EXEC: Delta Apparel Sees Dip In Annual Profits On Inflationary, Inventory Pressures

Delta Apparel saw another year of double-digit top line growth. However, earnings were slightly lower due to higher cotton prices. The next two quarters will see production curtailments to adjust inventories in response to a pullback of activewear orders in mass channels.

On a conference call with analysts, Bob Humphreys, chairman and CEO, said Delta Apparel achieved 11 percent growth for the year and “solid bottom line results” given the inflationary pressures and supply chain disruptions.

All five of the company’s primary market channels—Delta Direct, Global Brands, Retail Direct, DTG2Go, and Salt Life—delivered year-over-year sales growth in FY22.  This growth was due to higher sales in all product categories and price increases across all product lines. He said, “I’m incredibly proud of our entire organization’s ability to quickly adapt to change throughout the year, yet remain focused on the execution of our business goals and strategic initiatives.”

Fiscal Year Sales Increase 11 Percent
The company’s fiscal year ended October 1 saw sales rise 11.0 percent, to $484.9million. Sales for the Delta Group segment increased 9.8% to $424.8 Million, while Salt Life Group sales rose 20.8 percent to $60.1 Million.

The year’s gross margins decreased by 90 basis points to 22.4%. Delta Group’s gross margins were down 190 basis points to 18.3 percent, reflecting increasing input and labor costs, as well as production curtailments. Salt Life segment’s gross margins increased 370 basis points to 51.6 percent, driven by channel mix and higher selling prices.

SG&A expenses were 16.4 percent of sales, a decline of 20 basis points from the prior year. Operating profits in the year eased 2.8 percent to $31.8 million due to the increased input costs coupled with slightly increased SG&A expenses. Net income decreased 3.0% to $19.7million or $2.80 per Share, from $20.3million or $2.86 a Year ago.

Fourth-Quarter sales inch up
The fourth quarter saw sales rise 0.7 percent, to $115.5million. Sales at Delta Group were down 1.1 percent to $101.5 million as weakness in the Retail Direct channel offset Global Brands’ growth. Salt Life saw a 15.7 percent increase to $14 million due to organic growth in all three channels: wholesale and retail.

Gross margins fell 440 basis points from 18.7 percent to 18.7% due to higher input costs in its activewear and DTG2Go business, as well unbudgeted production curtailments. However, there was an improvement in the Salt Life Group segment.

Delta Group’s gross margins gave back 610 basis points to 14.1 percent, mostly negatively impacted by higher cost inventory flowing through cost of sales, including elevated cotton, energy, dyes and chemicals, freight and labor costs. Production in basic tees began to decrease, which resulted in $1.1million of unabsorbed fixed expenses expensed in fourth quarter. Salt Life’s gross margins improved 380 basis points to 51.8 percent, resulting from a favorable mix of sales, including increased Salt Life branded retail store sales.

SG&A expenses increased 170 basis points to 17.2 percent of sales, primarily driven by a higher percentage of sales coming through Salt Life stores and increased distribution labor costs across operations. Operating income dropped 78.2 per cent to $2.2million, from $10.1million.

The quarter saw a net loss of $281,000 or 4 cents per share, against earnings of $6.8million or 96cs a year earlier.

Delta Group Segment Impacted By Softening Replenishment Orders
The Delta Group segment saw strong demand in the beginning of the year, but this trend began to slow down as the years progressed. The Delta Group segment has seen strong demand for its DTG2Go channel and Delta Direct channels, as well as regional screen printing and ad specialties businesses. Due to fluctuating consumer demand, retailers partners have had difficulty managing their inventory.

“The overall economic uncertainty going into the holiday season caused by the inflationary environment has hampered replenishment orders for activewear from our mass retail partners,” said Humphreys.

As declines in overall demand for basic T’s were seen in the fourth quarter, Delta began reducing manufacturing output to level off its finished goods inventory. Said Humphreys, “We continue to stay close to our partners and we’ll be prepared to support demand as we progress through the first half of fiscal 2023.”

Humphreys pointed out that, with cotton prices rising almost 50 percent in five months and hitting a high of more than $1.50 per-pound in the third period, Delta began to reduce forward cotton purchases commitments when futures prices rose beyond what the company thought would be acceptable at retail. Said Humphreys, “These inflationary input costs of course increase the value of our inventory and put pressure on our gross margins as inventory is sold. This margin impact was evident in the second quarter of fiscal 2022, and it is expected to continue into the first quarter of fiscal 2023.

Simone Walsh, Delta’s CFO, stated that margins will remain depressed in the first quarter of fiscal 2023, as inventory from higher-priced cotton is sold and other increased input costs are incurred in the second half of fiscal 2022.

Currently, with the price of cotton declining and stabilizing recently from the volatility and peak price in last year’s third quarter, a return to margin expansion is projected by the fourth quarter of fiscal 2023. Added Walsh, “We are closely monitoring inventory levels and will continue to monitor our manufacturing output and make adjustments as necessary to align with market conditions. The vast majority of our inventory consists of basic Delta blank garments that we fully expect to sell through our various channels as demand arises.”

On the positive side, Humphreys said Delta Group’s vertical manufacturing platform supported by markets adjacent to the U.S. continues to generate increased demand in its Global Brands and Retail Direct channels.

“Brand and retailer interest in the near shore and domestic sourcing and fulfillment strategies our platform offers is accelerating due not only to U.S. market proximity and speed, but also to better risk management associated with evolving U.S. trade relations, social, environmental and sustainability priorities, inflationary pressures and supply chain disruptions,” said Humphreys. “These favorable dynamics, coupled with new investment in screen print production and other value-adding ancillary services, as well as higher selling prices from our pass-through of rising input costs manifested itself in solid sales growth in our Delta Group segment.”

DTG2Go Finds Success with Fanatics Partnership
DTG2Go, the company’s digital printing business on-demand, saw year-over-year sales and unit sales growth. Six out of eight DTG2Go locations are also blank garment distribution centers.

Said Humphreys, “More and more customers see the clear benefits of our digital make-on-demand model versus traditional inventory heavy, make-to-forecast model, particularly when coupled with our unique ability to vertically supply blank Delta garments on demand.”

DTG2Go’s digital print technology had been installed in four of DTG2Go’s facilities to support Fanatics’ licensed sports merchandise delivery. Within 24 hours of placing an order, custom orders can be made, packed and shipped to the customer.

Humphreys said of the Fanatics partnership, “I think we’ve made good sequential progress each quarter in producing more product and getting it out the door. We have more equipment running on that now than we ever have in our history and our output as we speak is the best that it’s been in our history and we see that continuing to grow. Black Friday will be in about a week, and then we will have additional shifts in place to maximize the potential of that business. But I think our fourth quarter output was up over 30 percent from the prior year, and you know we expect strong unit and selling price growth in that business this quarter.”

Humphreys noted that DTG2Go experienced additional cost and some production delays in FY22 due to the installation of new equipment and labor shortages, but he said DTG2Go’s sales and margin are expected to expand going forward as selling prices continue to increase. He added, “We also expect to see increased output through productivity gains, additional staffing and extending operating schedules to meet demand in this high-growth channel for our company.”

Salt Life Boosted By Higher Awareness
Salt Life’s 20 percent gain in the fiscal year was helped by balanced growth across owned retail, e-commerce and wholesale.

Humphreys said Salt Life’s retail locations “continue to serve as a valuable brand awareness tool and drivers of accretive revenue.” Eight new doors were added in the fiscal year to close with 21. Rehoboth beach, Delaware, has a new location that exceeds expectations. Six to eight more locations will open in fiscal 2023, with one additional Long Branch store, NJ.

Salt Life’s e-commerce business was challenged by supply chain shortages in the first half of FY22, but was able to work through the issues to drive organic growth in the fourth quarter. Salt Life’s wholesale customers continue to support it with more floor space, shop-in-shops and brand awareness to drive incremental sales.

Humphreys said Salt Life’s consumer engagement efforts are paying off. Due to YouTube Shorts’ success, the Salt Life YouTube channel saw a 37 percent increase in views during fiscal 2022. Two to three short videos are produced each week to appeal to a wider audience. Beyond YouTube, Salt Life’s social channel, net audience grew nearly 85 percent in fiscal 2022, spanning Facebook, Instagram, Twitter, LinkedIn and Pinterest.

Daily Salt is another engagement tool. It features published articles that feature reviews of gear in the industry and how-to articles. Salt Life’s podcast, Above and Below, is still available. It is hosted by Kieran Anderson (professional surfer, Salt Life ambassador).

Fiscal Outlook 2023
Looking ahead, continued growth is expected in Delta Group’s Retail Direct and Global Brand channels in FY23, offsetting slower sales in its Delta Direct channel in the first half, due primarily to the rebalancing of replenishment orders for activewear from large mass retailers. In the first half of 2018, activewear sales are expected to remain flat, with a return to growth in second half. This is due to the rebalancing of inventory and strong mass market demand. DTG2Go is expecting another strong holiday season, while Salt Life will again experience double-digit sales growth due to strong DTC growth.

“We are moving into fiscal year 2023 with positive momentum across many aspects of our business, but also with uncertainty across the apparel industry and the economy at large,” concluded Humphreys. “We will continue to leverage the flexibility our vertical manufacturing platform gives us to adjust production levels to meet demand and expect to manage our working capital and capital expenditures similarly as the year progresses. We have successfully operated through periods of economic ambiguity in the past, and believe that our diversified distribution channels and wide range of customer touchpoints should position us well to take advantage of market opportunities as they may arise.”

Photo by Salt Life