Delta Apparel, Inc. posted a loss in the fiscal third quarter that ended July 1 due to efforts to reduce production levels to rebalance inventories in the marketplace as well as from inflationary pressures on cotton. Delta said the inventory and inflationary pressures are receding.
Chairman and Chief Executive Officer Robert Humphreys commented, “We saw encouraging indications throughout the quarter that the two major trends impacting both our business and the entire industry this year – elevated cotton pricing and demand destruction from high inventory levels in the retail supply chain – are receding and we are moving into a more normalized operating environment. I’m extremely proud of the way our team has navigated these broad-based events and executed strategies to counteract them, including significant reductions in inventory and debt as well as several needle-moving cost restructuring initiatives.
We continue to see some signs of demand improvement in parts of our Activewear business, including our channel serving mass and mid-tier retailers, and our Salt Life business continues to expand its consumer reach with two new branded retail locations in New York and outstanding growth on its eCommerce site. In our DTG2Go business, we completed a comprehensive recalibration of our digital-first technology fleet and made substantial headway on consumer satisfaction initiatives. DTG2Go also reached an exciting milestone in launching a proprietary customer order portal that we believe will catalyze more industry migration to digital and increase our market share.
Humphreys concluded, “Our decision toward the end of last year to reduce production levels and purchase less price-inflated cotton proved to be strategically sound, but the significant one-time cost impacts of that decision greatly impacted our operating results this quarter and year-to-date. Looking ahead, we expect steady improvement in our operating results as we close out our fourth quarter and move into our next fiscal year. For fiscal year 2024, we anticipate net sales in a range of $410 to $425 million generating operating profit margins of 3.25 percent to 4.25 percent, with sequentially improving gross margins and operating profit as well as topline growth in the back half of the year.”
For the third quarter ended July 1, 2023:
- Net sales were $106.3 million compared to the prior year’s third-quarter net sales of $126.9 million. Salt Life Group segment net sales were $17.2 million compared to the prior year’s third quarter net sales of $20.9 million, with the year-over-year comparison skewed by significant sales occurring in the prior year’s third quarter due to transportation delays. Net sales in the Delta Group segment were $89.1 million compared to $106 million in the prior year’s third quarter.
- Gross margins were 13.1 percent compared to 24.2 percent in the prior year period, driven primarily by the above-referenced production curtailments intended to match manufacturing output with lighter market demand as well as inflationary cotton costs (collectively “Production Curtailment & Cotton Costs”). Excluding the Production Curtailment & Cotton Costs, adjusted third-quarter gross margins were 22.7 percent. Delta Group segment gross margins for the quarter were 5.9 percent compared to 19.1 percent in the prior year period; however, excluding the Production Curtailment & Cotton Costs, adjusted gross margins in the Delta Group segment were 17.4 percent. Salt Life Group segment gross margins for the quarter increased 30 basis points to 50.5 percent from 50.2 percent in the prior year period.
- Selling, general, and administrative expenses (SG&A) declined favorably to $18.5 million from $22.4 million in the prior year’s third quarter, while SG&A as a percentage of sales was down favorably to the prior year’s period at 17.4 percent.
- Operating income declined year-over-year from $9.3 million, or 7.3 percent of sales, to an operating loss of $4.5 million, or (4.2 percent) of sales. However, excluding the Production Curtailment & Cotton Costs, adjusted operating income was $5.8 million, or 5.5 percent of sales. Delta Group segment operating income for the quarter declined from $10.7 million to a loss of $3.6 million; however, excluding the Production Curtailment and Cotton Costs, adjusted operating income in the Delta Group segment was $6.7 million, or 7.5 percent of sales. Salt Life Group segment operating income for the quarter was $1.6 million, or 9.6 percent of sales, compared to $3.6 million and 17.2 percent of sales in the prior year period.
- Net income declined from $6.2 million, or $.88 per diluted share, to a loss of $6.3 million, or ($0.90) per diluted share. However, excluding the Production Curtailment & Cotton Costs, the third quarter adjusted net income was $1.2 million, or $0.17 per diluted share.
- Net inventory as of July 1, 2023, was $226.2 million, a sequential decrease of almost $33 million from December 2022 and generally flat year-over-year with inventory of $227.6 million at June 2022.
- Total net debt, including capital lease financing and cash on hand, was $166.2 million as of July 1, 2023, an approximately 15 percent reduction from $194.3 million at March 2023 and a slight increase from $162.4 million at June 2022. Cash on hand and availability under the company’s U.S. revolving credit facility totaled $14.4 million as of July 1, 2023, a decrease of $12.8 million from December 2022 and $16.4 million from June 2022, with the decrease from December 2022 principally driven by investments in the business to support working capital needs as well as higher interest costs.
- The company spent approximately $1.5 million on capital expenditures during the third quarter compared to $5.5 million during the prior year’s third quarter, with the expenditures focused on Salt Life retail store buildouts as well as facility and information technology enhancements.
For the nine months ended July 1, 2023
- Net sales were $323.9 million compared to prior year period net sales of $369.3 million. Salt Life Group segment net sales were $46.5 million compared to the prior year period net sales of $46 million. Net sales in the Delta Group segment were $277.5 million compared to $323 million in the prior year period.
- Gross margins were 13.5 percent compared to 23.6 percent in the prior year period, driven primarily by the Production Curtailment & Cotton Costs coupled with costs incurred in connection with restructuring initiatives (collectively Restructuring Costs). Excluding the Production Curtailment and Cotton Costs and Restructuring Costs, adjusted gross margins were 22.7 percent. Delta Group segment gross margins were 6.5 percent compared to 19.6 percent in the prior year period; however, excluding the Production Curtailment & Cotton Costs and Restructuring Costs, adjusted gross margins in the Delta Group segment were 17.2 percent. Salt Life Group segment gross margins increased to 55.4 percent from 51.6 percent in the prior year period.
- SG&A declined favorably to $56.7 million from $59.6 million in the prior year period, while SG&A as a percentage of sales increased from 16.1 percent to 17.5 percent.
- Operating income declined year-over-year from $29.5 million, or 8 percent of sales, to an operating loss of $12.4 million, or (3.8 percent) of sales. However, excluding the production curtailment, cotton and restructuring costs, adjusted operating income was $20.5 million, or 6.3 percent of sales. Delta Group segment operating income declined from $33.6 million to a loss of $11.0 million; however, excluding the production curtailment, cotton and restructuring costs, adjusted operating income in the Delta Group segment was $22.0 million, or 7.9 percent of sales. Salt Life Group segment operating income was $6.6 million, or 14.1 percent of sales, compared to $7 million, or 15.3 percent of sales, in the prior year period.
- Net income declined from $20 million, or $2.84 per diluted share, to a loss of $16.8 million, or ($2.41) per diluted share; however, excluding the production curtailment and cotton and restructuring costs, adjusted net income was $7.2 million, or $1.02 per diluted share, for the nine-month period.