Delta Apparel said a strong performance from FunTees, the company’s private label apparel business, drove yet another quarter of earnings and revenue growth. On a conference call with analysts, Bob Humphreys, chairman and CEO, said the company is benefiting in the current climate from close-to-home vertical manufacturing model.
“The private label market fundamentals remained strong, and strategic brands and retailers continue to focus on improving their supply chain and are seeing the benefits of Western Hemisphere manufacturing as a way to diversify their sourcing footprint and get their products to retail quicker,” said Humphreys. “As these procurement trends continue, FunTees is evolving its customer base, and anticipates several new brand partner launches in the upcoming quarters.”
Among other areas, DTG2Go, formerly named Art Gun, saw robust gains, Soffe was stung by declining military sales and Salt Life was down modestly due to poor early-spring weather in its core Southeast market.
Overall, sales in its third quarter ended June 30 were $112 million, up 7.7 percent over the same period a year ago. E-commerce sales were up 20 percent, bringing year-to-date sales up 18 percent, including 14 percent growth on consumer sites and 19 percent growth on B2B sites.
Net earnings improved 1.8 percent to $4.6 million, or 64 cents a share. Operating income jumped 14.0 percent to $6.7 million. The leaner bottom line gain reflected higher taxes and interest expense.
Gross margins improved to 21.6 percent from 21.4 percent in the prior-year period, driven largely by margin expansion in the basics segment.
In the Basics segment, revenues reached $90 million, a 14 percent increase over the prior year. Growth at both Delta Catalog and FunTees drove a 7 percent increase in Activewear sales for the quarter. The sales growth in higher-margin fashion basics products seen in recent periods continued, with the premium Delta Platinum line gaining more customer interest and market share on the strength of its quality, styling and fabric sophistication. Sales on Activewear’s B2B e-commerce site also continued to escalate, with almost 30 percent growth for the quarter. Activewear gross margins improved to 18.0 percent from 16.6 percent in the prior-year quarter, with higher selling prices helping to offset raw material and other cost pressures .
The third quarter was the first full quarter of combined operation for the company’s digital print and fulfillment business, DTG2Go, following the company’s acquisition in March 2018. The integrated DTG2Go’s revenues surged 167 percent, with increased sales from existing customers and new customer launches contributing to the strong performance. DTG2Go opened the company’s fourth manufacturing and fulfillment location during the quarter, located on Soffe’s Fayetteville campus, further increasing DTG2Go’s capacity as well as the company’s consumer reach in the key northeastern market.
Deb Merrill, CFO and president, said DTG2Go continues to benefit from the company’s expanded digital print and fulfillment platform. She said, “We’re excited about reaching new sales channels outside of only e-retailers, with new business coming in promotional products as well as traditional brick-and-mortar retailers that want to integrate an on-demand solution to their revenue stream.”
In the Branded segment, revenues in the quarter were $23 million, down 8.0 percent from the prior-year period.
Salt Life sees Bounceback in May and June
Salt Life saw a 2 percent decline in sales for the quarter as unseasonably cool, wet weather impacted sales in the independent sales channel, especially in key southeastern markets, and offset the addition of new national retailers and a double-digit increase in e-commerce. Gross margins “held strong and drove solid profitability at Salt Life,” Delta Apparel said in a statement.
Humphreys attributed Salt Life’s decline to cold wet April in the Southeast, but noted the brand “quickly rebounded” with strong growth in May and June to get close to flat sales in the period and growth prospects remain robust.
He added, “Salt Life’s strong performance across the United States with new national retail accounts is particularly encouraging. The brand has performed so well with these accounts they are now expanding into additional merchandising categories, and adding doors in California and other regional markets outside of the Southeast.”
Sales at Salt Life’s brick-and-mortar stores increased 51 percent during the quarter, and the brand’s newest store in Daytona Beach continues to “perform extremely well,” said Humphreys. The brand’s two California stores were up 36 percent for the quarter and up 48 percent year-to-date. An additional Florida store is planned this fall in Tampa.
Another promising trend is a growing number of independent retailers, mainly located in coastal areas of Florida, dedicating entire retail locations exclusively to the brand. Said Humphreys, “The sales are growing at these locations, and they represent unique brand building opportunities that carry no incremental cost to Salt Life.”
Finally, Salt Life is expanding through new products and brand categories, including higher price point performance and woven products becoming a larger portion of the apparel line. Salt Life recently introduced a women’s swimwear line through a license agreement with Swim USA and expanded the company’s bag offerings. Salt Life eyewear was recently brought in house.
Salt Life Lager, the brand’s new craft beer, was launched during the quarter in Jacksonville, Miami and Tampa, ahead of schedule and “sales have been phenomenal to date,” said Humphreys. He added, “This category expansion not only targets the large new market with substantial sales potential, but also creates opportunities for brand visibility in many new retail outlets such as restaurants and grocery stores.”
Humphreys did note that Salt Life’s growth is being constrained somewhat by some challenges by independents in Florida that are still recovering from hurricanes last fall. The CEO said, “Stores were completely wiped out and really just now getting rebuilt and opened.”
He also said some bigger retailers that have undergone private-equity buyouts over the last couple of years have generally become more conservative around buys. He added that it’s “not how our products are performing at retail for them, but just in general very tight open to buy dollars that have been hurting our terms in those businesses to some degree. We’re also experiencing several new major regional sporting goods stores that we’ll be putting Salt Life in way outside of our traditional geographic marketplaces for spring for trial.”
Soffe Operating Close to Break Even
Soffe’s sales declined about $1 million during the quarter, but are up 2 percent year-over-year through the first nine months. Humphreys said the decline resulted primarily from lower sales in the “fluctuating” military channel, offsetting growth with strategic sporting goods retailers through improved floor placement and increased demand for Soffe shorts.
Soffe opened the company’s fifth store in Greenville, NC, a key consumer market near the brand’s headquarters. Humphreys said the new DTG2Go digital print and fulfillment location on Soffe’s campus enables both Soffe and DTG2Go to offer customers blended digital print and traditional print solutions from a single location.
Overall, Humphreys said Soffe is “still basically operating slightly above breakeven,” with the military business impacted from a changeover in Navy training product. He said, “We’re seeing a pickup in the military demand as we sit here today, so we’ll see. But I think we’re making steady progress there, but certainly have plenty of work left to do.”
Looking to the fourth quarter and beyond, Humphreys said the company remains “very optimistic about our company’s prospects given the traction we’re seeing from a number of various initiatives across our businesses,” citing investments paying off in the digital print space, direct-to-consumer channels and vertical manufacturing platform. He also mentioned the growth potential for Salt Life.
Asked in the Q&A session about the impact of tariffs from China, Humphreys said FunTees’ pick up “is all pre-trade war talk” with such orders taking time to come to market. He also said the categories Delta specializes in haven’t been impacted by trade negotiations. He stated, “We’ll just have to see if there’s more impact on that.”
Asked about Target’s move to phase out the C9 Champion brand, Humphreys agreed that “there is definitely a shift going on to more private label, and I’ll say maybe a more sophisticated private label than what retailers have done in the past.”
He also referred to “noise on the media” about retailers feeling frustrated as brands are revived as private labels and then find premium positioning in other channels. Humphreys added about retailers, “They get the sense of ‘why do I want to build another brand for someone else to control; I’ll do it myself.”
But Humphreys also believes such shifts “come and go” with the periodic merchandise mistake, over-buy or quality issues leading many retailers to return to brands to avoid those risks. Said Humphreys, “So we see that strategy coming and going, and we both benefited and have been hurt from it over the years.”
Photo courtesy Salt Life
