Dan River bracing to tough it out

Don Hogsett, Staff Staff, November 18, 2003

Danville, GA — As Dan River works to toward structuring a plan for its banks that would ease covenant requirements, the mill has also embarked on the process of becoming a two-pronged operation that will both source from overseas and manufacture at home.

"As we move into 2004 and beyond, we expect to capitalize on inexpensive labor [abroad] and to develop our company as a hybrid — using internal assets to respond to near-term, fast demand and to mitigate long-term inventory risk such as you have if all your capacity is tied up in three- and four-month lead times," president and coo Tom Muscalino said during the company's third quarter conference call last week.

The company currently sources 20 million yards of greige annually, bringing in small amounts on a weekly basis. "We think the strategy will give us some significant advantage vs. those with no assets here in this country," Muscalino said.

The company took a thumping in the third quarter and expects more in the fourth. Nonetheless, chairman and ceo Joe Lanier Jr. said executives are optimistic about first quarter 2004, when new home fashions programs begin shipping and a new contract for Docker's pants fabric begins to roll.

Lower replenishment requests from retailers have hurt, and unit shipments are down about 15 percent, Muscalino said. Higher-priced goods showed the greatest contraction. Dan River also picked up an institutional sheet contract that had been supplied by Pillowtex; the hospitality business carries the lowest per-unit price of the mill's assortment.

Dan River Inc. recorded a Q3 loss of $103.5 million, compared with a year-before profit of $4.7 million. Sales dropped by almost 30 percent. At the same time, results were squeezed by a $91.7 million non-cash write-down of good will tied to the poor performance.

Weakness in all three of its business units pushed total sales down by 29.6 percent, to $103.7 million from $147.4 million. Core home fashions sales fell by 27.8 percent, to $76.4 million from $105.9 million last year. That followed a second quarter slide of 27.8 percent.

Expecting that sales in the fourth quarter will show no improvement, the company has scheduled "several weeks" of production curtailment, Lanier said. It will also shut down a home fashions distribution center and close an apparel fabrics weaving plant over the next 60 to 90 days. The moves follow the earlier closing of two plants. The company will close its Camelia home fashions distribution center in Juliette, GA, consolidating operations into other facilities; and shutter its Sevierville, TN, apparel weaving plant, consolidating operating into Danville, VA, weaving facilities. The closings will generate a charge of up to $17 million against fourth-quarter earnings, but should generate annualized savings in the range $6 to $7 million.

As tough as things were in home fashions, sales were even harder hit in the diversified textiles producers' other business units: apparel fabrics sales fell by 34.3 percent, to $20.5 million from $31.3 million last year; and by 34.0 percent in the engineered products division, to $6.8 million from $10.3 million.

With sales heading south, and its plants running slowly, margins were slashed by more than half, contracting to 8.5 percent from 21.0 percent a year ago.

Working to save cash and prop up the bottom line, the company pared its costs by 15.8 percent during the quarter, to $13.8 million from $16.4 million last year, generating a cash savings of $2.6 million. But when measured as a percentage of falling sales, costs still climbed higher by 210 basis points, or 2.1 percentage points, to 13.3 percent of sales form 11.2 percent a year ago.

Paying out more than it was taking in once it covered the cost of making the product, Dan River generated an operating loss of $5.0 million, compared with a prior-year operating profits of $14.5 million.

Acting as a further drag, interest expense jumped up by 10.5 percent, to $7.1 million from $6.5 million a y ear ago, pulling another $680,000 away form the bottom line. Adding another layer of costs, given the steep shortfall in sales inventories rose by 5.4 percent, to $159.8 million from $151.6 million.

Addressing the drop-off in sales, Joseph L. Lanier Jr., chairman and ceo, said, "We believe this reflects continuing adjustments in customer inventory levels during this period. The softness we experienced in home fashions occurred in all retail channels and across all price points and products." Dan River is a major supplier to Kmart's Martha Stewart program, and the shutdown of hundreds of Kmart stores during the retailer's recent bankruptcy, further hampered sales.

For the current fourth quarter, the company is staring at further sales erosion and another loss, said Lanier. "We are projecting sales to be at levels similar to the third quarter," he said, resulting in "scheduled production downtime for several weeks" during the period.

But the outlook for the opening quarter of 2004 is considerably brighter for all the company's business units, he emphasized. "Customers have indicated strong support for our recently introduced home fashions products that will begin to ship during the first quarter of 2004. Our apparel fabrics division has also had success in product placements that will ship in the first quarter."

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