Delta Apparel, Inc. (AMEX:DLA) Q4 2023 Earnings Call Transcript

Delta Apparel, Inc. (AMEX:DLA) Q4 2023 Earnings Call Transcript December 7, 2023

Operator: Thank you, and good afternoon to everyone participating in Delta Apparel, Inc.’s Fiscal Year 2023 Fourth Quarter and Full Year Earnings Conference Call. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer; Justin Grow, Executive Vice President and Chief Administrative Officer; and Nancy Bubanich, Vice President and Chief Accounting Officer. Before we begin, I would like to remind everyone that, during the course of this conference call, projections or other forward-looking statements may be made by Delta Apparel’s executives. Such projections and statements suggest prediction and involve risks and uncertainty and actual results may differ materially. Please refer to the periodic reports filed with the Securities and Exchange Commission, including the company’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

These documents identify important factors that could cause actual results to differ materially from those contained in the projections or forward-looking statements. Please note that any forward-looking statements are made only as of today and except as required by law, the company does not commit to update or revise any forward-looking statements, even if it becomes apparent that any projected results will not be realized. I will now turn the call over to Mr. Humphreys.

Bob Humphreys: Good afternoon, and thank you for joining us today. As always, we appreciate your interest in Delta Apparel. Before we review our results for the full year and fourth quarter, I want to take a moment to express my gratitude to our teams throughout the various countries in which we operate our business. This has been a very challenging year for our company with many of these challenges driven by market dynamics outside of our control. I am proud of the decisive steps we took across our business with respect to things within our control, such as reducing working capital, controlling costs and above all maintaining the high service levels that have been key to our growth and success over the years. Our employees remain steadfast in their commitment to meeting our customers’ needs each and every day.

Thanks to their hard work and flexibility, we were able to navigate what was truly a unique operating environment and enter our 2024 fiscal year better-positioned to drive sustainable, long-term growth as conditions improve. As you saw in our press release, we registered full fiscal year sales of $415.4 million, a contraction of 14% from our strong performance in the prior year, when the apparel industry enjoyed a seller’s market full of retailers looking to accumulate inventory in the wake of COVID-related supply chain delays. As I am sure most everyone on this call knows, this year market conditions presented a much different and more difficult picture for both the apparel industry and our company. These conditions were driven primarily by two distinct and thankfully temporary trends, historically high cotton prices and extremely shallow demand due to high inventory levels across the supply chain.

When cotton prices trended above historical averages, we made a strategic decision to purchase less cotton and reduce our production levels to align with what we anticipated to be a challenging demand picture in the first half of our fiscal year 2023, particularly in the mass retail supply chain. We originally expected customer demand to stabilize and improve in the second half of the year. However, when the softness in the mass retail supply chain spread to other channels and exhibited more depth than anticipated, we decided to further curtail our production levels to maintain balance with the declining demand. The collective impact of the elevated cotton costs and expenses incurred to reduce production throughout this year is hard for us to overstate.

If you compare the average price of cotton over the last decade to what our cost was during the year, the excess amounted to a headwind of approximately $26 million. Additive to that, we incurred roughly $8 million in excess cost associated with our production curtailment activities, with most of that being driven by the lower absorption of our fixed cost due to less volume and the payment of temporary unemployment benefits to idled employees at our offshore locations, that’s roughly $34 million in additional costs for the year. During the year, we also embarked on a longer-term initiative as designed to optimize our cost structure and better position our company to generate higher returns on the capital we invest in our business. Many of the decisions we made in connection with this initiative were difficult, but they were the right actions to support the business for the long-term and will result in meaningful annualized savings, as well as a more efficient operating structure.

Among the actions we took include: transitioning our Mexico sewing operations to our more-efficient Central American sewing facilities, absorbing the fabric production we previously had to purchase a third-party in Mexico into our textile facility in Central America, transitioning our Mexico screen print operations into our more-efficient Central America screen print operations, which we should finalize this month, and closing our legacy digital print facility in Clearwater, Florida and absorbing its capacity into our more-efficient, on-demand DC footprint throughout the United States, combining our DTG2Go and Direct Delta business. We expect these actions to generate approximately $6 million in annual run rate savings going forward and better position us to navigate the higher interest rate environment that appears to be here for some time.

Our team has also continued to do a good job of strategically managing our working capital and cost across all aspects of the business on a day-to-day basis. We have made substantial progress in reducing our inventory position throughout the year, finishing the year down approximately 18% from our recent high in December of 2022. We anticipate further reductions in fiscal year 2024 and to finish the year nearly 30% below December 2022 levels. Let me spend a moment on our Salt Life business. As you likely saw in a press release, we issued in October, we have received an unsolicited offer to purchase that business and we are conducting a thorough review of our strategic options. We do not have a specific update on that review process at this time, but I want to reiterate that our Board of Directors and management team are committed to maximizing value for Delta Apparel shareholders and taking the course of action, we believe is in their best interest.

We look forward to updating you once our Board of Directors has completed this process. I would like to recognize all the hard work put in by the Salt Life team to grow the brand into the highly profitable $60 million business it is today. It is amazing to think that Salt Life was basically a Florida brand with a small wholesale business when we acquired it 10 years ago and now has a growing core of enthusiasts throughout much of the Western Hemisphere as well as a comprehensive product line over to its over 1700 wholesale doors across the United States and direct-to-consumer customers by our e commerce site, shipping to all 50 states and branded retail stores spread across most of the U.S. coastlines. Touching briefly on our fourth quarter performance across Delta Apparel, we saw some indications throughout the quarter that demand in the activewear market is stabilizing and improving in some respects.

But our overall business continued to be impacted by the high inventory levels across retail as well as the higher interest rate environment. Importantly, we continue to operate our manufacturing platform at reduced, but more consistent levels during the quarter. And as I mentioned on our last call, the cost environment for activewear is normalizing. While we continue to see cotton in ourselves, there was higher cost than the historical average. Our cost is trending down and we expect to steadily move into a more favorable cotton cost picture in the second half of the new fiscal year. Nancy will now provide more detail on our reported and adjusted results in a moment, but let me now turn the call over to Justin to walk you through our business highlights in more detail.

I will join them at the end of the call to open up for questions. Justin?

Justin Grow: Thanks, Bob. Before taking a closer look at our individual business units, I would like to note that, in addition to the steady progress across our business during the year and fourth quarter to streamline our cost structure and reduce inventory, the team also made substantial progress in managing down our debt levels. We finished the year with an approximately 17% reduction from our most recent high in February 2023 and expect to finish fiscal ’24, nearly 40% below February levels. We recently entered into agreements to sell and leaseback several properties within our real estate portfolio, including our campus in Fayetteville, North Carolina and our distribution center in Clinton, Tennessee. The sale leaseback of these properties is something we have seriously considered at various times throughout the years and we believe the time is optimal to monetize these valuable assets and create value for our shareholders.

We expect to realize aggregate gross proceeds of approximately $31.5 million from these transactions, assuming they close in or around January ’24 as currently expected. We will simultaneously lease back these properties from the respective purchasers and continue our operations there uninterrupted as a tenant going forward. Now turning to our activewear business, which is organized around three key go-to-market channels: Delta Direct, which provides Blank Garments on demand to a variety of channels. Global Brands, which provides custom decorated activewear to major brands, Sportswear players in the U.S. Military. And Retail Direct, which provides decorated apparel fully ready for the retail floor to bricks-and-mortar and online retailers, bypassing layers of the traditional retail supply chain in the process.

The market dynamics and excess cost drivers Bob mentioned earlier are the most directed on our activewear business. Similarly, most of the working capital optimization and cost structure enhancements, Bob mentioned were executed by our Activewear team and will most directly benefit that business. The Activewear team has also been highly instrumental to our success in reducing overall inventory levels and made substantial progress on that front in the fourth quarter. We continue to carefully manage production rates in Activewear’s vertical manufacturing platform and expect continued reduction in both inventory units and dollars, as we progress through fiscal year ’24. Moreover, with our cotton cost trending down and our production volumes becoming more consistent, we believe our activewear business is poised to take advantage of market improvements and steadily level up its operating performance as we move into the spring selling season.

The two largest channels in Activewear is Delta Direct business, retail license and regional screen print were the hardest hit by last year’s demand destruction, which showed signs of improvement during the fourth quarter and to start the new fiscal year. However, activity in those channels is still generally soft and inconsistent relative to pre-pandemic levels. In contrast, Delta Direct’s e-retail and promotional channels continue to strengthen. We are heavily-focused on growing market share in those channels. We see the promotional channel, which is a multi-billion dollars market by itself as a strategic growth area given our unique ability to offer customers Delta Direct’s Blank Garments and full line of branded headwear, jackets, polos, bags and other items in combination with DTG2Go’s on demand digital print services.

In our SoFi channel, we anticipate growth in a variety of areas in fiscal 2024, including growth in the higher margin sales on the sofi.com e-commerce website. In Activewear’s global brands business, we continue to see lowering demand in the second half of our fiscal year 2023, as expected, following the solid first half performance in this channel. There is still a significant amount of unutilized manufacturing capacity in this channel, due to the higher inventory levels at retail. This droves more pricing pressure, particularly from Asia producers as we closed out the year. Nonetheless, our relationships with our core brands remain strong and business with much of that key customer base has remained relatively stable. Our business with the U.S. military has been trending favorably, with strengthening sales and a profitability profile that continues to improve, as more products are authorized to be made on our lower cost offshore platform.

We expect the positive top and bottom-line momentum we are seeing in our military business continue in fiscal year 2024. The market dynamics in our Retail Direct channel were similar to those in Global Brands during the year. We saw signs of improving inventory replenishment needs during the fourth quarter among the retail customer base served in that channel. Our dollar store off price and farm-and-fleet retail customers in this channel continue to be a bright spot and outperform relative to other areas. Looking ahead, we expect both our Global Brands and Retail Direct businesses to steadily pick up as we move into the second half of the fiscal year, and get past some of the current headwinds from lower demand and excess global manufacturing capacity.

The near and long-term prospects for these businesses continue to be solid. And we believe our investments in product development and decoration platforms forms that leverage our vertical blank garment platform and near shore speed to the U.S. market will drive higher margin sales growth going forward. There are substantial barriers to entry in these businesses and only the most qualified suppliers can do business for the world’s largest brands and retailers. We have provided full package programs to these highly sophisticated customers for almost two decades now, and made the investments required to meet their needs including adding a retail packaging and readiness platform and systems to facilitate advanced ship notifications and other premium logistics services.

Moreover, we always prioritize compliance and ensure that we offer brands and retailers a solution that lends integrity to their supply chains. Turning to Salt Life. The business continued to generate significant operating profitability during the year despite some recent softness at wholesale stemming from higher inventory levels. We see this softness as temporary and expect sales growth at Salt Life in fiscal year 2024, including more direct-to-consumer growth in both the branded retail and e-commerce channels. Salt Life continues to expand its branded retail footprint with the recent opening of two new retail doors in Florida and the brand’s first location in Virginia expected to open in our second fiscal quarter. Salt Life will finish the calendar year with six new retail stores and a total owned retail footprint comprising 27 stores, including 15 full price stores and 12 outlet stores across the country and over 55,000 square feet of retail floor space.

The new location in Pompano Beach, Florida will also house a multimedia content studio and broadcast platform for the Saltwater Sport Fishing Championship as part of Salt Life’s new agreement to service official apparel and sunglasses provider. Same-store sales among Salt Life stores for the fourth quarter were about flat with the prior year quarter and for the year decreased approximately 4%, with the drop due to the choppy retail traffic in the destination locales, where our stores are located. As we discussed on our prior call, the less-than-ideal spring and summer weather conditions in these areas, including hurricanes making landfall on the West Coast of Florida were a key driver in the choppiness. Looking deeper into the numbers, we continue to see consistent gains in key performance metrics, such as conversion rate and transaction value, which tells us that Salt Life’s products and retail presentation are on point and same-store sales will pick up commensurate with traffic returning to more normalized levels.

Salt Life’s e-commerce website sales continued to outperform and year-over-year grew 41% for the quarter and 54% for the year. We feel very good about our direct-to-consumer channels at Salt Life and we will continue to invest in building them out for long-term growth. We believe there is a lot of near-term white space for the e-commerce channel to grow as we develop more data analytics sophistication and build more targeted marketing strategies. We have experienced a similar dynamic in our retail strategy, where we continue to utilize more refined data points to make decisions regarding new markets and locations. Finally, on Salt Life. We were pleased to see the initial market interest in Salt Life’s newly licensed home furnishings line exceed expectations.

And we expect Salt Life’s license royalty revenue stream to more than double this fiscal year, as the new line sells through. Turning to our DTG2Go business. The fourth quarter capped off what can best be described as a foundational year, during which we completed a variety of key initiatives that set the stage for profitable growth for years to come. We completed the planned upgrade and recalibration of our entire Polaris fleet that drives the higher print quality products offered in our Digital First business. This initiative resulted in some downtime and reduced capacity in the back half of the year, but we now have all of our Digital First facilities re-certified and we are already seeing the consistency and quality gains we expected coming out of this effort.

We continue to remain keenly focused on driving uptime and output rate improvements in our Digital First channel. Our Digital First capacity was essentially sold out going into the critical holiday season and our relationships with our key partners in that channel continue to grow and solidify. In addition, we have recently enhanced the profitability profile of our Digital First business through revised pricing structures and increasing usage rates for Delta Direct manufactured garments. We see significant potential opportunities to expand that business through additional silhouettes in areas outside of e-commerce. On the traditional side of the DTG2Go business, where we serve e-commerce, retail, promotional brands, content companies in a variety of other channels, we recently implemented price increases across most of that customer base and our on quality performance remains at an all time high.

Sales in the traditional e-commerce platform channel remain dynamic and we see some significant new business development opportunities there as well as in other channels. Several of these new opportunities will utilize Delta Direct Blank Garments, which increases both our profitability profile and our customers due to price point and manufacturing consistency. We also advanced several foundational R&D initiatives on the product development side at DTG2Go in fiscal year ’23. The team developed a proprietary fabric optimized for ink reception and other aspects of digital printing that should accelerate customer usage of Delta Direct blank garments at DTG2Go beyond the approximately 55% usage rate in fiscal year ’23. We currently expect that internal blank garment usage rate to increase to as much as 70% in fiscal year ’24.

The team also developed a proprietary textile manufacturing process designed to solve well-known quality challenges in the digital print process. We believe that these are potential game changers from both quality and profitability perspectives, and should result in a higher quality product for the end consumer and a greater competitive advantage for us in the market. Looking ahead, we believe that our DTG2Go business is poised for a return to top-line growth fiscal year ’24. With the foundational pieces put in place this year and our Digital First offering uniquely able to meet even the highest customer quality requirements, DTG2Go is well-positioned to increase its share of the overall decorated apparel market. The digital disruption in decorated apparel is well underway and its hallmarks of speed to the consumer, SKU customization, inventory derisking and sustainability are things we believe more and more apparel players will want to leverage and move some or all of their business away from traditional screen print.

DTG2Go is right there to capitalize on that market shift with its leading print capacity, nationwide network and proprietary innovations as well as Delta Direct’s Blank Garment Platform. Let me now pass it over to Nancy for a detailed review of our financial results.

Nancy Bubanich: Thank you, Justin. Please note that, as we did on our call last quarter, we will discuss a variety of financial measures that are adjusted to account for the cost impacts of the inflationary pattern and production curtailment activities as well as strategic cost optimization initiatives Bob referenced earlier. In addition, during the fourth quarter, we concluded that the goodwill associated with our DTG2Go business was impaired, and we recorded a non-cash charge of $9.2 million in fiscal year 2023. We will discuss non-GAAP measures such as adjusted gross margins, adjusted operating income and adjusted net income, as we believe it is important to evaluate our operating results for this quarter and the full year in light of the impacts of these unique events.

Listeners may access a reconciliation of those measures to gross margin, operating income and net income on the most directly comparable GAAP measures on the Investor Relations page of our website, www.deltaapparelinc.com. For the fourth quarter ended September 30th, 2023, net sales were $91.4 million compared to the prior year fourth quarter net sales of $115.5 million. Salt Life group segment net sales were $12.5 million compared to the prior year fourth quarter net sales of $14 million. Net sales in the Delta Group segment were $78.9 million, compared to $101.5 million in the prior year fourth quarter. Gross margins were 11.2% compared to 18.7% in the prior year fourth quarter, driven primarily by production curtailments and inflationary cotton costs.

Adjusting for these cost impacts, fourth quarter gross margins were 15.9%. Delta Group segment gross margins for the quarter were 4.8% compared to the 14.1% in the prior year period. Adjusted for the production curtailment and cotton cost impacts, Delta Group segment gross margins were 10.3%. Salt Life Group segment gross margins for the quarter were flat at 51.7% versus 51.8% in the prior year period. Selling, general and administrative expenses decreased favorably from $19.8 million in the prior year fourth quarter to $17.1 million, while SG&A as a percentage of sales increased over the prior year period to 18.7%. Operating income declined year-over-year from $2.2 million or 1.9% of sales to an operating loss of $17 million or 18.6% of sales.

Adjusting for the production curtailment and cotton cost impacts as well as the non-cash impairment charge on the goodwill in the DTG2Go business, fourth quarter operating loss was $2.1 million or 2.3% of sales. Delta Group segment operating income for the quarter declined from $4.8 million to a loss of $15.2 million. Adjusted for the production curtailment and cotton cost impacts of the non-cash impairment charge, Delta Group segment operating income was a loss of $295,000 or 0.4% of sales. The Salt Life Group segment experienced an operating loss for the quarter of $400,000, compared to operating income of $1.2 million in the prior year period. Net income declined to a loss of $16.4 million or $2.34 per share from a loss of $281,000 or $0.04 per share.

Adjusting production curtailment and cotton cost impacts as well as the non-cash impairment charge, fourth quarter net loss was $5 million or $0.72 per share. Net income for the quarter was significantly impacted by the elevated interest rate environment with our interest expense for the quarter essentially doubling over the prior year quarter. Net inventory as of September 30th, 2023 was $212.4 million, a sequential decrease of almost $47 million or 18% for December 2022 and a year-over-year decrease from inventory of $248.5 million as September 2022. The inventory decrease was a part of our team’s excellent execution on a high-priority working capital efficiency initiative. Total net debt including capital lease financing and cash on hand was $165.3 million as of September 30th, 2023, an approximate 15% reduction from $194.3 million at March 2023 and year-over-year decrease from $170.6 million at September 2022.

Cash on hand availability under our U.S. revolving credit facility totaled $14.2 million as of September 30th, 2023, a decrease of $13 million from December 2022 and a $20.4 million from September 2022, with the decrease from December 2022 principally driven by investments in the business to support working capital needs as well as the higher interest expense. We had no capital spending during the fourth quarter compared to $2.1 million during the prior year fourth quarter. For the full year ended September 30th, 2023, net sales were $415.4 million, compared to the prior year net sales of $484.9 million. Salt Life Group segment net sales were $59 million compared to the prior year net sales of $60 million. Net sales in the Delta Group segment were $356.3 million compared to $424.8 million in the prior year.

Gross margins were 13% compared to 22.4% in the prior year, driven primarily by the production curtailment and cotton cost impacts coupled with the impacts of the strategic actions we undertook to better optimize our overall cost structure. Adjusting for the collective cost impacts of the production curtailment, cotton and strategic actions, gross margins were 21.2%. Delta Group segment gross margins were 6.1%, compared to 18.3% in the prior year. Adjusted for the collective cost impacts of the production curtailment, cotton and strategic actions, Delta Group segment gross margins were 15.6%. Salt Life Group segment gross margins increased to 54.6% from 51.6% in the prior year period with an increase driven primarily by a more favorable mix of higher margin direct to consumer sales.

Selling general and administrative expenses decreased favorably from $79.5 million in the prior year to $73.7 million, while SG&A as a percentage of sales increase from 16.4% to 17.8%. Our equity investment in Green Valley Industrial Park in Honduras, where our textiles facility is located, provided dividends during the year of approximately $1.6 million and continues to generate profits recorded in other income that provide excellent return on our investment there. Operating income declined year-over-year from $31.8 million or 6.6% of sales to an operating loss of $29.4 million or 7.1% of sales. Adjusting for the collective cost impacts of the production curtailment, cotton and strategic actions, as well as the non-cash impairment charges.

Operating income was $18.4 million or 4.4% of sales. Delta Group segment operating income declined from $37.5 million to a loss of $26.2 million, adjusted for the collective cost impacts of the production curtailment, cotton, and strategic actions, as well as the non-cash impairment charge, Delta Group segment operating income was $21.7 million or 6.1% of sales. Salt Life Group segment operating income was $6.2 million or 10.4% of sales, compared to $8.2 million or 13.6% of sales in the prior year. Net income declined from $19.7 million or $2.80 per diluted share to a loss of $33.2 million or $4.75 per share. Adjusted for the collective cost impacts of the production, curtailment, cotton, and strategic actions, as well as the non-cash impairment charge, net income was $3.3 million or $0.47 per diluted share for the full year.

Net income for the full year was also significantly impacted by the elevated interest rate environment with our interest expenses a period essentially doubling over the prior year. Now, I’ll turn the call back over to Bob.

Bob Humphreys: Thanks, Nancy. Fiscal 2023 was a transition year for us in many respects, particularly for our Delta Group Segment, but it was also very productive if you look across the company and see what we did to streamline our cost structure and better position ourselves and our business for the long term. Our activewear business is leaner from a fixed cost and working capital perspective, and DTG to go has completed the work necessary to take another step forward in its progression with technology, quality and service offerings that are quite unique in the marketplace. We see those businesses continue to capitalize on the growing synergies they share, and for both to grow and gain market share in fiscal of 2024. We also see Salt Life taking another step forward in fiscal year 2024, and believe that business is poised for continued revenue growth driven by direct-to-consumer channels.

We will continue to closely manage our cost working capital and debt levels and focus our investments in areas that should return the most value for our shareholders. These efforts along with the structural changes we have made across our business position us for steady operating improvement, as we move ahead and market conditions continue to level out. Based on our current view for fiscal year 2024, we anticipate net sales in a range of $400 million to $415 million and operating profit margins between approximately 2% and 3.5% with gross margins sequentially increasing into the low to mid 20s, improving operating margins beginning in the second quarter and revenue growth in the back half of the year. And now operator, you can open up the call for any questions we may have.

Operator: [Operator Instructions]. And our first question comes from the line of Dana Telsey with Telsey Advisory Group.

See also 20 Highest Paid Golf Players in the World and 15 Stocks ChatGPT Says Will Make Me Rich in 10 Years.

Q&A Session

Dana Telsey: Hi, good afternoon, everyone. Bob, as you think about this year, and Jason and Nancy, as you think about this year and how the fourth quarter ended, can you at all give some contextualization as to what the level of demand is going forward, even as we go through the first be second quarter from the customer base of Delta Group and how that’s shifting or changing? And then unpacking the gross margin, given the production curtailment and the cotton costs, when do we see some normalization or should the magnitude of what the gross margin impact was this quarter? Does it continue? How do you think of it moving forward? And then lastly, as you looked at expenses structure of the business and the changes you have made, as we go through 2024, how do you see that operating income and operating margin develop? Thank you.

Bob Humphreys: So on a demand standpoint, in the fourth quarter, our business remain choppy, depending on the particular market segment. We are seeing some areas that are still strong, like our ad specialty business, in our e-retailer business, in our basic activewear group. Our specialty business is strong and growing and there are other channels that are slower, and that would include regional screen print and retail licensing. Now having said that, our business meetings with our retail licensing customers have indicated that, their business is improving over time and that we will be receiving more business as we go into the new fiscal year. As you saw in our Salt Life business, our wholesale business slowed down in the fourth quarter like we have seen with many of their competitors as well.

So it does seem like the consumer is getting a little bit fatigued in buying, where we have customers in our stores, obviously, we have a lot of data. The purchase, what a customer is there is more product and higher average selling price, but less foot traffic in those retail doors. As we look into our first quarter, which is well underway now, in general, we are seeing the same conditions continue. We are off to a good start in our DTG2Go business in the quarter and the important holiday season. Our output is high, our quality is good, very good. And our labor utilization rates are some of the best that we’ve ever seen in that business. So we’ve got some more to go but are encouraged with our progress in our DTG2Go business as we go into the first quarter

Dana Telsey: Got it.

Nancy Bubanich: I believe you asked about the cotton as well. And if we’re through that — so we are through miss of our higher price cotton, and we’ll start seeing that impact on our P&L as we move into FY ‘24 with lower price cotton flowing through our cost of sales. And as far as, I think you also asked about production curtailment, or did you operating margin?

Dana Telsey: Yes.

Bob Humphreys : Yes. So the operating margin will sequentially improve as we go through the fiscal year. We still have some excess cost on our balance sheet that we’ll roll out in the first quarter, some in the second quarter, and that will be behind us. We’ve expense those where we can through gap and the things that have to follow the inventory, obviously, we’ll do so. And as Nancy spoke to on cotton, the cotton that we’ve been bringing into our business for the last several months is what we would call market price cotton, but it still has to roll through cost of sales, which we’ll start seeing the benefit of that in the second quarter and on out through the rest of the fiscal year.

Operator: Our next question comes from the line of Jamie Willin with Willin Management.

Jamie Willin : Hey fellas, when you give out that forecast for revenues for next year, prior to that you’ve talked about, you’re expecting growth in Salt life. You’re expecting growth in DTG2Go, but when you, those overall numbers come out, it doesn’t look like a major increase for this year. Can you explain that dichotomy?

Bob Humphreys : Well, we’re not expecting strong overall growth at Salt Life with the current wholesale business environment, growth, but not strong growth and DTG2Go, we’ll have growth sequentially in the second, third, and fourth quarter. Our first quarter last year was a large DTG2Go revenue quarter that we did not operate efficiently. And so, we took a different stance this year, and are not operating as many shifts as we have in prior years, but we think a lot more efficiently and we’ll have a strong rebound in operating profit EBITDA in DTG2Go this fiscal year compared to last year.

Jamie Willin : Okay. On the Salt Lake wholesale side, have you gained or lost any major customers there?

Bob Humphreys : We have not gained or lost any major customers. There are accounts that we chose to quit shipping last year when their margin requirements changed or other give backs that they wanted. We just didn’t feel like it was a business that was additive to the brand. And we see more and more lifestyle brands doing that. So retailers get under pressure, they ask for more and more, and if we’re not going to make money at it to keep our brand integrity, then we walk away from that business.