COVID-19 Impacts Delta Apparel’s Second-Quarter Sales, But Efficiencies Drive Profitability
Delta Apparel, Inc. (PPAI 188431, S9) has released financial results for its second quarter and for the six months ending March 28, 2020. The Greenville, South Carolina-based supplier’s net sales for this year’s second quarter was $96.7 million, down six percent from the same quarter last year. Prior to the impact of COVID-19 in March, the company was on pace to achieve sales growth of approximately nine percent for the quarter. Net sales for the past six months was $192.6 million, down 5.8 percent from the same period last year.
“Our second-quarter earnings reflect our continued focus on driving profitability despite topline challenges faced late in the quarter due to COVID-19,” says Robert W. Humphreys, Delta Apparel’s chairman and CEO. “Our vertically-integrated business model with diversified sales channels and broad geographic reach is allowing us to not only continue to operate and generate sales in the current environment, but has also created an opportunity for Delta Apparel to support our existing customers and onboard new customers in select channels.”
Humphreys adds, “In light of COVID-19, we continue to prudently manage all aspects of our business with a focus on conserving capital and maintaining strong financial flexibility. We are in a solid financial position to weather the current storm, and I am confident we will emerge from this pandemic stronger, ready to profitably grow our business and continue to provide value for all of our stakeholders.”
The company says that the closure of retail stores throughout the U.S. in March dramatically halted revenue during the final month of the second quarter. Net sales in the Delta Group segment and Salt Life Group segment decreased six percent and 6.3 percent, respectively, from the prior year period. Gross profit was $20.6 million, an 8.8-percent increase from $18.9 million in the prior year second quarter, while gross margin increased 290 basis points to 21.3 percent versus 18.4 percent in the prior year, and increased 60 basis points compared to the first quarter of fiscal 2020.
Delta Apparel reports that second-quarter gross profit was reduced by $1.9 million, or 200 basis points, from plant curtailments caused by government-mandated country closures in El Salvador and Honduras in March. Adjusting for these plant curtailment expenses, the company says that gross margins would have been 23.3 percent during the March-ending quarter, an improvement of 490 basis points from the prior year and 260 basis points from the fiscal 2020 December quarter. It attributes this margin expansion to continued efficiencies and process improvements within the Delta Group segment’s integrated vertical manufacturing platform.
Selling, general and administrative (SG&A) expenses were $17.9 million in second quarter compared to $17.1 million in the prior year. The increase in SG&A expenses was reported as principally resulting from investments made to expand the company’s distribution network. Operating income increased to $3.6 million compared to $2.7 million in the second quarter last year as a result of the strong gross margin expansion more than offsetting the lower sales levels and higher distribution network expenses. Net income for the quarter was $1.3 million, or $0.19 per diluted share, compared to $0.9 million, or $0.13 per diluted share, in the prior year period. When adjusted for the $1.9 million pre-tax, or $0.20 per diluted share, of plant curtailment expenses, net earnings per diluted share for the 2020 fiscal second quarter was $0.39, which represents a 200-percent increase over the prior year.
For the six-month period that ended March 28, 2020, net sales in the Delta Group segment and Salt Life Group segment decreased 5.9 percent and 5.8 percent, respectively, from the prior year period. Gross margin increased 270 basis points to 21 percent compared to 18.3 percent in the prior year period. Adjusting for the fiscal 2020 second quarter plant curtailment expenses, gross margins would have been 22 percent, an improvement of 370 basis points from the first six months of the prior year. SG&A expenses as a percentage of sales were 18.7 percent compared to 16.5 percent in the prior year period as fixed costs were not leveraged on the lower revenue.
Delta Apparel’s operating income during the six-month period increased by $3.5 million to $6.2 million compared to $2.7 million in the prior year period. Adjusting fiscal year 2020 for the $1.9 million in plant curtailment expenses, and adjusting fiscal year 2019 for the $2.5 million discrete expense in the December quarter in connection with a 2016 customer bankruptcy, operating income in fiscal 2020 would have been $8.1 million, a $2.9 million improvement over $5.2 million in the prior year period. Operating margin improvement resulted from significantly stronger gross margins, being partially offset by lower sales and higher distribution expenses.
Its net income for the period was $2.2 million, or $0.32 per diluted share, compared to a net loss of $0.2 million, or $0.03 per diluted share loss, during the same six-month period last year. When adjusted for the $1.9 million pre-tax expense, or $0.20 per diluted share, of plant curtailment expenses, adjusted net earnings for the first six months of fiscal 2020 were $0.52 per diluted share. When adjusted for the discrete $2.5 million pre-tax expense, or $0.30 per diluted share, net earnings for the first six months of fiscal 2019 were $1.9 million, or $0.27 per diluted share.
Due to the current environment and the impact of COVID-19, Delta Apparel says that it has taken aggressive actions to strengthen its financial position, preserve cash and improve liquidity beyond its current levels. On April 27, it secured a bridge amendment to its U.S. revolving credit facility with its lenders. The amendment provides additional flexibility to tap into the availability provided under the company’s asset-based lending arrangement.