Hampshire Group, Limited issued a letter to shareholders from its chief executive officer.
Our biggest operating disappointment stemmed from a challenging climate facing our largest retail customers. Several retail customers of both our Hampshire Brands and Rio Garment divisions reduced purchases resulting from their own sales declines and strategic changes. We suffered a major shortfall, representing 10% of company sales, in our private-label t-shirt business within Rio Garment. Additionally, the Hampshire Brands division forecast strong growth outside of our core product in both private label sales and licensed product sales which did not materialize.
These sales at Hampshire Brands were expected to account for 20% of the company’s 2013 planned revenue. The company entered 2013 with a cost structure in the Brands division to support this growth and was only able to begin reducing the corresponding fixed costs during the summer when it became apparent these sales were not going to materialize. Given the operating leverage inherent in our fixed-cost business model, sales declines pressured gross margins and selling, general and administrative (SG&A) expenses and stifled our ability to return to positive cash flow and profitability.
Beyond our external shortfalls in 2013, we worsened our own cause via inexcusable operating mistakes at our Rio Garment manufacturing plant in Honduras. These production and logistics mishaps should not have occurred. We have changed management and oversight to ensure that this does not reoccur. These mishaps accounted for $1 million of unanticipated costs in 2013 which will not reoccur in 2014.
Finally, as previously disclosed, we were disappointed to lose most of our valuable net operating losses (tax shields) stemming from the prior board and senior management's decisions relating to the tax consequences of stock trading after the August 2011 Rio Garment acquisition.
Although 2013 had many disappointments, Hampshire Group made major strides toward achieving operating profitability and positive cash flow which will become more evident in the 2014 financial results and beyond. Throughout 2013, management focused on re-balancing the product portfolio, improving sourcing and manufacturing in Hampshire Brands, as well as addressing and improving non-productive assets. The resulting operating platform can manage both a larger volume of sales at our two divisions as well as a larger portfolio of brands.
Mid-year, we divested Scott James, a men’s label that never achieved sufficient scale to reach profitability. The sale ended our company's recurring losses with the brand. As part of this transaction, we retained rights to certain aspects of the brand and may seek to develop those areas in the future. 2013’s results include approximately $2M of losses from Scott James.
Our greatest operating achievement in 2013 was the successful introduction of our Dockers Men's shirts and sweaters along with the overhaul of our contract-manufacturing and sourcing for our Dockers license. Dockers has achieved widespread acclaim at retail, with public recognition from Levi Strauss & Co., the brand's owner, as well as with major store operators selling the brand.