Fighting off higher raw material prices, Delta Apparel saw both sales and earnings increase year-over-year after adjusting for last year’s sale of Junkfood Clothing.
Sales came in at $100.0 million, up 2 percent after excluding the $6 million of sales from the Junkfood business divested last March. Net sales were down 4.0 percent.
Net income was $3.6 million, or 48 cents per share, a slight increase over the prior year period’s 47 cents per share after excluding an 11 cents per share gain on the Junkfood sale. Net earnings in the year-ago period were down 20.1 percent.
While margins expanded in most of Delta Apparel’s businesses during the quarter, overall gross margins declined to 22.2 percent from 23.3 percent in the prior year. Higher raw material prices and other inflationary cost pressures at Activewear drove the decline.
The bottom line was helped by a reduction in SG&A sales by 8.3 percent to $16.7 million. As a percent of sales, SG&A was reduced to 16.7 percent from 17.5 percent a year ago.
Basic segment net sales were $73.7 million in the quarter, up 4.1 percent. Sales were boosted by the March-12 acquisition of DTG2Go, a competitor of the company’s digital print subsidiary, Art Gun. The purchase nearly doubled in size of the digital print business.
On a conference call with analysts, Delta’s chairman and CEO, Bob Humphreys, said the acquisition is expected to be immediately accretive from both a sales and earnings perspective. He said, “This acquisition also accelerates our geographic expansion plans for digital print. DTG2Go now has multiple locations in Florida, a location in Nevada serving the Western United States and an additional manufacturing location on our Soffe campus scheduled to begin production this week. The new location gives us 1- to 2-day shipping to consumers in the important Northeastern marketplace.”
He said Delta expects to increase in size and scope of the company’s digital print business to provide more cross-selling opportunities with Activewear as customers migrate to the virtual inventory model and see the efficiency gains from using blank garments produced on Delta’s vertical manufacturing platform.
Deb Merrill, CFO, said the DTG2Go business overall achieved sales growth of nearly 60 percent year-over-year, including 20 percent organic sales growth. Gross margins at DTG2Go increased 330 basis points to 24.4 percent, driven from improved operational efficiencies and the incremental benefit of running higher sales volumes through the digital platform.
Added Merrill, “We expect the strong growth trend to continue as we leverage further investments in equipment in our proprietary platform. DTG2Go is now better positioned than ever to win business, both within its traditional customer base and in new channels that recognize the benefits of the virtual inventory model.”
Activewear sales, also included in the Basics segment, for the quarter increased 2 percent year-over-year, with 15 percent growth in catalog sales driven by increased units, higher selling prices and continuing velocity in fashion basics. Fashion basics sales more than doubled over the prior year quarter. Private-label sales were down during the quarter but remained up 3 percent in the first half of the year.
While gross margins in the Activewear business were lower in the first half from the higher-cost environment, price increases, a favorable mix of products sold and further manufacturing efficiencies are expected to improve gross margins in the back half of the year.
Net sales for the quarter in the Branded segment were $26.3 million, down 21.0 percent due to the divestiture of Junkfood.
Salt Life revenue increased almost 7 percent for the quarter, with growth across most sales channels. Escalating demand for performance products and other new categories, combined with strong momentum in direct-to-consumer channels, drove the topline growth. Humphreys said Salt Life’s customer base is expanding, with shipments to all doors at Buckle during the March quarter and shipments to a 100 Dillard’s stores started in April.
Salt Life’s retail stores, including the company’s newest addition in Daytona, FL, performed well during the quarter, and a second outlet store in the Florida market is targeted for late fall. Salt Life e-commerce sales continued to strengthen, increasing 21 percent overall year-to -date and led by 38 percent growth in California. Salt Life gross margins were consistent with the prior year period and drove solid profitability for the quarter.
“Looking forward to the second half of the year, Salt Life plans to expand its lifestyle brand offering with the introduction of a craft beer line in Florida during the fourth quarter. We have several other product extensions planned for fiscal 2019, including a licensed women’s swimwear line that many of our customers have been expressing interest in over the years,” said Humphreys. “Salt Life continues to expand its marketing efforts to increase the visibility of the brand. It expects to reach its largest television audience yet through its titled sponsorship of a new fishing show airing on the Discovery Channel later this year. Salt Life’s internet presence is also growing, with a direct social media reach of almost 1.4 million and over 19 million views on its YouTube channel.”
Soffe’s second quarter sales were down slightly from the prior year quarter but are up nearly $2 million in the first half of the year. Gross margins improved 130 basis points as a result of cost structure enhancements and a more profitable product mix.
“Soffe’s second quarter performance was mixed, but we encouraged by its double-digit growth in first half sales,” said Humphreys. “Soffe is also aggressively marketing its brand through various initiatives in the dance, cheer and other channels. In addition, its direct-to-consumer footprint will expand, once again, with the opening of a fifth branded retail store in Greenville, North Carolina during the third quarter. A recent virtual inventory partnership with DTG2Go also gives Soffe another avenue for growth in the future.”
For the first six months, Delta’s sales inched up 0.4 percent to $190.3 million and were up 9 percent year-over-year excluding prior year sales of Junkfood. Excluding the first quarter discrete impact of the tax reform legislation, first half earnings were $4.2 million, or 56 cents per share, a 12 percent increase year-over-year. Earnings were up 36 percent excluding the prior year gain on the sale of the Junkfood.
“Despite a still-challenging retail environment and cost pressures in a number of areas, overall, we’re pleased with our performance in the first half of the year,” said Humphreys. “We remain upbeat about the second half of fiscal 2018 and look for more organic growth and profit improvements, driven by higher gross margins in the second half of the year. We should continue to see the incremental benefits from our new products and category extensions, broadening customer base and investments in the digital print and fulfillment model. Our manufacturing platform continues to operate efficiently and we’re finding additional opportunities to increase volumes and capitalize on our new capacity and functionalities, such as our plan to move the productions of our fleece products, in-house, during the third quarter.”
Photo courtesy Salt Life