Delta Apparel Inc. reported earnings excluding specialty items were down slightly in its fiscal third quarter ended July 2 on a 7.4 percent revenue decline.
Earnings reached 32 cents per share on net sales of $111.6 million. Excluding the $1.8 million pre-tax charge taken during the quarter in connection with the previously announced manufacturing realignment comprised of $1.6 million in restructuring activities and $0.2 million in manufacturing inefficiencies, earnings would have been 50 cents per diluted share. This compares with earnings of 55 cents per diluted share for the prior year third quarter on net sales of $120.5 million.
While net sales in the 2016 third quarter were negatively impacted by continued weakness in the retail environment and the absence of the Kentucky Derby license, which the company did not seek to renew for this year, continued strong gross margins resulted in a year-over-year margin expansion of 150 basis points.
For the first nine months of fiscal 2016, net sales were $310.9 million compared with $328.9 million in the prior year period, which included $13.0 million in sales attributed to the since-divested The Game business and the discontinued Kentucky Derby license. Net income increased to $6.7 million, or $0.84 per diluted share, compared to $3.9 million, or $0.48 per diluted share, in the prior year period.
Basics Segment Review
Gross margin expansion of 210 basis points resulting from a stronger product mix and continued manufacturing efficiencies drove third quarter operating profit for the basics segment to $5.4 million, or 7.5 percent of sales. Net sales for the quarter were $72.1 million, 8.8 percent lower than the $79.0 million reported in the prior year’s third quarter. The decrease primarily resulted from a 10 percent decline in activewear sales due to lower unit sales of basic tees and a $1.8 million reduction in private label sales. These declines were offset somewhat by more than 100 percent growth in fashion basics and nearly 50 percent growth in catalog full-package products. Continued progress in these two areas is expected to be a major driver of growth in the basics segment. While there has been a slowdown from lower call-outs and an over-inventoried environment within several international brands, the company is experiencing strong growth from on-trend regional brands, as well as new customers acquired in 2015. Art Gun, which has solidified its leadership position in the digital printing marketplace, realized strong net sales growth of 28 percent for the quarter, with a 38 percent increase in units sold. Art Gun’s double-digit growth is expected to continue in the fourth quarter and into fiscal year 2017.
Branded Segment Review
Branded segment net sales for the quarter were $39.5 million, virtually level with the prior year period after adjusting for the Kentucky Derby license sales that did not recur in 2016. The branded segment produced operating profit of $2.7 million, or 6.7 percent of sales, for the quarter. Salt Life, driven by strong sell-through of its spring 2016 line, continued its double-digit growth trend with 45 percent growth over the prior year period. The new Salt Life distribution center functioned extremely well, efficiently handling record-high shipment levels during the third quarter. Salt Life’s direct-to-consumer sales were generously augmented by 80 percent growth in its e-commerce site, www.saltlife.com. The build-out for the new Salt Life store in San Clemente, California is well underway and the store is expected to open in September. Strong demand for the Salt Life brand continues, and the company believes that its continued double-digit growth trend will be accompanied by leveraged-cost efficiencies that should further improve margins in future quarters.
Soffe sales declined $1.6 million for the quarter, primarily due to the soft retail environment. However, Soffe has experienced notable growth with amazon.com and its own e-commerce websites, including a 33 percent sales increase from its recently relaunched B2B site and a 14 percent increase from its B2C site. The company anticipates continued double-digit growth in Soffe’s e-commerce business over the next several quarters. Additionally Soffe’s improved product line, enhanced customer service and solid in-stock position continue to be instrumental in gaining floor space at key strategic sporting goods stores, which should further bolster Soffe’s return to growth. Junkfood’s specialty business performed well during the quarter, with sales growing 15 percent. However, that growth was insufficient to overcome sales declines at a national retailer that negatively impacted Junkfood’s business. That impact, combined with lower-than-expected boutique sales, resulted in a $1.7 million decline in net sales for the quarter.
Robert W. Humphreys, Delta Apparel, Inc.’s chairman and CEO, commented, “Delta Apparel has completed yet another quarter of solid profitability despite persistent softness in the retail apparel marketplace. Our intense focus on efficiency, cost savings and bottom-line growth that began nearly two years ago with various strategic initiatives has positioned us to compete from a position of strength even when the marketplace is weak. Our continued focus on those areas has resulted in a rigorous manufacturing realignment that is expected to significantly reset our manufacturing cost structure and carry an annual savings of approximately $8 million, or $0.70 per diluted share, beginning in the first half fiscal 2017 and becoming fully annualized by our 2017 fiscal year-end.”
“To facilitate this realignment, we are expanding our Honduran textile and sew operations and have consolidated sew facilities in Mexico. We have also modernized our El Salvador screen-print operations. The manufacturing equipment for the expansion has been received and the vast majority of it is installed. We began operating the new equipment in June and should be at full production levels by the end of calendar 2016. In July, we closed our domestic textile operation in Maiden, NC and are in negotiations on a contract to sell the real estate and certain equipment used in that operation. We are pleased that the facility may continue as a wet-processing facility and provide employment opportunities in the Maiden community. More than half of the expense for this realignment is reflected in our third-quarter earnings and we expect the remainder, about $0.12 per diluted share, to be recorded in the fourth quarter. In addition, we are working to improve top-line growth by focusing on our business units with the highest immediate potential. Our new Salt Life store in San Clemente should leverage consumer enthusiasm for the ‘Salt Lifestyle’ that has made the brand so successful, and we plan to open a few stores each year for the next several years to continue to expand our geographic reach. We are also leveraging cross-selling opportunities inherent in our Art Gun business unit, which increasingly serves as a digital printing fulfillment service for other parts of our business, as well as other large e-retailers. Currently, over 20 percent of Junkfood’s ecommerce business is produced through Art Gun. By the same token, Art Gun utilizes Delta catalog blanks supplied by our Activewear business unit. Our ultimate goal is to thoroughly utilize the many opportunities to leverage talent and assets between our business units to promote growth.
“We believe Delta Apparel will continue to make solid progress over the next several quarters. While our recent initiatives have focused a great deal on improving margins and strengthening our bottom line, we are confident that the strength of our on-trend, high-quality products and solid marketing programs will bring renewed vigor to our top line as well. We are looking forward to a strong fourth quarter and continued success in 2017.”
