Delta Apparel Sees 14.5 Percent Q1 Revenue Gain

Each business unit contributed to the 14.5 percent organic sales growth in the quarter. Gross margins improved to 25.3 percent compared to 24.0 percent in the prior year first quarter, with margin expansion in both the branded and basics segments. Selling, general and administrative expenses were 19.9 percent of sales, an improvement of 130 basis points compared to 21.2 percent of sales in the prior year first quarter.

The prior year included costs associated with the acquisition of The Cotton Exchange, expenses related to the start-up of Art Gun, and brand-marketing campaigns that were not repeated during the current year quarter. Interest expense increased $0.3 million during the quarter compared to the prior year driven primarily from the higher working capital resulting from the significant rise in cotton costs. The company's effective tax rate is 24 percent for the current year quarter, down from the prior year quarter of 30 percent, but consistent with the 23.6 percent effective tax rate for the 2011 fiscal year. Net income for the quarter ended October 1, 2011 was $4.4 million, or $0.50 per diluted share, compared to $1.6 million, or $0.19 per diluted share, in the prior year first quarter.

Robert W. Humphreys, chairman and chief executive officer, commented, “We just completed a strong first quarter to begin fiscal year 2012. Each operating division increased revenues, contributing to the 14.5 percent organic sales growth during the quarter. Demand for our brands, licensed properties and decorated merchandise continues to grow, which allows us to ship higher value product to our retail partners and directly to consumers through our e-commerce sites. Our manufacturing facilities are operating efficiently and we are leveraging our fixed costs on higher volumes to improve our profitability. We anticipate continued revenue growth in the upcoming quarters, although we expect our profitability to be negatively impacted with our highest cost cotton flowing through cost of sales in our second and third fiscal quarters. Despite these less than ideal conditions, we expect to generate earnings growth in fiscal year 2012.”

Branded Segment Review

Branded segment sales for the first quarter were $70.9 million, a 21.5 percent increase from the prior year first quarter sales of $58.4 million. Sales of vintage inspired tees through our Junkfood business and Salt Life® products drove the growth during the quarter, with Soffe and Art Gun also contributing to the revenue increase. Gross margin improvement, along with better leveraged selling, general and administrative costs, drove an increase in operating income to $5.1 million, or 7.2 percent of sales, compared to $2.8 million, or 4.8 percent of sales, in the prior year quarter.

Basics Segment Review

The basics segment had sales of $52.6 million for the quarter ended October 1, 2011, an increase of 6.2 percent compared to the prior year first quarter, driven by sales growth in both catalog products and private label programs. The revenue growth resulted from a 17.3 percent increase in average selling prices partially offset by a 9.5 percent decrease in unit sales. The first quarter of fiscal year 2012 continued the rollout of higher priced cotton in cost of sales; however, the company expects that its highest cost cotton will flow through cost of sales during its second and third fiscal quarters. Higher selling prices, coupled with improved manufacturing results and the ability to leverage general and administrative expenses, resulted in operating income of $1.6 million, or 3.0 percent of sales, compared to $0.2 million, or 0.3 percent of sales, in the prior year first quarter.

Stock Repurchases

During the first quarter of fiscal year 2012, the company used $1.5 million to repurchase 92,756 shares at an average price of $15.73 per share. As of October 1, 2011, approximately $7.0 million remained available for future stock repurchases pursuant to the company's Stock Repurchase Program.

Fiscal 2012 Guidance

The company is maintaining its fiscal year 2012 outlook for sales and earnings. For the fiscal year ending June 30, 2012, the company still expects net sales to be in the range of $500 to $520 million and earnings to be in the range of $2.00 to $2.15 per diluted share.

The company continues to operate in a weak economy and faces challenging conditions as it manages through higher priced cotton and other inflationary pressures. Although the company believes it has taken these risks, as well as other factors, into consideration in determining the guidance for fiscal year 2012, the significance of the challenges, many of which are outside of the company's control, creates heightened risk of earnings volatility during the fiscal year.

Humphreys concluded, “We are focused on maintaining our trend of annual sales and earnings growth in fiscal year 2012. We are facing short-term challenges as we navigate through the weak marketplace and historically high raw material costs. That said, we continue to be optimistic about Delta Apparel's many long-term opportunities. Our brands are well recognized by a broad consumer base and our creative talent remains consistent in developing new products that resonate well with consumers. We continue to be innovative in our manufacturing operations to lower our product costs while maintaining our high quality standards. We believe we have a strong foundation to support further revenue growth and earnings expansion to provide significant and sustained value for our shareholders.”