Delta Apparel, Inc. reported sales of $104.7 million and earnings of 16 per diluted share for its second quarter ended Jan. 1, 2011. The company’s results for the fiscal 2011 second quarter include the operations of The Cotton Exchange, which was acquired on July 12, 2010 and are included in the branded segment (formerly called the Retail-Ready segment) of the company.


Second Quarter Highlights


Net sales for the three months ended Jan. 1, 2011 were a record $104.7 million, an increase of $13.6 million, or 14.9%, from the prior year second quarter. The basics segment (formerly called the Activewear segment) drove the increase with organic sales growth of 23.9% compared to the prior year quarter.


Branded segment (formerly called the Retail-Ready segment) sales increased $2.7 million driven from the addition of The Cotton Exchange revenue, partially offset by lower sales of vintage licensed products.

 

Gross margins declined approximately 300 basis points due primarily to a higher mix of basics product sold in the second quarter compared to the prior year as branded products typically carry higher margins. Selling, general and administrative expenses decreased to 19.2% of sales from 21.5% due primarily to the lower sales of licensed products that include royalty payments, partially offset by higher marketing costs and expenses associated with the Company’s recent acquisitions.

The company's second quarter operating income was $2.6 million, including a non-cash net favorable adjustment of $0.9 million related to the valuation of Art Gun contingent consideration and goodwill. At acquisition the company was required to record the estimated fair value of contingent consideration, which resulted in goodwill of $0.6 million associated with the acquisition.


Accounting standards require the company to evaluate the fair value of contingent consideration at each reporting period and record all changes in the valuation through earnings. Based on the performance and projections of the business, the current estimated fair value of the contingent consideration is de minimis and the goodwill is considered impaired, resulting in a net favorable adjustment of $0.9 million, or $0.07 per diluted share.

Net income for the quarter ended January 1, 2011 was $1.4 million, or $0.16 per diluted share, compared to $1.0 million, or 11 cents per diluted share, in the prior year second quarter.


Fiscal Year to Date Highlights


Net sales for the six months ended Jan. 1, 2011 were $212.6 million, an increase of $22.4 million, or 11.8%, compared to the same period for the prior fiscal year. The sales growth included revenue from the acquisition of The Cotton Exchange, along with an organic sales increase of 4.9%. Gross margins declined approximately 140 basis points as basics products comprised a higher percentage of sales. Net income for the six months ended January 1, 2011 was $3.1 million, or 35 cents per diluted share, compared to $3.6 million, or 42 cents per diluted share in the prior year.


Robert W. Humphreys, Chairman and Chief Executive Officer, commented, “Delta Apparel, Inc. had another good quarter, delivering great top line growth and solid profits that highlight the strength of our business model. While the greatest risk to our business continues to be the volatile cotton market, and the ultimate response by consumers to higher apparel price points, we believe we have many opportunities to expand our business in spite of these challenges. The Salt Life branded apparel, decals and bags, is an exciting opportunity for us to expand our product line and reach new consumers. In addition, our other proprietary brands, including Soffe®, The Cotton Exchange®, Junk Food®, and The Game®, continue to resonate well with consumers seeking quality, casual apparel. Our marketing and merchandising initiatives on both our basics and branded merchandise, coupled with our ability to continue leveraging our fixed costs, should give us strong growth and margin expansion potential for the second half of our fiscal year.”


Branded Segment Review


The branded segment sales (formerly called the Retail-Ready segment, but continuing to comprise the same business units, including Soffe, Junkfood, To The Game and Art Gun) were $48.5 million, a 5.9% increase from the prior year second quarter sales of $45.8 million.


The sales growth primarily resulted from additional revenue from The Cotton Exchange, the college bookstore division of Soffe. This sales growth was partially offset by a sales decline in our vintage licensed products. Gross margins in the branded segment declined from the prior year second quarter as the sales mix shifted within our branded products. In addition, the company incurred expenses in its digital printing business that further drove margins lower than the prior year. Including the $0.9 million net favorable adjustment from the valuation changes in the Art Gun business, operating income was $1.3 million in the second quarter of fiscal year 2011 compared to $2.9 million for the same period last year.

Basics Segment Review


The basics segment (formerly called the Activewear segment, but continuing to include the Delta Catalog and FunTees business units) had sales of $56.2 million for the quarter ended Jan. 1, 2011, an increase of 23.9% compared to the prior year second quarter, driven from sales growth in both catalog and private label products. The sales increase resulted from 16.0% volume growth coupled with 6.8% higher average selling prices. Gross margins in the basics segment continued to improve, driven from the higher average selling prices, offset partially by the mix of products sold. Operating income was $1.4 million for the quarter ended July 1, 2011, a $2.0 million improvement from the prior year second quarter loss of ($0.6) million.


Fiscal 2011 Guidance


The company reiterates its fiscal year 2011 outlook for sales and earnings. For the year ending July 2, 2011, the Company continues to expect net sales to be in the range of $455 to $465 million and earnings to be in the range of $1.55 to $1.70 per diluted share. The sales outlook for fiscal 2011 includes anticipated organic growth of approximately 3% to 6% after adjusting for one less week of operations in fiscal 2011 compared to the prior year, and approximately $25 million in additional revenues from The Cotton Exchange. The company expects its branded segment to grow approximately 15% to sales in the range of $225 to $230 million. The basics segment sales grew 14% in fiscal 2010, and the Company expects to achieve sales of $230 to $235 million in this segment in fiscal 2011.


The company remains concerned about the challenging economic conditions which, coupled with the higher prices driven from the volatile cotton market, could continue to impact consumer demand for apparel. In determining its expectations for the upcoming year, the Company believes it has taken into consideration these heightened risk factors.


Mr. Humphreys concluded, “We continue to remain optimistic about the future growth opportunities for our business. As a result of the Company’s recent additions to its brand portfolio, implementation of successful product marketing initiatives, ability to appeal to a larger customer base, and leverage of fixed cost, we should continue to drive sales growth and margin expansion in the second half of the year. Many new programs within Delta Apparel, Inc. are in their infancy and we have strategies in place to capitalize on these to deliver near- and long-term growth which should provide strong value to our shareholders in the years ahead.”