Delta Fiscal Q1 Slips to Loss Despite Sales Gains

Delta Apparel net sales for the fiscal first quarter, which ended September 29, 2007, increased 15.8% to $72.6 million compared to $62.7 million in the prior year’s first quarter. The increase was driven primarily by the acquisition of FunTees on October 2, 2006 and the sales growth in the Junkfood business, but was somewhat offset by lower sales of Soffe products and undecorated t-shirts. Gross margins declined 980 basis points to 17.9% compared to 27.7% in the prior year first quarter primarily as a result of higher sales in the activewear segment, higher raw material prices, and textile restructuring related costs.

Net loss for the first quarter was $1.5 million, or 18 cents per diluted share, compared to the prior year’s net income of $2.2 million, or 26 cents per diluted share. The first quarter of the prior year included an extraordinary gain, net of taxes, of $0.7 million, or $0.08 per diluted share, associated with the final earn-out payment made to the former M. J. Soffe shareholders.

Delta 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 start-up costs stemming from the opening of its Honduran textile facility. The restructuring charges began in Delta’s fiscal fourth quarter of 2007 and are expected to impact financial results through the third quarter of fiscal 2008. Delta expects to incur total costs of approximately $11.8 million, or 90 cents per diluted share, associated with the restructuring. This is an increase of $1.8 million, or 15 cents per diluted share, from the previously disclosed amounts, primarily caused from higher manufacturing costs in the Maiden, North Carolina facility due to the relocation of cutting offshore and lower production levels from the FunTees integration.

Robert W. Humphreys, president and CEO, commented, “Our first quarter financial results were negatively impacted by our previously announced textile restructuring costs and slower than expected results at Soffe, which were driven by a weak retail environment and certain production and sourcing constraints. Our retail partners continue to give us positive feedback on our Soffe products and our internet sales are growing steadily. The general slowdown in apparel sales is causing some retailers to delay call-outs, making us cautious until we see more sustained trends during our peak selling season this spring. We are pleased that our Junkfood business continued to grow during the quarter and has a good order backlog going into our second quarter. We have established additional customer relationships in this business which should provide further growth opportunities in the future.”

Mr. Humphreys continued, “We made significant progress with our textile restructuring during the first quarter. We closed operations at our Fayette, Alabama facility and started the transition of cutting from our Maiden, North Carolina plant into our new textile operation in Honduras. Construction and equipment installation progressed in our new Ceiba Textile facility in Honduras, which will soon be ready to start production of first quality fabric. We are rebuilding the productivity in our manufacturing facilities that was disrupted with the FunTees integration and are continuing to implement our manufacturing initiatives. We are seeing weekly progress and expect consistent improvement as we progress through the rest of fiscal year 2008.”

“While we remain encouraged with the future opportunities for each of our operating units, we recognize that the weak overall demand for apparel, significant raw material and energy price increases, and production constraints and start-up costs associated with our textile restructuring create risk to our overall profitability in the near future. Therefore, we are adjusting our fiscal year financial estimates downward accordingly.”

Fiscal 2008 Guidance

For the second fiscal quarter ending December 29, 2007, Delta expects sales to be in the range of $64 to $68 million and a loss in the range of 33 cents to 37 cents per diluted share. This includes approximately $1.9 million of expected textile restructuring related expenses during the quarter. For the full fiscal year, the Company expects net sales to be in the range of $325 to $340 million and diluted earnings per share to be in the range of 62 cents to 76 cents. Restructuring related expenses for the full year are expected to total approximately $4.9 million on a pre tax basis, or approximately 39 cents per diluted share.

The Board of Directors has elected to suspend payment of the Company's five cent quarterly dividend on its common stock. The Board believes the suspension of the dividend at this time is prudent to preserve Delta's financial flexibility in this uncertain retail environment and period of increased capital spending for our new Honduran textile facility. The additional capital resulting from this decision is intended to allow the Company to improve its balance sheet and increase its debt availability. The Company will evaluate the opportunity to resume a dividend payment as the quarterly profitability for the Company becomes more consistent.

Mr. Humphreys concluded, “While we are cautious about consumer demand for apparel in the short run, we believe all of our business units are moving forward in a positive direction. These trends should help us position ourselves to take advantage of better market conditions as they unfold. We remain focused on completing our textile restructuring, as we begin production in our Ceiba textile facility and rebuild the productivity and efficiency in our Maiden plant. We expect the excess expense associated with these initiatives will be substantially behind us by the end of our third fiscal quarter. Our efforts to implement these initiatives should result in significant cost savings in the years ahead.”

Retail-Ready Apparel

This segment, which includes the Soffe and Junkfood businesses, reported a sales decrease of 6.3% to $30.3 million for the first quarter of fiscal year 2008 compared to $32.4 million in the prior year quarter. The sales decrease was driven by lower sales in the Soffe business, offset partially by higher sales in the Junkfood business. Sales of Soffe products were down 14.3% from the prior year, driven by the weak retail environment. In addition, capacity constraints on decorated products and late shipments on sourced products further slowed the sales in this business. Sales in the Junkfood business grew 36% from the prior year first quarter, driven by increased sales to the higher-end department stores and specialty stores. In addition, foreign sales continued to expand. Operating income in the first fiscal quarter of 2008 decreased $500,000 from the prior year first quarter to $2.7 million due primarily to the lower sales levels.

Activewear Apparel

The activewear segment, which includes the Delta and the FunTees businesses, reported sales of $42.2 million for the three months ended September 29, 2007, a 39% increase from the prior year first quarter. The increase in sales was primarily due to the acquisition of the FunTees business on October 2, 2006, offset partially by lower volume in undecorated t-shirts. Our textile restructuring initiatives, including the costs of the FunTees integration, drove the decrease in operating income to a loss of $3.9 million compared to a profit of $200,000 in the prior year first quarter.