Delta Apparel Inc. reported a sharp decline in profits in the second quarter ended March 30. The shortfall was attributed to anticipated transition costs from changes in the private label product mix and higher-cost raw materials in the Delta Group segment, coupled with higher than expected digital print acquisition integration expenses and delayed spring sales in the Salt Life Group segment.

For the second quarter ended March 30, 2019:

  • Net sales were $102.8 million, up almost 3 percent from $100.0 million in the prior year second quarter. Net sales in the Delta Group segment increased almost 4 percent over the prior year period and net sales in the Salt Life Group segment declined approximately 4 percent from the prior year period.
  • Gross margin sequentially improved 10 basis points from the first quarter to 18.4 percent in the second quarter, but declined compared to 22.2 percent in the prior year second quarter. Anticipated transition costs from changes in the private label product mix and higher-cost raw materials in the Delta Group segment, coupled with higher than expected digital print acquisition integration expenses and delayed spring sales in the Salt Life Group segment, drove a decline in gross profit to $18.9 million from $22.2 million in the prior year period. The majority of these cost impacts are now behind us and we expect gross profit to improve in the back half of the year.
  • Selling, general and administrative (SG&A) expenses as a percentage of sales were 16.6 percent, compared to 16.7 percent in the prior year second quarter. The above-referenced cost impacts drove a decline in operating income for the quarter to $2.8 million compared to $5.6 million in the prior year second quarter, with Delta Group segment operating income declining $2.4 million and Salt Life Group segment operating income declining $0.1 million. We expect profitability to increase in the second half of the year as we enter our traditionally strong selling season with an expanding product mix and better balance between selling prices and raw material costs.
  • Net income for the quarter was $0.9 million, or 13 cents per diluted share, compared to $3.6 million, or 48 cents per diluted share, in the prior year period.

Robert W. Humphreys, the company’s chairman and chief executive officer, commented, “We were pleased to deliver another quarter of top-line growth despite challenges from unseasonable weather in key markets and this year’s later spring break selling period. Our Delta Group segment posted a nice sales increase for the quarter and our fast-growing digital print business, DTG2Go, was once again a bright spot, with sales growth of 177 percent.”

Humphreys continued, “Both our Delta Group and Salt Life Group segments achieved top-line growth for the first half of the year and we are off to a strong start to the second half. We see exciting opportunities for growth and increased profitability across all of our businesses as we leverage our investments in manufacturing technology and distribution, and expand into additional sales channels. We continue to believe Delta Apparel is uniquely positioned to succeed in today’s dynamic retail environment.”

For the six months ended March 30, 2019:

  • Net sales were $204.5 million, up 7.4 percent from $190.3 million in the comparable period last year. Net sales in the Delta Group segment increased 8.2 percent over the prior year and net sales in the Salt Life Group segment increased 1.5 percent over the prior year.
  • Gross profit was $37.5 million, down 2.9 percent from $38.6 million in the comparable period last year. Gross margin was 18.3 percent compared to 20.3 percent in the prior year period.
    SG&A expenses as a percentage of sales improved 20 basis points from last year to 16.5 percent.
  • Operating income was $2.9 million compared to $7.4 million in the comparable period last year, with the majority of the decrease attributable to a discrete expense of $2.5 million taken during the first quarter in connection with the resolution of litigation stemming from The Sports Authority’s March 2016 bankruptcy. Delta Group segment operating income was impacted by the litigation expense and declined $4.1 million over the prior year, while Salt Life Group segment operating income was relatively flat compared to the prior year.
  • The company experienced a net loss for the period of $209 thousand, or $0.03 per diluted share, an improvement over the prior year period’s net loss of $6.3 million, or $0.87 per diluted share. Excluding the above-referenced $2.5 million litigation expense, the company achieved net income of $1.9 million, or $0.27 per diluted share, for the six months ended March 30, 2019.

During the quarter, the company spent approximately $1.9 million on capital expenditures and $717 thousand to repurchase 35,353 shares of its stock. Total debt, including capital lease financing, as of the end of the first six months of fiscal 2019 was $143.9 million, up approximately $32 million from the end of our 2018 fiscal year due principally to the company’s recent digital print acquisition, capital expenditures, share repurchases and our seasonal build in inventory. Total inventory at the end of the first six months of fiscal 2019 was $186.5 million compared with $172.2 million a year ago due primarily to increased units on hand from the recent digital print acquisitions as well as higher costs per unit driven by product mix and the inflationary environment.

Delta Apparel, Inc.’s operating subsidiaries include Salt Life, LLC, M. J. Soffe, LLC, and DTG2Go, LLC.