Net income for the 2013 second quarter was $46 thousand, or $0.01 per diluted share, compared with a loss in the 2012 second quarter of $13.6 million, or $1.61 per diluted share. As previously reported, net income for the fiscal 2012 second quarter and first half was negatively impacted by a one-time inventory markdown of $16.2 million resulting from record high cotton costs combined with selling price decreases in Delta's line of basic undecorated t-shirts.
For the first six months of fiscal 2013, sales increased 3.4 percent to $236.9 million compared to $229.0 million for the first six months of fiscal 2012. Net income for the first six months of fiscal 2013 was $3.6 million, or $0.42 per diluted share, compared to a loss of $9.2 million, or $1.09 per share, in the prior-year six-month period. Fiscal 2013 first half net income was affected by a one-time charge of $1.2 million related to the previously reported Audit Committee internal investigation completed in September 2012 that reduced 2013 first quarter earnings per share by $0.10.
The Company's second quarter benefitted from solid year-over-year sales growth in its Delta Catalog, Junkfood, The Game and Art Gun businesses. This growth was offset somewhat by continued softness in the Company's Soffe business and lower selling prices within its FunTees and Delta Catalog businesses due to lower priced cotton.
Basics Segment Review
Second quarter 2013 sales in the basics segment rose to $58.8 million, a 2.2 percent increase over the comparable 2012 period. The increase resulted from a 13.1 percent rise in basics segment volume, which was offset somewhat by lower average selling prices in both the Delta Catalog and FunTees businesses. The addition of new customers in the blank and private-label business was the principal driver of the volume increase. Delta Catalog experienced a 15 percent increase in unit volume, driving 7.8 percent sales growth. Due to lower pricing, FunTees experienced a net sales decline of 7.3 percent despite a 6 percent increase in volume. Efficient use of new print programs using Delta Catalog blanks and the success of Delta's Six Sigma initiatives in reducing manufacturing costs bolstered revenue and provided improved margins for the basics segment.
Branded Segment Review
Branded segment sales for the second quarter were $47.9 million, up slightly from the prior year second quarter. Junkfood, The Game and Art Gun each experienced double-digit net sales growth, which was offset by continued weakness in the Soffe business. While Soffe's strategic sporting goods channel gained new distribution and better product placement, its independent sporting goods business remained slow. Soffe's juniors business with mid-tier department stores also remained slow but various girls and "missy" college programs performed well in that channel. Junkfood continued to add specialty retail customers and new design-for-fee business, and its professional sports license business continues to grow, largely through e-commerce channels. The Game continues to show good growth, led by Salt Life, which is experiencing strong buy-in from customers. Salt Life will start shipping its new footwear line in the March quarter. Art Gun grew net sales 83 percent in the second quarter and has been profitable throughout the first half. Driving its growth were several new e-commerce sites and direct-to-garment fulfillment opportunities that were added to the Art Gun platform since the beginning of the 2013 fiscal year.
Robert W. Humphreys, Delta Apparel's Chairman and Chief Executive Officer, commented that while the Company's second quarter was not as strong as expected, it is still on track to meet its full-year guidance. "During the second quarter we completed several projects that are designed to reduce costs and leverage customer relationships. The Game's basic tee products now employ a completely vertical production model extending from textiles through screen printing. This provides a low cost structure and facilitates rapid product replenishment. The Salt Life brand continues to gain in popularity. Our Fall 2013 line received an excellent reaction from buyers at the recent Surf Expo in Orlando, Florida, and we are making good headway in establishing the brand on the West Coast."
"Delta made good progress in bringing all of our bookstore business under The Game's operation and we expect to complete the consolidation by the end of this fiscal year. This will help us leverage our bookstore relationships and reduce our selling, general and administrative costs going forward."
"In the second quarter, we added additional equipment to our Art Gun business and went to a twenty-four/seven operation to support holiday growth and provide quicker shipping to customers spread across more than 65 countries. We also continued to expand sales on our own e-commerce sites, which grew 71 percent over last year's first half. While e-commerce is a very small part of our business, it is an area of exceptional growth that will continue to gain importance to our
business."
"Obviously, the Soffe business offers one of our biggest challenges as well as one of our biggest opportunities. In this regard, we are addressing Soffe's cost structure to bring it in line with that of our other business units. Beyond that, we are seizing a number of opportunities to leverage customer relationships through new, more creative sales and marketing programs to coincide with and enhance the rapidly evolving marketing strategies of mid-tier retailers and independent sporting goods operators."
Mr. Humphreys concluded, "While the economic outlook in the U.S. continues to lack certainty, current demand for our products is firm and we believe we can meet our sales and earnings expectations in each of the two remaining quarters of fiscal 2013."
Fiscal 2013 Guidance
The Company continues to believe that the guidance previously provided for fiscal 2013 can be achieved. Based on anticipated net sales growth and higher unit volume leveraging fixed costs, the Company believes that it will reach record revenues in the range of $500 to $510 million for fiscal 2013 or about a 3 percent increase over 2012. Net income is expected to be in a range of $1.65 to $1.80 per diluted share.
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