.
Salt Life sales increased over 2 percent from the prior year, with softness in the big-box retail sporting goods channel hampering stronger growth seen in independent retailers and on the Salt Life e-commerce site.
Soffe sales for the quarter were down $2.9 million year over year, with the decline primarily due to the loss of sales from the Sports Authority bankruptcy. Soffe is finding growth in the military channel and having success with e-retailers and on its own website.
While efficiencies and cost savings from its manufacturing realignment have exceeded expectations to date, the benefits are being tempered by higher-cost raw materials that, due to the softness in the marketplace, are not getting recouped fully with higher selling prices. In order to limit its overall exposure to the higher cost, Delta shuttered its manufacturing operations for a week during the June quarter to avoid building inventory with higher-cost raw materials. The cost of this shutdown lowered gross margins by 60 basis points and decreased earnings by 7 cents per share.
Said Deborah Merrill, CFO, VP, treasurer and president of Delta Basics, on the call, “We plan to continue this with another week out of production in our fourth quarter, which we expect to be our last production curtailment in the short term.”
Outside of the impact of the manufacturing shutdown, its Activewear gross margins improved 150 basis points over the prior-year quarter. Salt Life gross margins also expanded during the quarter, up 160 basis points over the prior-year quarter.
Overall, operating profit in the June quarter was $5.9 million or 5.6 percent of sales, compared to $4.2 million or 3.8 percent of sales in the prior-year quarter, which, adjusted for the manufacturing realignment expenses, was $6.1 million or 5.4 percent of sales.
Elaborating on the segments, Humphreys said the sales of fashion basics products in its Basics segment continued their growth trend, up 60 percent over the prior-year quarter.
“We are excited about the broader color palette and silhouette expansions planned for the Delta Platinum line in 2018 and expect to see these double-digit growth trends continue,” said Humphreys. “We are also excited about the newly redesigned business-to-business website that just launched in our Activewear business and believe it will greatly enhance the online experience for catalog customers.”
Efforts to diversify the FunTees private label customer base and product offerings are helping drive growth and the business is expected to show all-time record revenue this year.
Art Gun is expected to return to its historic consistent double-digit growth with new partner launches set in coming months. Further investments are being made by Art Gun to improve customer service levels and further shorten the time for its products to reach the end consumer. Art Gun’s capacity has also increased more than 50 percent to service the expected upcoming holiday 2017 season. Said Humphreys, “Art Gun’s virtual inventory and fulfillment model continues to be an innovation point for forward-looking retailers and apparel businesses, and we are seasoned upon this trend in cross-selling Art Gun services across the Delta Apparel customer base.”
In the Branded business, Salt Life’s growth is being hampered by struggles in the big-box retail sporting goods channel, including the loss of retail doors to bankruptcies, but the brand was still able to increase sales and achieve margin expansion.
“Salt Life continues to thrive in the independent channel, and several new customer launches in the specialty retail channel are anticipated and should drive future growth,” said Humphreys.
Salt Life’s direct-to-consumer strategy also continues to expand with a new store in Columbus, GA and the first Salt Life outlet store scheduled to open soon in Daytona Beach, FL. Salt Life also achieved an almost 50 percent year-over-year increase in e-commerce sales during the quarter and year-to-date.
Humphreys added, “We continue to receive positive feedback across the retailer and consumer spectrums on Salt Life’s product direction and brand identity. Consumers continue to seek Salt Life’s new performance products incorporating leading-edge fabrics. We expect Salt Life to resume its double-digit growth patterns as it continues to expand its product line, geographic reach and market penetration.”
Humphreys said Soffe’s sales in traditional sporting goods channels are “stabilizing” while the brand continues to gain traction with the military, e-retailers and on its own branded e-commerce site. Soffe’s e-commerce sites increased sales by 15 percent during the quarter, bringing it up 24 percent year-to-date. The CEO added, “While many traditional retail channels remain challenging, we are excited about the made-in-America opportunities for Soffe.”
The focus on Soffe will be on cost and inventory reduction efforts while expanding its brand awareness and omnichannel reach through the opening of stores. Two additional retail stores will open in upcoming quarters, bringing Soffe’s brick-and-mortar store footprint to five.
Delta Apparel doesn’t provide guidance but officials were upbeat given the third-quarter momentum.
Humphreys remarked that while “it seems that every quarter brings new challenges, particularly within the retail landscape,” Delta Apparel should continue to benefit from its diverse customer base, broad distribution and vertical manufacturing platform.
“Fiscal 2018 should be another year of strong cash flows to redeploy in business opportunities and to reduce debt and to return to shareholders,” said Humphreys. “We remain sharply focused on our most profitable opportunities and look forward to a strong finish to fiscal 2017 and continued future growth.”
Photo courtesy Soffe