Delta Apparel Sees 8.9% Climb in Q1 Sales

Delta Apparel, Inc., the parent of M.J. Soffe, reported sales increased 8.9% in its first quarter ended Oct. 2, to $107.9 million. Net income declined 38.5% to $1.6 million, or 19 cents a share, from $2.6 million, or 30 cents, a year earlier.

Both of the company's business segments achieved sales growth compared to the prior year quarter. Gross margins improved to 24.0% compared to 23.9% in the prior year first quarter. Selling, general and administrative expenses increased to 21.2% of sales from 19.4% of sales as investments were made in the business to promote future growth for the company. These expenses included costs associated with the acquisition of The Cotton Exchange, expenses related to the start-up of Art Gun, and new brand-marketing campaigns.

Robert W. Humphreys, Chairman and Chief Executive Officer, commented, “The positive sales trends we saw at the start of the quarter slowed as we headed into September. We believe the concern about consumer demand for apparel products, particularly with regard to the upcoming holiday selling season, has caused retailers to take a more cautious approach to their near-term inventory commitments. This, coupled with the significant rise in cotton prices and uncertainty about its long-term impact, has added pressure to an already weak marketplace. Despite this, we were able to achieve organic sales growth of 2% in the quarter. The first quarter was marked by several strategic investments aimed at accelerating growth in some of our recently acquired businesses. While this resulted in reduced profitability, we are committed to making the necessary investments to promote our long-term growth strategies. Although the apparel marketplace remains difficult, we remain on track to reach our full year financial targets for fiscal year 2011.”

Retail-Ready Apparel Segment Review

Retail-ready segment sales were $58.4 million, a 12.3% increase from the prior year first quarter sales of $52.0 million. The sales growth resulted from revenue in The Cotton Exchange, which was acquired during the first quarter of fiscal year 2011, partially offset by a 1.1% organic sales decline. The slight sales decline was driven from lower sales of licensed graphic tees and fleece products, partially offset by strong sales of the company's exclusively-licensed outdoor brands, Realtree Outfitters and Realtree Outfitters by The Game. Gross margins in the retail-ready segment were 35.2% in the first quarter of fiscal year 2011 compared with 38.3% in the prior year first quarter. The decline in gross margins was driven from a shift in sales mix by distribution channel. The company incurred higher selling, general and administrative expenses during the first quarter of fiscal year 2011 driven by the additional expenses associated with its recently acquired businesses, Art Gun and The Cotton Exchange. In addition, the company invested in additional brand marketing during the quarter to promote its brands for growth in the future. Operating income was $2.8 million in the first quarter of fiscal year 2011 compared to $5.6 million for the same period last year.

Activewear Apparel Segment Review

The activewear segment had sales of $49.5 million for the quarter ended Oct. 2, 2010, an increase of 5.1% compared to the prior year first quarter driven from sales growth in both catalog and private label products. The sales increase resulted from an increase of approximately 10% in average selling prices, partially offset by a 5% decline in unit sales. Gross margins in the activewear segment improved 300 basis points to 10.9% in the first quarter of fiscal year 2011 compared to 7.9% for the first quarter of fiscal year 2010. Operating income improved $1.2 million from the prior year first quarter to $200,000 for the quarter ended Oct. 2, 2010.

Fiscal 2011 Guidance

The company reiterates its fiscal year 2011 outlook for sales and earnings. For the year ending July 2, 2011, the company continues to expect net sales to be in the range of $455 to $465 million and earnings to be in the range of $1.55 to $1.70 per diluted share. The sales outlook for fiscal 2011 includes anticipated organic growth of approximately 3% to 6% after adjusting for one less week of operations in fiscal year 2010, and approximately $25 million in additional revenues from The Cotton Exchange, which was acquired on July 12, 2010.

The company remains concerned about the challenging economic conditions which continue to impact consumer demand for apparel. In addition, volatile cotton prices, global yarn shortages and limited capacities in cargo freight have created further short-term challenges in the apparel marketplace. In determining its expectations for the upcoming year, the company believes it has taken into consideration these heightened risk factors.

Humphreys concluded, “We continue to be optimistic about the future potential of our business. Over the past several years we have successfully restructured our manufacturing platform in order to support higher organic sales volumes and drive enhanced profitability. At the same time, we have made a number of strategic acquisitions that have expanded our market presence and created new growth vehicles. This includes our recent purchase of The Cotton Exchange, which should allow us to build our collegiate and licensed offerings to new and existing customers in the bookstore, specialty retail, and military channels. We believe we have the right strategies in place to capitalize on both our short and long-term growth prospects and deliver greater value to our shareholders in the years ahead.”