Delta Apparel, Inc. reported earnings doubled in the third quarter ended June 27, boosted by meatier gross margins, reduced expenses and improving sales trends across its businesses.
“During the quarter the company not only turned the corner in terms of sales and net income growth but showed vast improvement in other areas such as gross expansion and general and administrative cost reductions resulting in significant improvement in our operating margins,” said Bob Humphreys, chairman and CEO, on a conference call with analysts. “The strategic initiatives that we began implementing a year ago had proved successful in regards to call savings, efficiency gains, profit growth and better service to customers and we believe the best is yet to come. We continue to invest in areas of our business where we expect to yield high returns.”
Net income reached $4.4 million, or 55 cents a share, up from $2.2 million, or 27 cents, a year ago.
Gross margins improved 270 basis points year-over-year as well as 260 basis points versus its March quarter. SG&A expenses were reduced $1.4 million, to 16.3 percent of sales versus 17.1 percent in the prior year period. The reduction principally resulted from cost savings measures put in place almost a year ago offset partially by higher marketing expense in its Branded businesses.
Revenues grew 1.7 percent after adjustment to exclude the March sale of The Game fan headwear business to David Peyser Inc. in March 2015. Without the adjustment, sales were down 2.4 percent to $120.5 million.
In its Basics Segment, sales increased 4.2 percent to $79 million. Activewear sales increased 3.6 percent year-over-year, driven by 12.7 percent growth in private label. Delta's catalog business maintained stable pricing throughout the quarter and improved its product mix with a greater variety of fashion basics and more programs with value-added services. New product categories including fleece and its Delta Dri performance products are being received well. In the June quarter Delta saw 26 percent growth in fleece and a 43 percent growth in its performance product sales.
Art Gun, the company's e-commerce business specializing in customized apparel offerings through its digital printing platform, increased sales 26.2 percent to $2.9 million. The Basics Segment overall achieved solid margin expansion, both sequentially from the March quarter and year-over-year, due to a stronger product mix, greater efficiencies in manufacturing and operations, and the benefit of balanced selling prices with lower cotton costs.
Branded Segment sales declined 13.0 percent to $41.5 million, reflecting approximately $5 million in prior-year sales from The Game. The rest of its Branded Segment business is experiencing sales growth and solid margin improvement with the exception of the slight sales decline at Soffe.
Soffe sales were off $600,000 due to fewer closeout sales. Soffe’s main channels remained flat.
Junkfood sales were up slightly compared with the prior year quarter, with strong margin improvement both sequentially and over the 2014 third quarter. Continued double-digit sales growth at specialty retailers offset some weakness in other sales channels. The Junkfood website continued its strong growth, increasing sales 22 percent, bringing year-to-date sales growth to 61 percent.
Sales of Salt Life products were lower than expected, with sales growth of 4.1 percent compared to the prior June quarter. While strong demand during the quarter suggested almost 30 percent growth, shipping was hindered by the transition of distribution operations from Phoenix City, AL, to the Soffe facility in Fayetteville, NC. Salt Life expects to work through its order backlog during the fourth quarter and be in position to take full advantage of its new, more efficient and cost-effective distribution platform in Fayetteville by calendar year 2016.
Highlighting some progress, Humphreys noted that Delta purchased additional knitting equipment for its textile facilities in Honduras for open-width fabrics in order to reduce its reliance on purchase fabric and better service its customers. The investment is expected to result in annual savings of approximately $2 million. Delta also completed the move of additional screen-printing equipment to El Salvador to service the strong growth in private label programs.
E-commerce sales on its internal website grew 56 percent with each of its direct to consumer sites seeing growth in excess of 20 percent. It continues to invest in improving the functionality of its sites.
Art Gun also purchased additional digital print equipment to service the high-growth e-commerce business providing customized products for consumers. The Art Gun purchase is also helping Junkfood deliver web exclusive designs. As an example, Humphreys noted that in June, Junkfood partnered with Connor Franta, an American YouTube blogger, on an exclusive capsule of apparel to be sold only on the Junk Food e-commerce side and at the Junk Food retail store. Over 2000 fans waited outside its California stores waiting in line for over seven hours to see the collection.
At Soffe, sales appear to have stabilized and the business is no longer losing money, Humphreys said. The core Soffe short in various colors and patterns is trending well with consumers, and a number of major retailers are adding doors with the short. Soffe's fall line has been well received by retailers and the company anticipates a good response from consumers once the products hit retail shelves. Said Humphreys, “Soffe has a large consumer fan group and it's direct to consumer sales continue to increase with growth of 24 percent during the June quarter and 32 percent year-to-date.”
While the transition of its distribution center impacted Salt Life's top-line growth, HH sees it as a “temporary situation and we’re not seeing any decline in the strong demand for Salt Life products.” He also noted that Salt Life’s gross margins expanded about 300 basis points.
“Salt Life has received an overwhelming strong response through this new spring line,” said Humphreys. “Our major regional and national retailers or add new doors in expanding product categories. We feel confident that the new efficient distribution center with this impaired cost savings and improve customer service that becomes fully functional, Salt Life will return to it's traditional strong double digit growth rates.”
Overall, Humphreys said the positive trends seen in each of its business units makes him optimistic going forward. He added, “We will continue to be diligent in our efforts to build off the recent success to drive further growth and profit expansion in the coming quarters. Bottom-line we believe we have built a foundation that should provide steady growth and improved profitability for Delta Apparel.”
