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. Higher units were sold in all product categories as well as price increases across products. 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
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 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. From $20.3million or $2.86 a Year ago, net income dropped 3.0 percent at $19.7 million to $2.80 per Share, which is $2.80 less.
Fourth-Quarter Sales Up
Sales increased 0.7 percent to $115.5 Million in the fourth quarter. 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 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 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.
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 initial overall demand for products, with the trend of declining as the year went on. 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. This margin impact was visible in the second half fiscal 2022 and will continue to be evident in the first quarter 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’s on-demand digital printing business saw an increase in sales revenue and units sold year over year. 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 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’s new location is exceeding all expectations. Six to eight additional locations are expected to open in fiscal 2023.
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 7.1 million visits in fiscal 2022. That is a 37 percent increase from fiscal 2021. 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 also offers engagement tools, including published articles with reviews of industry gear and how-to articles. Salt Life Ambassador Kieran Anderson hosts the podcast Above and Below.
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, 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 courtesy Salt Life