Delta Apparel Inc. reported net sales of $85.3 million for its fiscal 2017 first quarter ended December 31, down $4.8 million, or 5.4 percent, from $90.2 million for the 2016 first quarter.
Art Gun and e-commerce showed strong revenue growth, but overall sales for the quarter were hindered by the impact of Hurricane Matthew, the closure of a large sports retailer, lower sales in Junkfood’s specialty channel due to the difficult retail environment and inventory de-stocking at major retail licensing accounts in the Delta catalog business.
Overall gross margins remained solid at 20.6 percent, down only slightly from 20.9 percent in the prior-year first quarter. Operating income was $469,000, compared with $2.2 million for the 2016 first quarter, and the company experienced a net loss for the quarter of $607,000, or 8 cents per diluted share, versus net income in the prior-year quarter of $681 thousand, or 9 cents per diluted share.
Basics Segment Review
2017 first quarter net sales for the basics segment were $60.8 million, down 1.1 percent from the 2016 first quarter’s $61.5 million. The decline was due to a 3.1 percent drop in Delta Activewear sales driven by slower business with retail license accounts, as mass channel retailers de-stocked inventory during the quarter. Other Delta Activewear channels showed strong growth, with ad-specialty up 35 percent and sales into regional screen-printers up 4 percent. Sales of higher-margin fashion basics products grew by more than 50 percent from the prior-year first quarter and this trend is expected to continue during 2017 as new fashion basics products are introduced.
The private label business saw solid demand during the quarter, with sales tracking those in the prior-year period. Private label demand is expected to rise as major brands increasingly require the specialized vertical manufacturing capabilities and compliance programs that are characteristic of our manufacturing platform.
Art Gun continued its rapid growth during the quarter, experiencing record revenue with net sales up 28 percent on 34 percent higher units. Profitability continues to grow as Art Gun expands and leverages the full capabilities of its state-of-the-art facility and the Delta catalog product base, bringing operating profit as a percentage of sales into double digits for the quarter. Art Gun’s excellent service and response times during the holiday season proved the effectiveness of its service model and, with new customers already coming on board, signal continued growth during fiscal 2017.
Branded Segment Review
Net sales for the branded segment were $24.5 million in the fiscal 2017 first quarter compared with $28.7 million in the prior-year period. Several factors contributed to the sales decline. Soffe’s sales were down approximately $1.5 million but would have generally tracked last year’s first quarter absent the negative impacts of The Sports Authority closure and a winter product return. Soffe achieved strong e-commerce growth, with B2C sales up 30 percent and B2B sales up 40 percent, and continues to add new e-retail customers as well as strategic and independent sporting goods retailers. Junkfood, without the benefit of sales momentum generated in the prior-year first quarter from a large-scale movie release, also experienced comparatively lower sales due to declines at brick-and-mortar retailers.
Salt Life achieved record first-quarter profit on 3.8 percent quarter-over-quarter sales growth with expanded margins. The effects of Hurricane Matthew and the slow sell-through of long sleeve products due to the unseasonably warm winter impeded Salt Life sales growth. Salt Life’s juniors and performance products continued their growth trend during the quarter, as did its ecommerce website, www.saltlife.com, which produced record sales and was up nearly 50 percent over the prior-year first quarter. Overall margins for the branded segment expanded 160 basis points for the quarter compared to the prior-year period.
Robert W. Humphreys, Delta Apparel’s chairman and chief executive officer commented that while sales were down year-over-year, they remain on track with expectations. “A few things that were out of our control hampered sales in our first quarter – Hurricane Matthew, atypically warm weather and The Sports Authority closure, to name a few. These should not, however, have a lasting effect on the future growth of Delta Apparel. We remain focused on those activities that have a continuing positive impact on our top and bottom lines, and on measures that will improve efficiency and service for our customers while expanding our gross margins. The results of our efforts are already becoming apparent.”
“In advance of the holiday spike, we added new equipment and made process flow improvements at Art Gun that give us the capacity to print more than 15,000 unique garments a day and ship to customers in over 100 countries. This enabled us to efficiently manage this year’s record holiday volumes. Our excellent performance has attracted additional business that should support Art Gun’s continued growth during non-holiday periods.”
“Salt Life’s new Fayetteville, North Carolina distribution center is already improving service to customers and lowering costs. We expect increased traffic at Salt Life’s San Clemente, California store, through the spring and summer months. We also just opened a Salt Life store in Huntington Beach, furthering consumer outreach in California. Salt Life ended the quarter in a strong position, with a solid order backlog that we believe will drive growth back into the double digits.”
“We anticipate significant margin improvement in our Delta Activewear business over the next several quarters. During the first quarter, we met the production and cost-related goals set in connection with our recent manufacturing realignment. To further leverage our improved manufacturing platform, we have initiated an invigorated go-to-market strategy and introduced new fashion basics products that should further enhance margins.”
“While we see the challenging retail environment continuing, we believe fiscal 2017 will be a year of growth and improved profitability for Delta Apparel. We entered the year with exciting new products, have lowered our manufacturing and distribution costs, and are adopting innovative ways to serve our customers. We believe that Art Gun’s virtual inventory model and our e-commerce platforms represent the wave of the future, and provide synergies benefitting all of our business units. This is a formula that we believe will drive significant growth for Delta Apparel as we move forward,” Humphreys said.
Image courtesy Soffe