Delta Apparel Inc. reported et sales for the fiscal year 2018 first quarter ended December 31 were $90.3 million, an increase of $14.4 million, or 19 percent, from prior year first quarter sales of $75.9 million, excluding the $9.4 million of sales from the company’s since-divested Junkfood business.
Net sales for the fiscal year 2018 first quarter increased by $5.0 million, or 5.9 percent, from the $85.3 million reported for the prior year first quarter that includes sales from the since-divested Junkfood business. Significantly, each of the company’s business units achieved double-digit sales growth over the prior year period, led by increases of 28 percent and 26 percent at Soffe and Art Gun, respectively, and 20 percent growth at Activewear.
Gross margins for the quarter improved significantly within the branded segment, expanding to 37.2 percent from 31.1 percent in the prior year period. This increase was offset by a decline in basics segment gross margins due to higher raw material costs, resulting in overall gross margins of 18.1 percent compared to 20.6 percent in the prior year period. Significant improvement in selling, general and administrative expenses contributed to year-over-year increases in profitability. The company achieved operating profit of $1.7 million for the quarter, a 271 percent increase over the prior year period’s operating profit of $0.5 million, and also achieved a pre-tax profit of $0.4 million compared to a pre-tax loss of $0.8 million in the prior year period.
During the quarter, the company recognized a discrete provisional tax expense of $10.6 million associated with the recent United States tax reform legislation, which impacted the company’s earnings by $1.45 per share. Included in the $10.6 million is $1.1 million of expense related to the revaluation of the company’s net deferred tax assets, which is a non-cash item, and $9.5 million of expenses related to the transition tax on deemed repatriated cumulative earnings of the company’s foreign subsidiaries, which will be paid over the next eight years.
The company anticipates that the benefit resulting from the reduction of the federal tax rate from 34 percent to 21 percent will offset the future payments of the transition tax, resulting in minimal cash flow impact to the company. The amounts recorded during the quarter are based on reasonable estimates for the impact of the new tax legislation and may change as more information becomes available. For the quarter ended December 30, 2017, the company had a net loss of $9.95 million, or $1.37 per diluted share. Adjusting for the discrete impact of tax reform, the company achieved net income of $0.08 per diluted share as compared to a loss of $0.08 per diluted share in the prior year period.
Basics Segment Review
Fiscal year 2018 first quarter net sales in the basics segment were $73.2 million, up 20 percent from $60.8 million in the fiscal year 2017 first quarter. Activewear sales grew 20 percent over the prior year quarter, with significant increases at both Catalog and FunTees. The Catalog growth was supported by rebounding conditions in the retail licensing channel and strong demand within most other channels, while the FunTees growth drew on the strength of private-label sales to strategic brands.
The marked growth in Catalog fashion basics products seen in recent periods continued during the quarter. These higher-margin products, particularly those within the Delta Platinum line, continued to gain acceptance in the market and sales increased 73 percent year-over-year. As expected, Art Gun returned to its traditional growth trend, with a double-digit increase in units driving 26 percent year-over-year sales growth and record sales for the quarter. The combination of excellent service levels, increases in digital print capacity and flexibility and its market-differentiating vertical fulfillment platform enabled Art Gun to both gain market share and boost profits.
Branded Segment Review
Net sales in the branded segment were $17.2 million for the quarter, up 14 percent year-over-year after excluding sales of $9.4 million in the prior year period from the company’s since-divested Junkfood business. Sales in the prior year period were $24.5 million including Junkfood sales. Soffe sales for the quarter increased 28 percent over the prior year period. Strength in the military channel from successes with “pride” graphic programs and military issue programs drove Soffe’s sales momentum.
Successful graphic programs with strategic sporting goods retailers also contributed to Soffe’s strong top-line growth. Soffe gross margins expanded year-over-year and, coupled with its cost-control efforts, drove significant profitability improvement at Soffe during the quarter. Salt Life sales increased 12.4 percent over the prior year period with solid growth across the majority of its distribution channels. New product categories along with additional retail doors contributed to the expansion. Salt Life’s eCommerce sales remained on their double-digit growth path during the quarter and its new retail store in Daytona Beach, Florida, continued to perform extremely well.
“With double-digit growth across the board and improved operating earnings, we are pleased with our results in what is usually our most challenging seasonal quarter,” commented Robert W. Humphreys, Delta Apparel, Inc.’s chairman and chief executive officer. “While the pickup in holiday demand for apparel was an encouraging development, we believe the time and effort our team devotes to marketing and omni-channel strategies, operational improvements and cost-control initiatives were also key success drivers for us during the quarter.”
“Art Gun’s customer service focus and execution resulted in additional market share during the important holiday season and also led to record sales and profitability for the quarter. Those wins, coupled with several anticipated new customer launches, expansion opportunities with existing customers and the move to a larger production facility that fully integrates with Activewear’s vertical manufacturing platform, should provide solid growth momentum for Art Gun during fiscal 2018.”
“Year-over-year increases in both units and selling prices drove solid growth at Activewear for the quarter. That growth was also well-balanced, with both Catalog and FunTees contributing to the gain. The improved conditions in the retail licensing channel were a welcome contrast to last year’s weak environment and customer de-stocking activity, and our Catalog business was able to take advantage of the opportunity with strong inventory positions. FunTees continues to benefit from its efforts to diversify both its customer base and product offerings as well as leverage its design competencies and manufacturing versatility.”
“We were pleased to see Salt Life’s sales growth accelerate during the quarter and return to its previous double-digit trend. We are excited about the prospect of Salt Life adding more retail doors this year through additional new accounts with regional and national footprints. With substantial increases in eCommerce sales to California and growth at our Huntington Beach and San Clemente retail stores, we remain optimistic about the brand’s West Coast market potential.”
“Soffe gained velocity during the quarter with strong sales growth and solid profit improvement. Soffe also recently opened its fourth branded retail location, in Jacksonville, North Carolina, and we are excited about its potential with military consumers in that market. Soffe has many ongoing initiatives to continue its growth and further improve its overall performance in the coming quarters.”
“While we expect the apparel markets to generally remain challenging, particularly for traditional retailers, we are excited about what we are seeing in our businesses and anticipate another year of growth and profitability for Delta Apparel. Our efforts to rationalize our business in recent years have us well-positioned for opportunities wherever and whenever they materialize, as reflected in our strong first quarter results,” Humphreys said.
