Delta Apparel (NYSE:DLA), as projected, reported significantly improved earnings for its fiscal second quarter, ended April 2, due to substantial gross margin improvement. And margins are expected to further improve with its decision to close its textile manufacturing operation in Maiden, NC.
Production will be transitioned to its Honduran textile facility. On the company’s second-quarter conference call, Robert W. Humphreys, Delta Apparel’s chairman and CEO, said the decision to close the plant comes amid ongoing efforts over the last two years to increase flexibility and reduce costs across its manufacturing base to better compete in the marketplace. The closing will affect 160 jobs.
“This realignment is intended to maximize production at the company’s lower-cost facility and eliminate duplicative fixed costs,” Humphreys said.
The company expects to support its Mexico sew and screen-print production with in-country sourced fabric. Domestic fabric will be sourced with current suppliers that will be sewn in the company’s Rowland, NC plant to support its Made in the USA programs.
Once completed, the lower production costs are expected to improve gross margins and ultimately earnings by up to 70 cents per share. Investments of $7 million are being made in new equipment for its offshore manufacturing operations that should be installed this quarter to expand output in those facilities. Expenses of $3 million, or 28 cents a share, are expected this year as part of this realignment, including severance, shutdown and start-up inefficiency and other expenses, with the majority of this expense in the fiscal-2016 third quarter.
The realignment should be completed by the end of fiscal-year 2016. Savings are expected to arrive in the first half of fiscal 2017 with annual savings pegged at approximately $8 million.
In the second quarter, earnings declined to $3.4 million, or 43 cents a share, from $3.6 million, or 46 cents, a year ago. However, excluding a year-ago gain tied to the sale of The Game, EPS would have sharply improved to 43 cents a share from 3 cents a year ago. The earnings increase was projected in a preliminary update given on April 28.Overall gross margins expanded 510 basis points over the prior year period and 270 basis points sequentially.
Net sales declined 5.1 percent to $109.2 million, impacted by the bankruptcy filing of Sports Authority. Excluding the sale of The Game last year and year-ago sales of a Kentucky Derby license, the company decided not to renew, sales would have been off 0.4 percent.
In Delta Apparel’s basics segment, gross margins in the quarter expanded 810 basis points resulting from a stronger product mix, continued manufacturing efficiencies and lower raw material costs. Net sales in the basics segment were off 2.2 percent to $69.8 million. Activewear
sales were down 1.5 percent from the prior year period due to a 7 percent decline in unit sales of basic tees that was partially offset by strong growth in fashion basics, which exceeded
250 percent year-over-year growth, and catalog, full-package growth of 15 percent. Private-label sales improved 4 percent, with growth coming from regional, trendy brands as well as new customers acquired in 2015. Art Gun experienced solid year-over-year growth in March but had an overall sales decline of approximately $500,000 for the full second quarter as it made adjustments to correct inefficiencies that surfaced during the high-volume 2015 holiday season.
In Delta Apparel’s branded segment, sales in the quarter grew 2.8 percent to $39.3 million after adjusting for the divestitures of The Game and the Kentucky Derby license. The segment achieved margin expansion of 110 basis points.
Among its brands, Salt Life experienced year-over-year sales growth of 23 percent in the quarter and nearly 120 percent sequentially, with its e-commerce website, saltlife.com, growing 48 percent. Robust sell-through was seen for Salt Life’s spring 2016 product line.
The M.J. Soffe business was negatively impacted by the filing of Sports Authority and otherwise would have achieved sales growth of 5 percent over the prior-year period. Company officials said Soffe had improved service levels to the independent sporting goods channel and recently launched a new business-to-business website that is expected to further enhance Soffe’s recent double-digit sales growth in that channel.
While the junkfoodclothing.com e-commerce website achieved growth of 26 percent for the quarter, overall Junkfood sales were down $1.9 million from the prior-year period. The decline is primarily attributed to “unsettled conditions” in the retail marketplace and management changes at several specialty apparel customers. Said Deb Merrill, Delta Apparel’s CFO, “Such changes normally lead to more deliberative buy decisions and slower order placements during the transitions, which was the case in the second quarter.”
Looking ahead to the second half, Humphreys said Delta Apparel expects ”continued sluggishness in the retail marketplace.” He still expects the company will be able to achieve further organic growth in the low-single digits and continued gross margin expansion.
“This should be driven by market-share gains based on the demand for our products, a trend towards our more profitable mix of products sold, and the expansion of the margin channels of distribution,” Humphreys said. “We also expect the strength of our e-commerce business to continue to follow the high-growth trends that we saw in our B2B and B2C sites in the second quarter. These things combined with our other significant fixed cost reduction efforts points us to a strong second half of the year and provides a foundation for further improvement in fiscal 2017.”
