Delta Apparel, Inc. reported financial results for the third fiscal quarter ended April 2, 2005. Net sales slipped to $58.3 million from $58.8 million in the prior year. Net income increased to $5.4 million compared to the prior year's level of $3.8 million. Diluted earnings per share for the quarter were 64 cents compared to 46 cents in the third quarter of the prior year (adjusted to reflect 2-for-1 stock split effective May 31, 2005).
Gross margins for the quarter increased 330 basis points to 25.3% compared to 22.0% in the second quarter, and increased 80 basis points from the third quarter of the prior year. Operating margin increased to 13.7% primarily as a result of the $3.6 million gain on the sale of the Edgefield, S.C. yarn spinning facility. This is an 820 basis point increase from the second quarter and a 430 basis point increase from the prior year's third quarter.
For the nine months ending April 2, 2005, net sales increased 19.6% to $161.8 million compared to $135.2 million in the prior year. Net income for the nine month period increased 86.6% to $8.0 million, or $0.95 per diluted share, compared to $4.3 million, or $0.52 per diluted share in the same period last year (adjusted to reflect 2-for-1 stock split effective May 31, 2005).
Gross margins for the first nine months of fiscal year 2005 improved 270 basis points to 23.0% compared to 20.3% in the prior year. Operating margin increased 310 basis points to 8.5% compared to 5.4% in the prior year. This improvement was driven by increased sales of higher margin products and improved manufacturing operations, offset partially by higher raw material costs. The Company noted that prior year results included six months of operations from M. J. Soffe Co., which was acquired on October 3, 2003.
Robert W. Humphreys, President and CEO, commented, “We are pleased with our performance for the third fiscal quarter. We successfully increased our gross margins through price increases in our core apparel styles, a more favorable mix of higher margin goods, as well as through improvements to our manufacturing process. During the quarter, we focused on several operational initiatives to better position the Company for the future. We transitioned our primary distribution center in Tennessee to a new facility that will allow us to better serve customers and reduce distribution costs. We also dedicated resources to the preparation of our new Cranbury, New Jersey distribution center, which commenced shipping in April. With these enhancements to our infrastructure, we are well-positioned with our distribution centers, and the demand for our product lines remains strong.”
Mr. Humphreys continued, “We have begun implementing significant cost reductions to our Soffe business to improve its operational performance. During the quarter we announced the closing of our Soffe sewing facility in Bladenboro, North Carolina and, over the course of the next few months, we will continue to transition our domestic sewing production to offshore facilities. We will, however, maintain appropriate levels of sewing production in the United States to support our military programs, which require domestic manufacturing. We believe these initiatives, coupled with our more focused distribution strategy, will enhance our overall performance and continue to drive sales and gross margins for our business.”
The Delta business reported sales of $36.0 million for the three months ended April 2, 2005, a 0.8% decrease from the prior year quarter. This slight decrease in sales was primarily a result of reduced distribution capacity as a result of the Company's transition of its primary distribution center in Tennessee to a new building. The Company continued to focus its efforts on maintaining higher pricing and improved product mix. Operating income was $6.1 million for the third quarter compared to $2.6 million from the prior year quarter, primarily as a result of the $3.6 million gain on the sale of the Edgefield facility in January, 2005.
The Soffe business contributed $22.9 million in sales for the third quarter of fiscal year 2005, a $0.4 million increase, or 1.6%, from sales in the prior year's quarter. During the quarter, the Soffe business reduced its inventory and increased its sales of close-out products, which had a slightly negative impact on sales and gross margins. Operating income for the quarter ended April 2, 2005 decreased to $2.1 million compared to $2.8 million from the prior year quarter, due to higher raw material costs, transition costs associated with the ongoing move of domestic sewing to offshore contractors, and the increased sales of close-out products.
The Company's effective income tax rate for the three months ended April 2, 2005 was 25.3%, compared to 19.4% for the third quarter of the prior year and 32.4% for the fiscal year ended July 3, 2004. During the quarter ended April 2, 2005, the Company decided to permanently reinvest its foreign earnings in Honduras and therefore reversed a $0.7 million tax liability associated with the foreign earnings, resulting in the lower effective tax rate during the quarter ended April 2, 2005. During the quarter ended March 27, 2004, the statute of limitations expired on the tax years covered by the tax sharing agreement between the Company and Delta Woodside Industries, Inc. As a result, the Company reversed a $0.9 million tax liability associated with the tax sharing agreement, resulting in the lower effective tax rate during the quarter ended March 27, 2004.
Inventory at April 2, 2005 decreased $4.6 million to $105.2 million compared to the prior year. Inventory in the Soffe business decreased $3.7 million compared to the prior year, and decreased $3.0 million compared to January 1, 2005. The Company remains focused on further improving its inventory utilization while maintaining appropriate inventory levels to service its customers and continue its sales growth.
SELECTED FINANCIAL DATA:
(In thousands, except per
share amounts)
Three Months Ended Nine Months Ended
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
--------- --------- --------- ---------
Net Sales $ 58,272 58,805 $161,767 135,230
Cost of Goods Sold 43,528 44,374 124,631 107,807
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Gross Margin 14,744 14,431 37,136 27,423
SG&A 10,392 8,879 26,932 20,085
Other (Income)/Expense (3,616) 20 (3,612) (29)
--------- --------- --------- ---------
Operating Income 7,968 5,532 13,816 7,367
Interest Expense 679 799 2,217 1,846
Taxes 1,844 920 3,556 1,211
--------- --------- --------- ---------
Net Income $ 5,445 $ 3,813 $ 8,043 $ 4,310
========= ========= ========= =========
Weighted Average Shares
Outstanding (a)
Basic 8,376 8,178 8,316 8,130
Diluted 8,558 8,376 8,480 8,324
Net Income per Common Share (a)
Basic $ 0.65 $ 0.47 $ 0.97 $ 0.53
Diluted $ 0.64 $ 0.46 $ 0.95 $ 0.52
(a) Adjusted to reflect 2-for-1 stock split effective May 31, 2005
