Selling, general and administrative expenses as a percentage of sales improved to 18.6 percent in the 2014 second quarter compared with 19.7 percent in the prior year period as a result of the cost reduction measures implemented during the last several quarters.
Operating margins in the branded segment improved 160 basis points from the prior March quarter, but this improvement was more than offset by depressed margins in the basics segment from lower selling prices on basic undecorated tees coupled with higher raw material costs. This resulted in a net loss for the 2014 second quarter of $763 thousand, or $0.10 per diluted share, compared with net income for the prior year quarter of $1.6 million, or $0.19 per diluted share.
For the first six months of fiscal 2014, net sales were $214.5 million compared with $226.8 million in the prior year period. The company experienced a net loss for the 2014 first six months of $2.4 million, or $0.30 per diluted share, compared with net income of $1.7 million, or $0.19 per diluted share, in the prior year period.
Basics Segment Review
Net sales for the basics segment were $64.1 million in the 2014 second quarter, a 5 percent decrease from $67.4 million in the prior year period. Private label sales were down 17 percent as some customers reduced shipments of products because of slowness at retail and changes in product strategy. Sales of catalog basic tees increased 2 percent based on a 7 percent increase in unit sales offset by a 5 percent decrease in average selling prices. Weak market conditions for undecorated tees resulted in significant price discounting and a shift in sales mix to drive volume growth. This, coupled with higher cotton costs, lowered operating margins in the basics segment by 370 basis points to 1.7 percent of sales in the 2014 second quarter.
Branded Segment Review
Branded segment sales for the fiscal 2014 second quarter were $50.3 million compared with $52.6 million in the prior year period. Salt Life and Art Gun continued their strong growth trends of the past several quarters but those were offset by lower sales at Soffe, Junk Food and The Game. Although Soffe sales were down 12 percent compared to a year ago, the new Soffe juniors' offerings and Intensity branded products are regaining traction and showing solid sell-through at retail. Sales of Junk Food products declined 3 percent, with softness at larger retail customers nearly being offset by new business that Junk Food continues to generate with boutiques and specialty retailers.
The Game apparel and headwear lines are also winning new programs as college bookstores begin placing orders for the new school year. Art Gun, with a 34 percent sales increase, continued to grow with online retailers who want the flexibility and no-risk inventory model that the Art Gun service platform provides. Salt Life, which the company acquired in August 2013, had another strong quarter, expanding sales 28 percent from the prior year period. Salt Life’s sales were driven from retail door growth and product expansions, as Salt Life lifestyle products continue to gain popularity with consumers. Despite the 4 percent sales decline in branded segment sales, operating income improved $0.8 million to a loss of $0.3 million, or 0.5 percent of sales, compared to a loss of $1.1 million, or 2.1 percent of sales, in the prior year quarter.
Robert W. Humphreys, Delta Apparel, Inc.’s Chairman and Chief Executive Officer, commented that the disappointing second quarter resulted mainly from the convergence of several previously-noted marketplace risks as well as extended cooler weather throughout the United States. “While we knew the undecorated tee market was going to be challenging, a heavier promotional environment driven from continued softness in demand at the start of the spring selling season made it even more challenging than expected.
Weak demand also caused deferred call-outs and slower replenishment orders for our branded products. The unseasonable weather that prevailed across the country played a significant part in slow retail sales, but the continuing sluggish economy and its negative effect on consumer purchasing power was also a major factor.”
“The lost revenue impacted our bottom line and this was coupled with higher cotton and other raw material prices that we were not able to pass along to customers in higher selling prices due to the heavier promotional activity in the marketplace. In addition, weak demand hindered us from taking full advantage of our expanded manufacturing capacity to leverage fixed costs.”
“Although this was a difficult quarter for us, there were a number of positive developments that we intend to build upon for the future. The high level of service we provide to the private label and activewear marketplace has resulted in us winning additional decorated tee programs. So far this year we have shipped nearly $5 million in decorated catalog tees to customers who previously were purchasing undecorated tees. We opened a third party-operated distribution facility in Dallas, Texas to better service a large market for undecorated tees with shorter shipping times and reduced freight costs. We have also added new upscale fleece to our product line that we expect will attract new customers and help reduce some of the seasonality in our business. Our recently expanded manufacturing and screen-printing capabilities give us the capacity to continue growing these decorated and undecorated programs in our basics segment.”
“Salt Life continued its strong growth, with sales up 29 percent for the first six months of the year compared to the prior year period. This growth trend gives us confidence that sales of Salt Life products should exceed $30 million in calendar year 2014. We continue to expand the product offerings in lifestyle and performance products to reach across the broad consumer base in fishing, surfing/paddleboard, diving and beach lovers. During the March quarter, we increased the Salt Life presence in retail doors by 5 percent and increased the average shipment into existing doors by about 20 percent. We just recently initiated our first consumer advertising runs in several key publications, including Surfer Magazine, which featured paddleboard professional Colin McPhillips. We are also sponsoring several paddleboard competitions principally on the West Coast to continue our grass roots marketing in that region.”
"We are extremely excited about our restaurant licensee hosting the grand opening of the new Salt Life Food Shack restaurant in St. Augustine Beach this week. You may have seen the restaurant featured on the hit television show “Tanked” on Animal Planet, with the installation of a “wave” 1,300 gallon saltwater fish tank. With three restaurants now open, we expect over half a million consumers to experience Salt Life through the Food Shack concept, driving significant consumer awareness to the brand.”
Mr. Humphreys concluded, “We continue our focus on providing high-quality products and customer satisfaction that should result in the long-term growth and profitability of Delta Apparel, especially as economic conditions improve and consumer buying power is renewed. In the meantime, we are keeping our costs in line and introducing new products that consumers want with the efficiency and price points our customers need.”
Fiscal 2014 Guidance
As previously discussed, there are several factors that have negatively impacted the company’s fiscal 2014 results to date. Net sales in the second half of fiscal 2014 may not be sufficient to overcome the declines of the first half, which could, in turn, reduce incremental revenues that the company expected to leverage against fixed costs. This, combined with recent and potential future increases in cotton prices and higher than expected legal-related costs, leads management, at this time, to revise the company’s fiscal year 2014 guidance to sales in the range of $480 million to $490 million, and earnings in the range of $0.80 to $0.90 per diluted share.
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