Delta Apparel Finishes Solid Year Despite Fourth Quarter Challenges

Delta Apparel Inc. reported a small loss in the fourth quarter ended October 1 on a slight sales increase. Earnings were slightly down for the year as gross margin pressures offset an 11 percent revenue gain.

Robert W. Humphreys, the company’s chairman and chief executive Officer, commented, “We are pleased to announce results marking our second consecutive year of strong organic growth. The combination of our diversified go-to-market strategies with our vertically integrated manufacturing and service platforms allowed us to successfully navigate a dynamic business and economic environment. All five of our market channels – Delta Direct, Global Brands, Retail Direct, DTG2Go, and Salt Life – delivered year-over-year sales growth in fiscal 2022.

Within our Delta Group segment, we continued to see solid growth in our regional screen print and ad specialty businesses along with increasing interest in the supply chain solutions offered in our Global Brands and Retail Direct channels. Our DTG2Go print-on-demand business continues to grow, with a strong double-digit sales increase on the year, and order flow for our digital first strategy exceeds our current capacity. We remain extremely focused on increasing output to meet demand in this important growth area.

“Our Salt Life segment achieved another record year of sales and operating results, with overall sales outpacing the prior year by 21 percent. The Salt Life brand’s ability to connect with consumers across its many marketing touchpoints led to organic growth in all three Salt Life omni-channel markets – wholesale, retail and eCommerce – in the fourth quarter. We ended the year with 21 Salt Life branded retail doors open for business across the U.S. coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware.

“The flexibility of our vertical, near-shore manufacturing platform enabled us to quickly respond to market fluidity and adjust production levels to manage inventory and mitigate higher input costs. We currently plan to operate some of our facilities at less than full capacity in the first half of fiscal 2023 until inventories better align with overall demand.”

Humphreys concluded, “I remain incredibly proud of our associates as they continue to respond to the ever-changing needs of our business. Thanks to their hard work and dedication, we move into our new fiscal year with a highly resilient and diversified business model ready to seize opportunities and meet the challenges ahead.”

For the fourth quarter ended October 1, 2022:

• Net sales were $115.5 million, a slight increase over prior year period net sales of $114.7 million. Net sales in the Salt Life Group segment increased 15.6 percent over the prior year period, while net sales in the Delta Group segment decreased 1.1 percent.
  
• Gross profit was $21.6 million, compared to $26.5 million in the prior year period, with gross margins declining 440 basis points to 18.7 percent. Gross margin improvement in the Salt Life Group segment helped offset a gross margin decline in the Delta Group segment driven by higher input costs in its Activewear and DTG2Go businesses and unabsorbed fixed manufacturing costs. We started reducing production of basic tees in the September quarter, which resulted in $1.1 million of unabsorbed fixed costs.
  
• Selling, general and administrative (SG&A) expenses were $19.8 million, compared to $17.7 million in the prior year period. SG&A expenses as a percentage of sales increased 170 basis points to 17.2 percent, compared to 15.5 percent in the prior year period. Selling costs associated with the Salt Life retail store expansion and higher distribution labor costs primarily drove the increase.
  
• Operating income was $2.2 million, a decline of 78.0 percent from the prior year period. The decline resulted in a net loss of $0.3 million, or $0.04 per diluted share for the quarter compared to net income of $6.9 million, or $0.96 per diluted share, in the prior year period.
  

For the full year ended October 1, 2022:

• Net sales increased 11.0 percent to $484.9 million from $436.8 million in the prior year. Net sales in the Delta Group and Salt Life Group segments increased 9.8 percent and 20.8 percent, respectively, over the prior year.
  
• Gross profit increased 6.8 percent to $108.8 million from $101.9 million in the prior year. Gross margins were 22.4 percent, a decline of 90 basis points from the prior year driven by a decline in the Delta Group segment partially offset by improvement in the Salt Life Group segment.
  
• Selling, general and administrative (“SG&A”) expenses were $79.5 million, compared to $70.7 million in the prior year, driven by selling costs associated with expansion of Salt Life’s retail footprint and higher distribution labor costs. SG&A expenses as a percentage of sales were relatively flat at 16.4 percent, compared to 16.2 percent in the prior year.
  
• Operating income was $31.8 million, resulting in an operating margin of 6.6 percent, compared to operating income of $32.7 million and operating margin of 7.5 percent in the prior year.
  
• Net income was $19.7 million, or $2.80 per diluted share, compared to net income of $20.3 million, or $2.86 per diluted share, in the prior year.
  

Total net inventory at year-end was $248.5 million, compared to $161.7 million a year ago. The year-over-year inventory expansion reflects higher input costs impacting materials, transportation and labor as well as an increase in units on hand.

Total net debt, including capital lease financing and cash on hand, at year-end was $170.6 million, compared to $121.7 million a year ago.