Delta Apparel, Inc. reported earnings fell 45 percent in the third quarter ended June 28, to $2.2 million, or 27 cents per share, from $4.0 million or 48 cents, a year ago. Revenues were down 7.6 percent to $123.5 million from $133.6 million.
ADVERTISEMENT For the first nine months of fiscal 2014, net sales were $338.0 million compared with $360.4 million in the prior year period. The company had a net loss for the 2014 first nine months of $195 thousand, or $0.02 per diluted share, compared with net income of $5.6 million, or $0.67 per diluted share, in the prior year period.
Responding to its financial performance and near-term view of business conditions, the company has initiated a reorganization of its administrative structure at all levels to streamline decision-making and information flow as well as reduce duplicative and excess fixed costs. In addition, the company is currently evaluating other initiatives focused on improving net profitability in the face of continued marketplace weakness. These other initiatives include (i) restructuring the company's manufacturing platform to lower product cost and strategically reduce capacity on certain product lines, and (ii) a comprehensive rationalization of all business units, product lines and sales channels.
Robert W. Humphreys, Delta Apparel, Inc.'s chairman and chief executive officer, commented that weak market conditions resulting from the continued sluggish economy are having a strong negative effect on the apparel industry in general. "Many apparel retailers and small to mid-sized brands have been affected, as weak market conditions persist across most sales channels and tiers of distribution. This pervasive weakness is an unusual condition we have not seen in recent history, and there is no certainty when there will be a reversal of these trends. As such, it is imperative that we adjust the fixed cost structure within Delta Apparel to give us the ability to operate profitably in the current retail environment. Beyond that, when conditions improve, as we expect they will, we anticipate that incremental sales growth will be reflected to a much greater degree in our bottom line," Humphreys said.
Strategic Initiatives
Certain strategic initiatives are already being implemented. The company is in the process of reorganizing key business functions to reduce fixed costs and streamline its administrative workforce. This plan impacts all business units within the organization and is designed to de-layer the company's management structure, further leverage back-office functions, and streamline departments through the use of information technology systems that have recently been or are currently being implemented. The reorganization should result in approximately $7 million of annualized savings for the company, with approximately $5 million recognized in fiscal year 2015. The company expects to incur about $2.5 million in severance-related expenses, with the majority being expensed in the company's 2014 fourth quarter.
In addition, the company continues to focus on improving its supply chain and manufacturing efficiencies, lowering product costs and reducing the operating capital required for the business. A number of steps have already been taken on this front, including the previously announced consolidation of some domestic fabric production for basic tees into the company's lower-cost platform in Honduras. The company is currently evaluating further action for fiscal year 2015 that, if taken, should allow for improved service to customers with streamlined product development and shorter lead times to fulfill orders. The actions under evaluation, along with steps already taken, should reduce capacity in certain product lines until market conditions improve, allowing the company to recoup capital currently employed in the business.
The company is also undertaking a comprehensive rationalization analysis of its under-performing business units, product lines and sales channels. From this assessment, the company plans to focus its capital and other resources on areas that demonstrate the most profitable growth opportunities and deemphasize or eliminate others.
Basics Segment Review
Net sales for the basics segment were $73.5 million in the 2014 third quarter, a 5.8 percent decrease from $78.0 million in the prior year period. Sales of basic, undecorated tees continued to suffer from weak demand and an over-inventoried environment driving ongoing promotional price discounting. Although sales of private-label products declined in the June quarter, additional programs with existing customers are in development and programs with new customers are underway. We expect these new initiatives, now in the pipeline, to help drive growth in future quarters.
Branded Segment Review
Branded segment sales for the fiscal 2014 third quarter were $50.0 million compared with $55.5 million in the prior year period, a 9.9 percent decline. Salt Life and Art Gun continued their double-digit sales growth during the quarter but not at a pace adequate to offset sales declines in the other branded segment businesses. Sales of Salt Life branded products increased 16 percent in the June quarter over the prior year quarter, and are up 24 percent year to date. The sluggish economy and unusual weather appears to have reduced traffic to vacation and resort destinations, reducing Salt Life's growth with independent retailers compared to previous quarters. Strong growth has continued for Salt Life in its other sales channels, including department stores and active lifestyle retail chains. Art Gun, reflecting the expanding popularity of ecommerce purchasing, enjoyed sales growth of nearly 25 percent for the quarter, continuing the strong growth trends of the past several quarters.
The Game began shipments to college bookstores in the June quarter and its college sales were on par with the prior year. Based on order backlog, double-digit sales growth is anticipated in The Game's college line in the September quarter. Private label headwear sales decreased during the quarter compared with the prior year as customers' licensed product declined at retail. Junkfood experienced very strong growth with its boutique and specialty store customers during the quarter. Although this growth was significant, unsettled conditions within one of Junkfood's large retail customer groups hampered sales and resulted in an overall sales decline at Junkfood of nearly 20 percent for the third quarter. Soffe sales during the quarter were not as strong as anticipated despite returned placements at major mid-tier retailers. Overall weakness in other Soffe sales channels offset the incremental mid-tier placements, resulting in a sales decline of about 10 percent in the third fiscal quarter.
Humphreys concluded, "The difficult economic and apparel marketplace conditions have greatly impacted our financial performance. However, our brands continue to enjoy strong consumer recognition and our products are on-trend. As the market strengthens, we anticipate a solid rebound in sales of our branded and basic products. Our current efforts to reduce fixed costs should provide for markedly improved profitability as the economy and consumer spending for apparel improves. With the significant initiatives we are undertaking, along with those currently being evaluated, we are unable to confirm prior financial guidance and believe it is prudent to suspend financial guidance for the remainder of our 2014 fiscal year and for fiscal 2015. In the meantime we will continue to focus on building those products and business units that exhibit the greatest potential and reducing fixed cost to enhance the bottom-line potential of the company."
Delta Apparel, Inc., along with its operating subsidiaries, M.J. Soffe, LLC, Junkfood Clothing company, To The Game, LLC and Art Gun, is a maker of lifestyle basic and branded activewear apparel and headwear. T
