Delta Apparel, Inc.

Thank you, and good afternoon. Delta Apparel had a good first quarter.

Net sales for Q1 of fiscal 2013, which ended on September 29, were $130.1 million. That represented a 5.3% increase over the prior year's $123.5 million, setting a new first quarter record for the company.

We believe that puts us right on track to meet our guidance for fiscal 2013 and to set yet another record for full-year revenue, which would be our 10th in a row.

Net income for our 2013 first quarter came in at $3.6 million or $0.41 per diluted share, compared with $4.4 million or $0.50 per diluted share for the prior year's quarter. It's important to note that this year's first quarter included a onetime charge of $1.2 million, which shaved $0.10 off our earnings per share.

That charge covered legal and professional fees related to the previously disclosed Audit Committee internal investigation in our Activewear division. Had this onetime charge not been incurred, we would've achieved net income of $4.4 million or $0.51 per diluted share, which would've been a first quarter record for net income.

Even with the charge, we met our goal for the quarter and remained comfortable with our guidance for full year net income and revenue. Delta's first-quarter performance was primarily driven by strong growth and improved margins in the basics segment, as well as in the branded segment, Art Gun business.

The higher revenues were offset somewhat by lower average selling prices that resulted by cotton price declines and product mix changes.

Fiscal 2013 first quarter net sales for our basics segment rose 26.6% to $66.5 million, compared to $52.6 million in the prior-year period. The increase was led by the company's FunTees business, which enjoyed a 48% rise in unit volume and 41.5% net sales growth during the quarter.

Delta Catalog experienced a 35% increase in unit volume and 20% net sales growth. The higher unit volumes leveraged against fixed manufacturing costs, coupled with lower cotton costs in inventory enabled Delta to reduce pricing while maintaining acceptable margins in the basics segment.

The market for undecorated tee was stable during the first quarter, with overall market demand keeping pace with channel inventories. Branded segment sales for fiscal 2013 first quarter were $63.5 million versus $70.9 million for the comparable 2012 quarter.

The 10% shortfall primarily resulted from lower net sales in Soffe, Junkfood and The Game, which were only slightly offset by sales growth at Art Gun.

Soffe's revenue was down due to weak department store business with low replenishment orders. But Soffe did experience solid growth in the military and sporting goods channels.

While the decline in Junkfood sales was primarily driven by mix changes and early shifting of fall merchandise, the business achieved growth with its core Junkfood brand in boutiques, specialty chains and high-end department stores and maintained strong margins during the quarter. Slower sales in collegiate products lowered the gain sales during the quarter, but solid growth is anticipated from the Salt Life and motorsports lines for the remainder of the year.

Art Gun continued its strength that it has shown over the past several quarters, with a net sales increase of nearly 230% over last year's first quarter.

SG&A expenses as a percentage of sales continued to improve in our 2013 first quarter. When we look at the normalized SG&A expenses, which would exclude the previously mentioned onetime charge, it would have come in at 18.9%, compared to 19.9% of sales for the comparable 2012 period.

We also improved our day sales outstanding and inventory turns compared to June. Capital spending during the quarter was $1.7 million, and we believe that will continue at about that quarterly rate for the entire year.

Depreciation and amortization, including non-cash compensation, was $2.3 million in the quarter. Taking advantage of our strong cash flow and lower working capital requirement, we reduced our total debt at September 29 to approximately $102.6 million, which is a decrease of nearly $12 million from our fiscal 2012 year end.

We will continue our efforts toward lowering at our capital requirements and reducing debt throughout fiscal 2013.

Concurrent with reducing our debt during the quarter, we also repurchased 72,854 shares of Delta stock at an average price of $14.7 per share for a total of about $1 million. Since the price we paid was significantly less than Delta's book value of $16.90, we believe that was a logical use of funds.

We expect to continue such repurchases while our shares are trading below what we believe is intrinsic value.

As of the end of the first quarter, we had $4.7 million remaining authorized by the Board for share repurchases.

We believe our fiscal 2013 first quarter is an indication of things to come. We managed our business through a very difficult cotton price spike last year, and have emerged with an increase in overall market share, improved manufacturing operations, lower inventories and solid margins to build upon as the year progressed.

I'll now turn the call over to our Chairman and CEO, Bob Humphreys, for his thoughts on the quarter and for the rest of the year.

Thanks, Deb. And thanks all of you for joining us on our conference call this afternoon.

I'm pleased to tell you that the strategies we initiated last year in the face of the spike in cotton prices and higher energy costs drove the success of our fiscal 2013 first quarter. While our basics segment certainty led the way, we saw improvements across the board in many of our businesses, although in different ways.

In our branded segment, all of our businesses had strengthening margins with the exception of Soffe. In the department store channel, we are still suffering from cautious retailers who are judiciously managing their inventories, and in some cases, favoring private label alternatives.

We're seeing some improvement in Soffe's military and sporting goods lines, but have lost shelf space with national mid tier department stores for spring on basic merchandise.

We are currently evaluating a number of strategies to better leverage our Soffe brand assets to accelerate growth, and have recently added a strong business-to-business platform, aimed at gaining market position in the sporting goods channel.

We continue to focus on Information Technology initiatives that will streamline our business operations and enhance our service levels to our customers.

Our Salt Life store in Jacksonville, Florida, had a good quarter, with sales meeting our expectations. Looking ahead, we see the Salt Life store as a model that retailers can successfully emulate in their own locations for the marketing and promotion of Salt Life products.

We believe we can drive Salt Life's geographic growth with solid grassroots marketing campaign, and we now have a marketing manager fully on board to expand the Salt Life brand to the West Coast.

As I mentioned, our basics segment did very well in the quarter, with lower selling prices being more than offset by higher volumes and lower cost. Our goal obviously, is to have all of our businesses contributing to sales and gross profit, with a high level by the end of the year.

In that regard, we are making excellent progress in leveraging our creative talent in retail relationships across all of our operating units.

We're encouraged by the fact that inventories are running below what we had expected. Therefore, we stepped up our manufacturing levels in the first quarter, and are evaluating a stronger running schedule for the second half of the year.

While we do have some downtime scheduled in our internal forecast to manage inventories, we are seeing some indications that we might be able to run a fuller schedule than we had anticipated.

As Deb mentioned, we had about $1.7 million in capital expenditures in the first quarter, and anticipate approximately that amount per quarter to continue for the remainder of the fiscal year.

Our focus for much of this investments, excuse me, will be on the modernization and expansion of our screen and digital printing capabilities, as well as branding and point-of-sales displays for branded products.

Overall, the first quarter gave us every reason to be optimistic about the remainder of the year. We are remaining short on cotton commitments, as cotton prices continue to moderate, and we are carefully managing inventories.

Barring any unforeseen event, unit volume should continue to grow, and leverage against fixed costs should keep margin strong and improving.

In addition, we will continue to focus on reducing debt and further strengthening our balance sheet.

Given our good first quarter, I remain confident that the guidance previously provided for fiscal 2013 can be achieved. Based on anticipated net sales growth, we believe that 2013 will be another year of record revenue for Delta Apparel, in the range of $500 million to $510 million or about a 3% increase over fiscal 2012.

With higher unit volume leveraging fixed costs, we believe net income should be in the range of $1.65 to $1.80 per diluted share, even with the inclusion of the previously mentioned $0.10 per share charge in the first quarter.

Now Deb and I would like to answer any questions you may have.

First, just want to head straight to the guidance that you gave, $1.65 to $1.80 which was the same guidance you gave at the end of the year, without knowing that you had a $0.10 charge. So are you -- I mean, effectively, you've raised it to $1.75 to $1.90 because you had no idea, at that point in time, that you would have any charge coming yours.

Is that true?

Yes, Jamie. I would say that, that -- based off of our first quarter, that is correct.

We had a strong first quarter, but then, it's giving us the ability to still meet our original guidance, even with that additional $0.10 hit.

Fantastic. Okay.

And that everything from there is fully behind you. You had one, let's say, disgruntled employee who said something, and you had to spend $1.2 million to prove what he was saying was not correct, and it's nailed down.

Yes. We believe that's all behind us, and the expense has been taken in the first quarter.

Okay. And no recourse to get any of that back, I assume, in this quarter?

That would be correct.

Okay. In the basics business, why is FunTees so strong?

What's happening -- what happened to their business then? And what is the outlook for FunTees?

Well, I think, as FunTees and our undecorated product, as well, Jamie, had a really strong quarter with strong growth. I think, a combination of the number of things.

Our service levels are good, our inventory levels are good in our undecorated -- and by that, it's more than just having how many units you have as having the right units or the right SKUs on hand so you can really service business good. So that certainly helped us in the first quarter.

On the FunTees side, I'd say it's driven primarily by the new businesses that we have been adding really over the last 2 years. It's been one of our initiatives in that business.

We've hired some people to just work on that. It takes a while to get programs, work through sampling, et cetera, et cetera.

And then finally, later, you're actually shipping more products. So that will certainly help in Delta revenue.

Our plants in that business are running well. Probably better than they ever have, although we see them improving further.

We've just had some good initiatives there. We're installing some new screen-printing equipment with that department, there was some key customers there.

So certainly a good quarter and things, we think we can continue to build on.

Would you expect that business to have a strong double-digit growth, moving forward? Or is that just a one-shot deal in this quarter?

We can't continue at the same pace, but yes, we see growth going further in the business.

Okay. In the world of cotton and retailing, have retailers, as they raise the price of cotton goods because you raise their prices?

It seems like things are selling at a little bit higher level. Do you think retailers will be able to maintain that higher level?

And is there a new year for what cotton is really worth? And a little bit more room in there for everybody.

Yes. Yes.

Yes. Perhaps, we'll see.

I don't think that retailers ever really raised retail prices to fully reflect how high cotton got, which was probably good in the overall scheme of things. And so probably where retail prices are right now and where cotton price is right now, in general, it's probably pretty well-balanced.

So I think we're probably okay there through the springtime.

Okay. On the Junkfood side, business was down in this quarter.

But you said you're looking for growth throughout the rest of the year. Why is that?

Well, a couple things. Really, one reason that was down is we shipped several programs right at the end of last fiscal year that we had ready, and customers went ahead -- wanted to go ahead and take it.

And you may recall, I was talking about that got us to an all-time record revenue at Junkfoods. But it did take some business out of the first quarter.

We've got good momentum in a lot of the Junkfood initiatives we've had. We've got some new programs, some of which will start shipping in the second quarter.

So we think we have enough visibility there. We've had good sell-through, really across the board on Junkfood.

We've had some good increases on the whole e-commerce side of the business. So we have enough visibility there that we think we have some opportunities to continue to grow that business.

Okay. And lastly, I just wanted to congratulate you on the buyback of stock.

If you can buy back $1 million every quarter, I think it's easily doable within how much money you make, and you can pay down debt. But it does create great long-term value for shareholders as you really start to turn in numbers in the years ahead.

Nice job.

I'm just curious to know, for the gross margin do you think this 24% is a decent level to use going forward? Depending on where cotton prices go, obviously, if they stay where they are.

Yes, James. And in fact, usually, in our second -- there is some seasonality in our gross margins quarter-by-quarter.

But then, overall, we would expect that gross margins could continue to improve as the year goes on if we get back in the back half of the year.

So, unfortunately, I have dropped off 4x. So I don't know if you've already -- I presuming you might have already addressed it in some detail.

But I'm just trying really to get my arms around what's going on with Soffe. And I understand what's happening at the mid-tier department stores.

But how much do you think this is just product -- I mean, has the product had its day in the sun and it's contrary business to product or what?

Yes. Thanks, Liz.

Where we're having problem at mid-tiers is where people were just buying items from almost mostly the -- that entry price point Soffe short. It still sells very well in a lot of channels of distribution.

And if you look at the nationals, sporting goods chains and regional sporting goods chains, they continue to buy. More so a few product, but it's more of a collection versus just an item.

So we never like losing shelf space or position. But there's also a reaction to everything.

And so for some of our other customers, they'll be delighted that this product is not in some of those locations. And we think we'll be marketing it more aggressively.

And we'll continue to try to have really compelling product and rebuild some of that business in that mid-tier department store. But we prefer to do it in more of a collection concept versus just having an item in there.

Let me continue in the Soffe line. I mean, your -- you have a basic product that's been there for a while.

I mean, how are you -- what are the things you're doing to update the product to make it just more appealing to the whole world? I mean, obviously, when you have started a step like this, you go back and you retrench and you rethink how you're going to bring the product to market, and you come up with a whole slew of new ideas.

What would those new ideas be for Soffe?

Yes. And, it's kind of a two edge question.

Obviously on Soffe shorts, we have a lot of new products, and we've actually been working for years to try to obsolete the basic Soffe short ourselves, and have made some progress in doing that. And really, that sale of the entry-level short, I'll call it, that's held up better than we were expecting over the years.

So then we did go back, and it's branding and packaging, obviously keeping up with the new colors. We have a couple of different fits that we're offering, but you still have that basic short for people who are looking for it, and that is still a very popular item.

Okay. And lastly, on Salt Life and I am wearing a Salt Life shirt for you guys today.

As you're expanding to the West Coast, I mean, what is the game plan? You've hired people, obviously.

You're going to be, I assume, set for the spring season. But what's your objective for how many doors you think you can be in on the West Coast, and how much that's going to add to the whole opportunity for Salt Life as it expands?

Well, the surf show was in Orlando just a few weeks ago. And so we've talked to a lot of West Coast-based retailers that we think did our definition of a true grassroots Salt Life retailer.

They're very interested in the product, and we've got orders to ship them. We have some products specifically designed for the West Coast customer, and so we will be introducing those out there and also on the East Coast.

So I think, probably the next 12 months will give us a better indication of how well the product is perceived on the West Coast. So far, it's been very good.

It's been in West Marine on the West Coast for over a year now, and they've had good sell-through out there, and plan to expand their footprint. So I think, if we're reasonably successful there, it should at least be as big as the East Coast business that we have.

Okay. So you're still looking for the brand that have super strong double-digit growth as you move forward for this year?

Absolutely, and we've got a lot of that in backlog currently, as we speak. So we'll start shipping that in January.

And we also have a real good reaction to our footwear line that we're introducing, and then we'll be shipping that in January as well.

Okay. Well, thank you very much for joining us this afternoon.

And we all look forward to updating you on our second quarter results in January. Thank you.