US clothing retailer Delta Apparel has announced the suspension of its manufacturing operations in Honduras – with the potential of a permanent wind down. At the same time its board has approved a plan to exit its DTG2Go business unit, ceasing all production operations related as of 13 June.
This followed an earlier decision by Delta Apparel, which owns the Soffe brand, to wind down its manufacturing operations in Morocco.
“The main problem for Delta Apparel is the demand for many of its products have declined steeply,” GlobalData retail analyst Neil Saunders told Just Style.
“The retailers it sells to via wholesale have cut back on inventory and orders as customers have reduced buying activity. This has put the squeeze on Delta. Its direct-to-consumer businesses, including Salt Life, have performed a little better but now even these seem to be suffering from deterioration. All of this has pushed Delta into loss making territory. The problems are likely fixable with time, but the question is whether Delta has enough time to enact a turnaround.”
Delta’s shaky financial performance
Delta Apparel reported a challenging start to FY24 with a decline in net sales and operating income during the first quarter which it attributed to “uniquely unfavourable market dynamics”.
CEO Bob Humphreys explained that while many Delta Apparel customers have de-stocked to more normalised inventory levels, “the activewear supply ecosystem as a whole still has some ground to cover to return to pre-pandemic activity levels.”
The downturn appears to have taken hold quite suddenly and dramatically with the group posting a series of consecutive quarterly sales increases in 2022.
Last August, Humphreys said he believed the company’s decision in the previous year to decrease production levels and purchase less price-inflated cotton, “proved to be strategically sound, but the significant one-time cost impacts of that decision greatly impacted our operating results this quarter and year-to-date.”
Then last month Delta Apparel revealed to the US Securities Exchange Commission (SEC) that Humphreys has tended his resignation effective 29 June. The company appointed Tim Pruban as its chief restructuring officer who would also advise on succession planning following Humphrey's departure.
Justin Grow, EVP and chief administrative officer and Matthew Miller, president of Delta Group also submitted their resignations.
How close is Delta Apparel to bankruptcy?
The company has moved to end its on-demand digital solution, which had looked promising.
The DTG2Go unit, which was announced in October, was first launched as its ‘On-Demand DC’ in 2020, a solution for retailers and brands to grow their business utilising an integrated, on-demand fulfilment model.
The DTG2Go ‘On-Demand DC’ digital solution aimed to provide retailers immediate access to DTG2Go’s broad network of print and fulfilment facilities, while offering the scalability to integrate digital fulfilment within the retailer’s own distribution facility.
It expanded this across several locations in recent years as it aimed to integrate DTG2Go’s digital print and fulfilment platform with Delta Apparel‘s blank garment distribution network.
Delta Apparel also previously announced it was weighing options for its Salt Life fishing apparel brand last autumn, again, a brand that was performing relatively well.
Salt life was acquired in 2013 and grew into a highly profitable business with over $60m in revenue.
The brand’s products are offered in over 1,700 wholesale doors across 48 states and direct to-consumer via a growing ecommerce site as well as 25 branded retail stores spanning the US coastline from California to Florida to New York.”
Both announcements suggest Delta is in a real spot of bother and could use an instant cash boost.
“Bankruptcy is a very real possibility for Delta Apparel,” explained Saunders. “The group is in a financial mess and is struggling to maintain liquidity. There is talk of suppliers refusing to provide it with traditional credit terms for the supply of raw materials.
"Delta is also in default on several loan covenants. All of this points to a company that is running out of options. If things don’t change, the plug will soon be pulled.”
The group decided not to hold a conference call regarding its Q2 results. In fact, no commentary about the performance was offered at all.
However, its first quarter results shed some light on the current state of affairs. Delta Apparel confirmed its debt and inventory levels were down more than 20% year on year and it was nearing the completion of reducing its offshore manufacturing footprint down to two countries and consolidating production in its “more efficient Central American platform.”
But is it enough to futureproof the business?
Saunders is unsure, and calls for more drastic measures.
He believes the company needs an infusion of cash and to rationalise its production facilities.
"At the same time, it needs to pay down debt and lean more heavily into the direct-to-consumer business. Enacting all these things is a very tall order so it is highly questionable as to whether the company can engineer a turnaround," he added.
