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

Delta Apparel continued to see double-digit top-line growth in another year, but earnings were slightly down due to higher cotton costs. Due to a decrease in activewear orders from the mass channel, production curtailments will continue for the next two quarters.

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 driven by increased units sold across all product categories and price increases across 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 Rise 11 Percent
Sales rose 11.0 percent to $484.9 Million in the fiscal year that ended on October 1. Sales for the Delta Group segment increased 9.8 percent 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 $19.7m, or $2.80 per Share, from $20.3m, 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’s organic growth across all three channels, wholesale, retail, and e-commerce, drove a 15.7% increase in sales to $14 Million.

Gross margins dropped 440 basis point to 18.7 per cent, due to higher input cost in DTG2Go and activewear businesses as well as unbudgeted production curtailments. This was offset by an increase 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 was reduced in basic tees. This resulted is $1.1 million in unabsorbed fixed costs that were expensed during the 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 decreased by 78.2 percentage to $2.2million from $10.1 million.

In comparison to earnings of $6.8million, or 96cs, last year, the quarter saw a net loss in the quarter of $281,000.

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. Retail partners have faced difficulties managing their inventory due to fluctuations in consumer demands.

“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 noted that as the price of cotton rose almost 50 percent over a five-month span and reached a peak of $1.50 per kilogram in the third quarter of 2013, Delta began to reduce its forward cotton purchase commitments when futures prices rose beyond what the company considered 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. We observed this margin impact in fiscal 2022’s second half and anticipate it to continue in fiscal 2023’s first half.

CFO Simone Walsh stated that Delta expects its margins to remain low in the first half fiscal 2023 because inventory at higher prices for cotton and other high input costs in fiscal 2022 will be sold.

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 is a Success Story with Fanatics Partnership
DTG2Go, the company’s digital printing business on-demand, saw year-over-year sales and unit sales growth. Six of the eight DTG2Go digital print locations that were operational at year-end also serve as blank garment distribution centres.

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 ordering, custom orders can usually be manufactured, packaged, and shipped to consumers.

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 is just a week away and we’ll have more shifts to maximize our potential in 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. In fiscal 2022, Salt Life’s YouTube channel had 7.1 million views. This is a 37% increase over fiscal 2021. Its success was largely due to YouTube Shorts. These short videos appeal to a larger audience. Two to three shows are produced per semaine. 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 Ambassador Kieran Anderson hosts the podcast Above and Below.

Fiscal 2023 Outlook
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, activewear sales are expected to be flat. However, the second half will see growth as inventory balances and demand from the mass market strengthen. 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