Delta Apparel delivers great top line growth
Delta Apparel Inc reported sales of $104.7 million and earnings of $0.16 per diluted share for its second quarter ended January 1, 2011. The Company's results for the fiscal 2011 second quarter include the operations of The Cotton Exchange, which was acquired on July 12, 2010 and are included in the branded segment (formerly called the Retail-Ready segment) of the Company.
Second Quarter Highlights
Net sales for the three months ended January 1, 2011 were a record $104.7 million, an increase of $13.6 million, or 14.9%, from the prior year second quarter. The basics segment (formerly called the Activewear segment) drove the increase with organic sales growth of 23.9% compared to the prior year quarter. Branded segment (formerly called the Retail-Ready segment) sales increased $2.7 million driven from the addition of The Cotton Exchange revenue, partially offset by lower sales of vintage licensed products.
Gross margins declined approximately 300 basis points due primarily to a higher mix of basics product sold in the second quarter compared to the prior year as branded products typically carry higher margins. Selling, general and administrative expenses decreased to 19.2% of sales from 21.5% due primarily to the lower sales of licensed products that include royalty payments, partially offset by higher marketing costs and expenses associated with the Company's recent acquisitions.
The Company's second quarter operating income was $2.6 million, including a non-cash net favorable adjustment of $0.9 million related to the valuation of Art Gun contingent consideration and goodwill. At acquisition the Company was required to record the estimated fair value of contingent consideration, which resulted in goodwill of $0.6 million associated with the acquisition.
Accounting standards require the Company to evaluate the fair value of contingent consideration at each reporting period and record all changes in the valuation through earnings. Based on the performance and projections of the business, the current estimated fair value of the contingent consideration is de minimis and the goodwill is considered impaired, resulting in a net favorable adjustment of $0.9 million, or $0.07 per diluted share.
Net income for the quarter ended January 1, 2011 was $1.4 million, or $0.16 per diluted share, compared to $1.0 million, or $0.11 per diluted share, in the prior year second quarter.
Fiscal Year to Date Highlights
Net sales for the six months ended January 1, 2011 were $212.6 million, an increase of $22.4 million, or 11.8%, compared to the same period for the prior fiscal year. The sales growth included revenue from the acquisition of The Cotton Exchange, along with an organic sales increase of 4.9%. Gross margins declined approximately 140 basis points as basics products comprised a higher percentage of sales. Net income for the six months ended January 1, 2011 was $3.1 million, or $0.35 per diluted share, compared to $3.6 million, or $0.42 per diluted share in the prior year.