Delta Apparel Swings to a Loss

 

Gross margin was also down 3.6 percentage points at 20.8% as a result of textile restructuring related costs, higher raw material prices, increased energy and transportation costs and sales of a more basic mix in the catalog tee business..

 

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. In the third quarter of fiscal 2008, the Company expensed $0.9 million, or $0.07 per diluted share, predominantly related to start-up costs from the opening of its Honduran textile facility. We expect that these third quarter restructuring costs will be the final charges relating to the Company’s textile restructuring plan announced on July 18, 2007. Expenses associated with the restructuring plan impacted the Company’s financials as follows:

Net loss for the third quarter, inclusive of the textile restructuring charges, was $0.4 million, or ($0.05) per diluted share, compared to the prior year’s net income of $2.8 million, or $0.32 per diluted share.

Robert W. Humphreys, President and Chief Executive Officer, commented, “We are pleased that during the quarter we completed our previously announced textile restructuring plan. Our new, state-of-the-art textile facility in Honduras continues to increase its production of first-quality dyed fabric and is on pace to reach our initial goal of producing over 500,000 pounds of fabric per week in our fiscal fourth quarter. Based on our experience to date, we continue to believe this facility can provide our activewear business with annual pre-tax savings of $7 million when producing at the one million pound per week production level. We remain focused on continued cost savings and quality improvement in our manufacturing operations.“

Mr. Humphreys continued, “While we did not meet our initial expectations for the quarter, we are continuing to see positive aspects in our businesses. The sell-through of our Soffe product line at retail met our expectations despite the slowing in consumer spending. We continue to see double-digit sales growth in our Soffe college bookstore distribution channel and our Intensity Athletics business. Our Junkfood business had its fourth consecutive quarter of sales growth, resulting from both its traditional customers as well as its new partnership with GapKids. In our activewear segment, we believe we are servicing our private label customers well and are seeing the rewards with new, additional programs for shipment in the upcoming seasons. Unfortunately, retailers are taking a more cautious approach with their re-orders and inventory positions due to the slowdown of the general economy and weakness in consumer spending, which is offsetting our results more than we originally expected.“

Fourth Quarter and Fiscal 2008 Guidance

For the fourth fiscal quarter ending June 28, 2008, the Company expects sales to be in the range of $88 to $98 million and diluted earnings to be in the range of $0.40 to $0.46 per share. This compares to sales of $91.8 million and diluted earnings of $0.08 per share in the prior year fourth fiscal quarter. The earnings in the fourth quarter of 2007 included $0.51 per diluted share of costs associated with the textile restructuring plan.

For the 2008 fiscal year, the Company expects net sales to be in the range of $305 to $315 million and diluted loss per share to be in the range of ($0.10) to ($0.16), inclusive of restructuring related expenses of ($0.39) per diluted share. The Company remains concerned about the general slowdown of the U.S. economy and consumer demand for apparel. Further deterioration in the economy and retail marketplace may negatively impact the Company’s results of operations.

Retail-Ready Apparel

This segment, which is comprised of the Soffe and Junkfood businesses, reported a 7.1% sales increase to $35.0 million for the third quarter of fiscal year 2008 compared to $32.7 million in the prior year third quarter. The higher sales were driven primarily by a 37.1% increase in Junkfood sales, the fourth consecutive quarter of double-digit sales growth. Junkfood sales were positively impacted by sales of the new co-branded products to GapKids, increased foreign sales, and new boutique customers. Sales in the Soffe business were flat with the prior year, with increased sales in its military and college bookstore distribution channels being offset by lower sales in its retail and sporting goods channels. Operating income in the retail-ready segment was $4.7 million for the third fiscal quarter of 2008, an increase of $0.6 million from the prior year third quarter due primarily to the increased sales and leveraged fixed costs in the Junkfood business.

Activewear Apparel

The activewear segment, which is comprised of the Delta and FunTees businesses, reported sales of $40.3 million for the three months ended March 29, 2008, a 22.9% decrease from the prior year third quarter sales of $52.3 million. The decrease in sales was due to lower sales in both the Delta and FunTees businesses, caused by customers taking a more cautious approach with their orders due to weakness in consumer spending and a slowdown in the release of orders from retailers. Although pricing increased during the quarter in the catalog business, these increases were offset by higher cotton, energy and transportation costs. In addition, a higher sales mix of more basic products lowered overall margins. The activewear segment generated an operating loss of $3.6 million compared to operating income of $1.1 million in the prior year third quarter due primarily to $0.9 million in restructuring related costs, increased raw material prices, higher energy and transportation costs, a higher mix of core basic tees in the Delta business, and lower sales in the FunTees business.

Humphreys concluded, “Despite the challenging economic conditions and difficult retail environment, we remain focused on our strategies to better position our businesses for the long-term. During fiscal 2008, we are completing a number of initiatives that we believe will allow us to deliver top-line growth, improve profitability, and increase shareholder value in the future.“