Delta Apparel, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Dec 2014

[Operator:]

Thank you, and good afternoon to everyone participating in Delta Apparel's Fiscal 2014 Fourth Quarter and Year End Earnings Conference Call. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer; and Deb Merrill, Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone this call is being recorded and during the course of this conference call, projections or other forward-looking statements may be made by Delta Apparel's executives. Such statements suggest prediction and involve risk and uncertainty, and actual results may differ materially. Please refer to the periodic reports filed with the Securities and Exchange Commission, including the company's most recent Form 10-K and 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in the projections of forward-looking statements. Please note that any forward-looking statements are made only as of today, and the company does not commit to update or revise these statements even if it becomes apparent that any projected results will not be realized. In addition, during this call certain non-GAAP financial measures will be discussed. The company's filings with the SEC which are available on the company's website, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with comparable GAAP measures. I'll now turn the call over to Delta's CFO, Deb Merrill, who will provide the details of the company's 2014 fourth quarter and fiscal year end results.

[Deb Merrill:]

Thank you. While Delta's products did well at retail during the fourth quarter and the full fiscal year, continuing sluggishness in the economy and unusually harsh winter had a negative impact on the entire apparel industry. The lingering effects of management changes and related issues at several of our large customers presented additional challenges as well. Net sales for the fiscal year ended September 27, 2014 were $452.9 million, versus $483 million in the prior twelve months. Net income, adjusted for the $4 million pre-tax impact of strategic initiatives, was $1.5 million, or $0.19 per diluted share, compared with net income in the prior year of $6.2 million, or $0.74 per diluted share. Without adjustment for the impact of our strategic initiatives, the company experienced a net loss for the year of $1million, or $0.12 per diluted share. Fourth quarter sales were $114.9 million, compared to $122.6 million in the prior year September quarter. Our fourth quarter adjusted net income of $1.7 million, or $0.22 per diluted share, was an improvement over the net income of $600,000 or $0.07 per diluted share, in the prior year period. Without adjustment for the impact of our strategic initiatives, we experienced the net loss for the fourth quarter of $765,000 or $0.10 per diluted share. As I begin discussing our results by segment, you should note that we are reclassifying Art Gun to the basics segments to reflect these current operating characteristics in the market place. And this change is reflected in our fiscal 2014 results and corresponding comparisons. For fiscal 2014, net sales for our basics segment declined 3.4% to $265.9 million; demand for undecorated tees was week throughout the first three quarters of fiscal 2014, leading to discounting and price erosion as the year progress. On the positive side, we experienced strong growth providing customers with decorated full packaged programs on catalog blank. These programs increased over 80% in the fiscal 2014 year adding incremental revenue and profits from the printing and packaging of blank tees. This success in 2014 has led us to being awarded additional programs that should provide for continued growth in these types of programs in fiscal 2015. Art Gun was up 23% for the year but experienced the 14% decrease in the fiscal 2014 fourth quarter due to slowness of e-retailers business in advance of the holiday season coupled with some temporary disruption in production as we brought new equipment into the facility to support anticipated holiday growth. Art Gun is now equipped with the latest technology and digital printing equipment which should provide capacity to continue its strong growth in fiscal 2015. Four quarter net sales in the basic segment were $61.4 million versus $65 million in the prior year period, a 5.5% decrease. The undecorated tee market appeared to strengthen in the September quarter and the company's undecorated tee sales were up slightly from the prior year, driven by higher unit and higher average prices. That improvement was offset by decline primarily driven by one private label customer that in the prior year had success at retail with a licensed product sourced from FunTees. This business did not repeat this year as the license ran its course and declined at retail. Sales to our core private label customers increased during the quarter, but the increase was not enough to offset the decline of this one licensed program. The company has recently gained new programs with existing customers and added programs with a major international brand, which should drive sales growth in private label for fiscal 2015. Fiscal 2014 net sales for the branded segment were $187 million, a 10% decrease from the prior 12 months period. Fourth quarter sales for the branded segment were $53.5 million compared to $57.6 million in the prior year period, a 7% decline. Salt Life continued its strong sales growth, up 31% for the quarter and nearly 26% for the year, driven by its new product lines and an increase in retail door count. Soft retail environment and continued unsettled conditions within one of Junkfood’s large retail customer groups were the primary reason for a 16% sales decline in the Junkfood business for the fourth quarter. Junkfood continues to grow in its other sales channels including specialty stores and boutique. We anticipate top-line growth and improved profitability for Junkfood in fiscal 2015. Soffe sales declined 15% in the 2014 fourth quarter from the prior year quarter, but started regaining shelf space with key retailers and won additional military programs which we believe should drive top-line growth for Soffe in fiscal 2015. Throughout the year we continued our focus on expense reduction and leveraging our back office function. The benefits of these efforts are seen in the reduced general and administrative expenses, but SG&A expenses as a percentage of sales at 21% in the fourth quarter compared to 21.7% in the prior year. For the full year SG&A cost were 19% of sales compared to 19.8% in the prior year. We anticipate continued improvement in our SG&A cost as a percentage of sales in fiscal 2015. Capital spending during the September quarter was $2 million, which brings the total to $9.7 million for the full year. Depreciation and amortization, including non-cash compensation was $2.3 million in the quarter and $9.7 million for the full year. We did not make any stock repurchases during the September quarter but during fiscal 2014, we repurchased almost 79,000 shares of our common stock for a total cost of $1.2 million. Total debt at September was approximately $130 million, a reduction of nearly $5 million from the prior year September. We expect further debt reductions in the upcoming year from improved earnings, limited capital spending, reduction in underperforming assets and lower inventory investments driven by lower inventory unit and reduction in cost for lower raw material price. I'll now turn the call over to our Chairman and CEO, Bob Humphreys for his comments on the previous year and how things are shaping up for fiscal 2015.

[Bob Humphreys:]

Thanks, Deb. And thank you all for being on this call with us. Despite our disappointing financial results we completed a number of key initiatives during the year which we believe makes Delta Apparel a stronger, more agile company as we move forward. We have streamlined our administrative workforce and with minor exception have completed our planned headcount reductions, effectively delayering the management structure across all of our business units. We recorded the $2.2 million of severance-related expenses associated with this initiative in the fourth quarter of fiscal 2014, and anticipate recognizing nearly $6 million of the expected $7 million in annualized savings of this recognition of $6 million will occur in fiscal 2015. In fiscal 2014, we made important improvements to our manufacturing platform; we completed the current phase of expansion for Ceiba Textiles, our textile facility in Honduras. Output from this facility is expected to increase using this new expansion capacity as we progress through 2015. In addition, we improved our sewing and screen printing facilities in Honduras and El Salvador which is allowing us to increase our internal production of garments in this low cost plant. Our domestic screen print operation located in Fayetteville, North Carolina was also modernized which expands its capacity, enhance capability and reduces its cost. We also began a comprehensive rationalization analysis of all our business units, product lines and sales channels in order to refocus our capital and other resources on the areas we believe are strategic to our business. Although we are not yet prepared to go into details regarding all these initiatives, we anticipate that a number of them will be completed as we progress through fiscal 2015 and should have further positive results on our business both in the short term and long term. Based on the action items currently under consideration, we don't expect to take additional charges to complete these plans. Soffe is being revitalized on several levels. We have rebuilt the Soffe leadership team with experienced apparel industry executives. Most recently, we added to that team of proving highly effective Vice President of sales. The Soffe team recently kicked off a new marketing program designed to build consumer brand recognition and drive our targeted customer to retail to purchase Soffe products. Regional and national retailers are supporting the Soffe brand and have increased the buy in of Soffe spring merchandize. We have won new military issue programs which will begin shipping this quarter. We are also growing in the military PX space and are seeing a growing interest in our unique ability to provide Made in America products on our vertical manufacturing platform. We are optimistic that Soffe can start regaining lost revenue and return to profitability as fiscal year 2015 unfolds. We are also very pleased with our new Junkfood store on the iconic Abbot Kinney Boulevard in Venice, California. It is not only meeting our financial expectations, but has attracted numerous national retailers who are able to witness the most effective ways to merchandize Junkfood product. Some of this business have already led to new retail program that Junkfood will begin shipping in fiscal 2015. Sales of Salt Life products grew nicely during the quarter and we further expanded the geographic footprint of the brand. Our acquisition of Salt Life in August of 2013 changed our status from a licensee to a brand owner. This has allowed us to further expand the product line and make long-term investments in point of sales fixtures, marketing and the building of social media touch points. Our licensed Salt Life restaurant in Saint Augustine is exceeding expectations by virtue of the high number consumers who have the opportunity to experience the Salt Life brand as they patronize the restaurant. While there is a good revenue stream from royalties, we are most pleased that the restaurant has become an effective marketing tool for Salt Life's exciting lifestyle products. We have a number of new Salt Life marketing initiatives underway. In conjunction with the January surf show, we will be announcing additional professional brand ambassador who are primarily West Coast based. We also recently engaged a digital media firm which will soon launch a Salt Life YouTube channel. The extensive Salt Life consumer survey we recently completed confirmed that our consumer think of Salt Life products as their go to lifestyle brand. The survey indicates that Salt Life consumers are split 50

[Operator:]

[Operator Instructions] And our first question is from Buzz Heidtke from Heidtke and Company.

[Buzz Heidtke:]

Yes. Could you tell me little bit about your cotton -- I guess your buy program -- I guess in the commodity market, I guess you probably lost money on that.

[Bob Humphreys:]

Not at all, I don't think so.

[Buzz Heidtke:]

I know it is got dropped but I thought you -- are you in hedging right now or what are you doing right now with cotton?

[Deb Merrill:]

We do our hedging programs at various times and when we get in options and when we get out of options are just depending on what our views of the market place is and where we are with our expectations. And so, no, I mean what Bob said is exactly right. We did not lose money on our hedging strategy. We were able to make that a positive move for us and overall lower our cotton cost for the yarns that we are bringing in.

[Operator:]

[Operator Instructions] Our next question comes from James Fronda with Sidoti & Company.

[James Fronda:]

Hey guys. How are you? But on the flip side of that I mean do your customers negotiate in terms of the cotton price on the other side of that in terms of sales?

[Bob Humphreys:]

Well, yes. It obviously depends on what sales channel we are ultimately selling the product is through, whether they are branded or unbranded. It is most sensitive in the commodity undecorated T -shirt market. And so replacement cotton is cheaper than what's been the market place is inventory, but we will soon be getting to lower cost cotton and we feel good about our position on that because we have leaner import than we did this time last year, I think probably leaner than the market place. And we did have a hedging strategy in place. So we did not really chase the December's futures down. We waited and were able to take advantage when they got closer to their low and are in very good position I think to take advantage of marks, March based cotton.

[James Fronda:]

Okay. And then I have the turned call little late, will there be ability for SG&A savings in 2015?

[Bob Humphreys:]

Yes. So fiscal 2015 SG&A, dollar savings and this is our delayering which is almost all SG&A related, it is about $6 million and so we expect SG&A cost to be around 18.5% for the full fiscal 2015.

[Operator:]

Our next question is from James Clement with Macquarie.

[James Clement:]

Hey guys, good afternoon. I was just curious I know we are perhaps only about six days in, but any sense from your customers how retail store traffic might be doing as it relates to T-shirt sales early on in the holiday season?

[Bob Humphreys:]

Yes, from a macro standpoint if you look at what November retail sales were in totality the numbers I have seen are okay. There is a little bit of -- maybe there was more discounting early I think the Thanksgiving sales period was probably a little bit below people's expectations. But so I don't think a disaster or anything like that at this stage of a game.

[James Clement:]

And just changing gears, the new retail store in Southern California. Would you expect the all in cost to be somewhat similar to Venice location?

[Bob Humphreys:]

Yes.

[Operator:]

[Operator Instructions] As we have no further questions, I will turn the call back over to our speakers for any closing comments.

[Bob Humphreys:]

Okay. Thank you all again for joining us. And we will look forward to reporting on our first quarter results here in just a few weeks. Thank you.

[Operator:]

That does conclude our call. We appreciate your participation.