By Thomas J. Ryan

Delta Apparel Inc. (NYSE:DLA) reported earnings excluding non-recurring charges fell slightly during its fiscal third quarter, ended July 2, due to a sales decline. But fatter margins resulting from its ongoing manufacturing restructuring activities helped the company beat Wall Street estimates.

“We have just completed yet another quarter of solid profitability despite persistent softness in the retail apparel market place,” said Bob Humphreys, chairman and CEO, on an August 8 conference call with analysts. “The results of the quarter demonstrate that our continued focus on the efficiently, cost savings and net income growth that began nearly two years ago now allows us to complete from a position of strength even when the marketplace is weak.”

Net earnings slumped 42.5 percent to $2.5 million, or 32 cents a share. The drop largely reflected a $1.8 million pre-tax charge taken during the quarter in connection with the previously announced manufacturing realignment comprised of $1.6 million in restructuring activities and $200,000 in manufacturing inefficiencies. Excluding the charge, earnings would have been 50 cents per share, down from 55 cents in the same period a year ago. Wall Street’s consensus estimate had been 45 percent.

Revenues sunk 7.4 percent to $111.6 million. The decline was due to continued weakness overall in the retail environment, particularly in the apparel space, as well as the absence of the Kentucky Derby license, which the company did not renew for this year.

The bottom line was boosted by an improvement in gross margins to 22.4 percent from 21.1 percent a year ago due to manufacturing realignments.

Basics Segment
In its basics segment, sales were $72.1 million, 8.8 percent lower than the same period a year ago. The decrease primarily resulted from a 10 percent decline in activewear sales due to lower unit sales of basic tees and a $1.8 million reduction in private label sales. The declines were offset somewhat by more than 100-percent growth in fashion basics, including the Delta Drive, Delta Soft line, a variety of fleece and French terry items and nearly 50 percent growth in catalog full-package products.

“We expect the growth in these areas to continue in future quarters,” said Deb Merrill, president and CFO. “These products have higher selling prices and on average carry margin nearly 1,000 basis points higher than those of basic tees.”

Art Gun, a leader in the digital printing marketplace, saw sales expand 28 percent for the quarter, with a 38 percent increase in units sold.  Art Gun’s double-digit growth is expected to continue in the fourth quarter and into fiscal year 2017.

Gross margins in the basics segment improved 210 basis points resulting from a stronger product mix and continued manufacturing efficiencies, helping drive operating profit for the segment to $5.4 million, only slightly down from $5.5 percent a year ago.

Branded Segment 
In the branded segment, sales reached $39.5 million, virtually level with the prior year period after adjusting for the exit of the Kentucky Derby license. The branded segment produced operating profit of $2.7 million, up from $1.4 million a year ago.

Among its brands, Salt Life, driven by strong sell-through of its spring 2016 line, continued its double-digit growth trend with 45 percent growth over the prior year period. Direct-to-consumer sales led the way with 80 percent e-commerce growth. The first Salt Life store opened in San Clemente, CA and additional stores are expected to open over the next several years. The brand will also sell in the Junkfood store in Venice Beach, CA, beginning with the spring 2017 line. Continued double-digit growth is expected for Salt Life in coming quarters.

Soffe and Junkfood 
Soffe’s sales declined $1.6 million for the quarter, primarily due to the soft retail environment. Humphreys said Soffe was impacted by the bankruptcy of Sports Authority and the related “inventory overhang” that slowed orders in the channel, as well as overall cautiousness around the apparel category.

On the positive side, Soffe experienced notable growth with Amazon.com and its own e-commerce websites, including a 33 percent sales increase from its recently relaunched B2B site and a 14 percent increase from its B2C site. Double-digit growth is expected in Soffe’s e-commerce business over the next several quarters. Additionally, Soffe’s improved product line, enhanced customer service and solid in-stock position continue to help the brand gain floor space at key strategic sporting goods stores, which should further bolster Soffe’s return to growth.

“We think Soffe has turned the corner,” Humphreys said. He added that while the Sports Authority bankruptcy “pushed us back a little bit,” the brand is finding success with DTC and expanding in a number of channels of distribution. Soffe also has brought on a “much lower cost structure” as a result of restructuring initiatives over the last two years. “So just a little bit more sales really has a big impact on Soffe’s bottom line now,” Humphreys explained.

Junkfood’s specialty business performed well during the quarter, with sales growing 15 percent. However, that growth was insufficient to overcome sales declines at an unnamed national retailer that negatively impacted Junkfood’s business. That impact, combined with lower-than-expected boutique sales, resulted in a $1.7 million decline in sales for the quarter.

Looking Ahead 
Humphreys said Delta Apparel’s cost structure will continue to benefit in the future from the company’s ongoing “rigorous manufacturing realignment.” Annual savings of $8 million, or 70 cents per share, is expected, beginning in the first half of fiscal 2017 and becoming fully annualized by its 2017 fiscal year-end. The moves include the expanding of its Honduran textile and sew operations, consolidation of its sew facilities in Mexico and modernizing its El Salvador screen-print operations. In July, Delta Apparel closed its domestic textile operation in Maiden, NC. More than half of the expense for the Maiden realignment is reflected in its third quarter results with the remainder, about 12 cents per share, to be recorded in the fourth quarter.

He is also encouraged by sales momentum at Salt Life and Art Gun. Stated Humphreys, “Our fourth quarter has gotten off to a good start in July with record shipments of basic tees, record shipments of Salt Life branded products, record shipments from Art Gun and record e-commerce shipments. We’re encouraged with these brands and expect the good finish to fiscal 2016 with further progress to come as we go into fiscal 2017.”

Photo Courtesy Soffe Apparel