Delta Apparel, Inc. reported a 5.6% decline in fiscal second quarter net revenues to $68.8 million, for the period ended December 29, 2007, from $72.9 million last year due to lower FunTees sales. The FunTees decline was partially offset by higher sales in the Delta catalog, Soffe and Junkfood businesses. Gross margins declined 630 basis points to 15.8% compared to 22.1% in the prior year second quarter primarily as a result of textile restructuring related costs, higher raw material prices, increased transportation costs and sales of a more basic mix in the t-shirt business. Net loss for the second quarter was $2.8 million, or 33 cents per diluted share, compared to the prior years net income of $0.6 million, or 7 cents per diluted share.
The company previously announced on July 18, 2007 an overall restructuring plan which included the closing of its Fayette, Alabama manufacturing facility, the expensing of excess manufacturing costs with the FunTees integration and the expensing of start-up costs stemming from the opening of its Honduran textile facility. The restructuring plan began in the fourth quarter of fiscal 2007 and is expected to be completed by the end of the third quarter of fiscal 2008 for a total cost of approximately $11.9 million, or 90 cents per diluted share. In the second quarter of fiscal 2008 the company expensed $2.0 million, or 15 cents per diluted share, predominantly related to excess textile manufacturing costs and start-up costs from the opening of its Honduran textile facility. Final restructuring related expenses of approximately $0.9 million, or 7 cents per diluted share, are expected to be expensed in the companys fiscal 2008 third quarter. Expenses are expected to impact the companys financials as follows:
|FY 07 Qtr 4||FY 08 Qtr 1||FY 08 Qtr 2||FY 08 Qtr 3||Total|
|Cost of Sales||$5.4 million||$2.0 million||$2.0 million||$0.9 million||$10.3 million|
|Restructuring Charges||$1.5 million||$0.1 million||—||—||$ 1.6 million|
|Total||$6.9 million||$2.1 million||$2.0 million||$0.9 million||$11.9 million|
|Diluted EPS Impact||$||0.51||$||0.16||$||0.15||$||0.07||$||0.90|
Robert W. Humphreys, president and CEO, commented, “During the quarter we made significant progress executing our textile restructuring plan. Our new, state-of-the-art textile facility in Honduras began producing first-quality dyed fabric during the quarter, and is on pace to reach our initial goal of producing over 500,000 pounds of fabric per week in our fiscal fourth quarter. This facility should provide our activewear business with lower cost production to drive enhanced profitability in the near future. Despite the slowing retail environment, we achieved sales growth in both of our retail-ready businesses by penetrating new markets and establishing additional doors for our products. While we are cautious about the retail conditions in the marketplace, we believe we are positioned to achieve our sales and earnings goals in the second half of our fiscal year.”
Mr. Humphreys concluded, “Our manufacturing operations are focused on continued cost savings and quality improvement. Our new offshore textile production, team sewing and consolidation of offshore cutting should provide us with a lower cost manufacturing platform for the future. We continue to build new customer relationships and open new doors across most apparel distribution channels. We believe these initiatives will place us in a strong position for future growth.”
Fiscal 2008 Guidance
For the third fiscal quarter ending March 29, 2008, the company expects sales to be in the range of $84 million to $88 million and diluted earnings to be in the range of 25 cents to 29 cents per share. These results are expected to include approximately $0.9 million, or 7 cents per diluted share, of textile restructuring related costs during the quarter. This compares to sales of $85.0 million and diluted earnings of 32 cents per share in the prior year third fiscal quarter.
For the 2008 fiscal year, the company continues to expect net sales to be in the range of $325 million to $340 million and diluted earnings per share to be in the range of 62 cents to 76 cents. Restructuring related expenses for the full year are expected to total approximately $5.0 million on a pre tax basis, or approximately 39 cents per diluted share.
This segment, which is comprised of the Soffe and Junkfood businesses, reported a 7.1% sales increase to $27.7 million for the second quarter of fiscal year 2008 compared to $25.9 million in the prior year second quarter. The sales increase was driven primarily by a 24.6% increase in the Junkfood business, the third consecutive quarter of double-digit sales growth. Junkfood sales were positively impacted by sales of the new co-branded products to Gap Kids, increased foreign sales, and new boutique customers. The Soffe business also grew its sales in the second quarter, driven from its military and bookstore channels, offset partially by lower sales in its retail and sporting goods distribution channels. Operating income in the retail-ready segment was $2.0 million for the second fiscal quarter of 2008, an increase of $0.9 million from the prior year second quarter due primarily to the increased sales and improved margins in the Junkfood business.
The activewear segment, which is comprised of the Delta and FunTees businesses, reported sales of $41.1 million for the three months ended December 29, 2007, a 12.7% decrease from the prior year second quarter. The decrease in sales was due to lower sales in the FunTees business driven by capacity constraints experienced during the FunTees textile transition and reduced callouts due to slower retail demand. Sales in the Delta business increased slightly from the prior year second quarter, driven by increased volumes offset by lower average selling prices. The lower average selling prices resulted from selling a mix containing more core basic t-shirt products. The activewear segment generated an operating loss of $4.6 million compared to operating income of $1.3 million in the prior year second quarter due to restructuring related costs, increased raw material prices, higher transportation costs, a higher mix of core basic tees in the Delta business, and lower sales in the FunTees business.