Delta Apparel Inc. reported net income fell 54.3 percent to $2.3 million, or 29 cents a share. Earnings were impacted by costs associated with the recently completed manufacturing realignment as well as a shorter sales period and tax expense.
The company, based in Greenville, SC, reported that all of its businesses, with the exception of Junkfood, experienced sales growth during the fourth quarter ended October 1, 2016. For comparison purposes, the 2016 fourth quarter comprised 13 weeks, while the prior-year fourth quarter included an additional 14th week because fiscal year 2015 was a 53-week year.
Net sales for the 13-week fiscal 2016 fourth quarter were $114.4 million, compared to $120.2 million in the prior year’s 14-week fourth quarter. Removing the additional week in the prior year, net sales in the fiscal 2016 fourth quarter exceeded those in the comparable 2015 period by 2.5 percent.
While 2016 fourth-quarter operating margins were on par with the prior-year quarter, earnings were impacted by costs associated with the recently completed manufacturing realignment that reduced 2016 fourth-quarter earnings by 11 cents per diluted share, to the reported 29 cents per diluted share. Excluding these costs, fourth-quarter 2016 earnings were 40 cents per share. In comparison to the prior-year quarter’s reported earnings of 53 cents per diluted share, current-quarter earnings are hindered by the approximately 15 cents a share impact of this quarter’s shorter sales period and tax expense versus the prior-year quarter’s additional week of sales and tax benefit.
Gross margins for the fourth quarter were 20.9 percent compared to 21.9 percent in the prior-year quarter; however, the current year includes costs associated with the company’s manufacturing realignment, which lowered gross margins by 80 basis points. Gross margins, excluding the $0.9 million in manufacturing realignment costs included in cost of goods sold, expanded in both the company’s basics and branded segments. A shift to a higher mix of basics sales resulted in the slight decline in margins overall for the quarter. The company achieved gross margin expansion throughout fiscal year 2016 and anticipates this trend to continue and strengthen in fiscal year 2017 as the benefits from the completed manufacturing realignment are realized.
For the 52-week 2016 fiscal year, net sales were $425.2 million compared to $449.1 million in the 53-week 2015 fiscal year. Net sales in fiscal year 2016 declined 0.5 percent from the prior year, when adjusting the prior year for the additional week of sales, the sale of The Game business and the discontinued Kentucky Derby licensed business, for which the company did not seek renewal. Operating profit in fiscal year 2016 was $16.3 million, or $19.2 million after adding back the $2.8 million of realignment-related expenses (including $1.1 million in cost of goods sold and $1.7 million in restructuring costs). This is a significant improvement over the prior-year operating profit of $16.1 million, or $10.5 million after excluding the gain on the sale of The Game business in the second quarter of fiscal 2015.
Earnings per diluted share for the 2016 fiscal year were reported at $1.12. After adding back the impact of the manufacturing realignment, earnings per share were $1.41. The prior year’s $1 earnings per diluted share included 43 cents a share of gain on the sale of The Game. Excluding this gain, the prior-year earnings were 57 cents per diluted share.
Basics Segment Review
Net sales in the basics segment were $73.7 million in the 13-week fiscal 2016 fourth quarter compared to $74.4 million in the 14-week prior-year quarter. Adjusting for the additional week of sales in the prior-year quarter, net sales grew 6.7 percent in the fiscal 2016 fourth quarter, with sales increasing 5 percent in Activewear and 34 percent in Art Gun. Activewear continued its high growth within fashion basics, seeing sales nearly double in the current quarter compared to the prior year.
Private label programs also continued to expand, adding to the sales growth. Art Gun continued its rapid growth, driven by its expanded customer base and new product lines with existing customers. Recently, the company significantly expanded production capacity at Art Gun, which should provide an avenue for continued strong growth, particularly as we enter the high-demand holiday season. Gross margins expanded 440 basis points in fiscal year 2016 compared to the prior year, and expanded 480 basis points when adjusted for the manufacturing realignment expenses in the 2016 fiscal year.
Branded Segment Review
Net sales in the branded segment were $40.7 million in the fiscal 2016 fourth quarter. Although nearly all branded segment businesses exceeded the prior-year sales after adjusting for the additional week in the 2015 fourth quarter, total net sales declined $5.2 million from the prior-year sales of $45.8 million. The decline was due primarily to a $5.3 million decrease at Junkfood, resulting from the impact of the additional week of sales in the prior year coupled with the soft retail environment that affected all channels of distribution.
After reducing the prior-year quarter for the additional sales week, Salt Life sales grew 20 percent over the prior-year quarter, attaining 27 percent growth for the full year. Strong demand for the Salt Life brand continued, with good sell-through of its spring line driving reorders and robust initial fall shipments. Sales on saltlife.com grew 66 percent in the quarter and 71 percent for the full year. The Salt Life flagship store in Jacksonville, FL, in operation for five years now, continues to increase its sales, with growth of nearly 20 percent in fiscal year 2016 over the prior year.
Soffe grew net sales in the 2016 fourth quarter, and after adjusting for the additional week in the prior year increased sales by 8 percent. The Soffe growth was driven by expansion in the strategic sporting goods and e-retailer channels. The Soffe business-to-business e-commerce site, which re-launched in May 2016, is driving additional business, with sales up 5 percent in the fourth quarter and up 16 percent during the second half of the fiscal year. Gross margins in the branded segment were up 20 basis points in the 2016 fourth quarter and down 60 basis points for the full 2016 year from the prior year.
Robert W. Humphreys, Delta Apparel Inc.’s chairman and chief executive officer, commented, “We are pleased with our fourth-quarter financial and operational results, and are excited about what our accomplishments mean for the future of the company. Over the last two years we have taken decisive action to reduce our fixed cost structure, streamline our business operations, and lower our production costs. By focusing on key growth areas, we successfully navigated through a tough retail environment, and our fourth quarter highlights the momentum we have headed into fiscal year 2017.”
He continued, “During our fourth quarter, we fully implemented our manufacturing realignment at a cost of about 1 cent per share less than we originally anticipated. We expect the lower-cost inventory that is now being produced at our manufacturing facilities to begin positively impacting our margins towards the end of our fiscal 2017 second quarter. We continue to expand our output, which should allow for inventory levels that better support our growing catalog business this spring. We are also producing open-width fabrics, and are meeting our $2 million cost savings goals for this initiative.
Salt Life expanded its presence on the West Coast with the opening of a Salt Life retail store in San Clemente, CA. The company has leased a location in Huntington Beach, with an anticipated opening in early calendar 2017. Salt Life’s flagship Jacksonville, FL store exceeded the company’s expectations over the past five years, with nearly 20 percent sales growth this year. Delta Apparel recently completed the acquisition of Coast Apparel, which it sees as a brand with growth potential similar to Salt Life and Art Gun. Coast Apparel products are primarily sold direct-to-consumer through its e-commerce site and two South Carolina retail stores.
“Although we anticipate the retail environment will continue to be a challenge in fiscal 2017, we can see that our strategic initiatives completed in the past year have created momentum that we expect to result in sales growth, expanded margins and higher profits in fiscal 2017 and beyond,” said Humphreys.
Photo courtesy Soffe
