Dan River down in 1Q; yet home sales increase

Don Hogsett, April 30, 2001

DANVILLE, VA — Despite a solid gain in home fashions sales — the only increase recorded among the major mills — Dan River posted a wider-than-expected first-quarter loss of $6.5 million, its margins slashed in half as it idled its plants, worked down stockpiles and sold a more promotional mix of product.

Bucking a recent industry trend, home fashions sales actually advanced in the quarter, moving up by 5.4 percent, to $120.5 million from $114.4 million last year, lifted by strong sales of juvenile product, a new Kmart program, and $3 million in sales from its recently acquired Import Specialties Product Group.

It was the only gain in home fashions sales recorded by any of the major mills, with WestPoint reporting a 6.5 percent decline, and Springs a drop of 3.9 percent. Pillowtex has yet to report first-quarter results, but recently reported a fourth-quarter drop of almost 25 percent, hammered by the double-whammy of a slowing retail environment and its own bankruptcy filing.

While Dan River may have moved its home sales higher, it couldn't figure out a way to make money doing it, and earnings in the core home fashions business plunged by 96.0 percent, to a break-even $485,000 from a year-ago profit of $12.2 million.

And the strength in home fashions wasn't quite enough to offset continued weakness in apparel fabrics sales, and overall sales at the company dipped slightly, by 0.6 percent, to $164.0 million from $164.9 million. Sales of apparel fabrics declined by 12.9 percent, to $32.2 million from $37.0 million, and the business posted a loss of $497,000, compared to a year-before profit of $3.2 million.

Dragging down the bottom line, average gross margin was virtually slashed in half, eroding by 890 basis points, to 9.8 percent from 18.7 percent a year ago. Gross margin dollars declined by 48.0 percent, to $16.1 million from $30.9 million.

Joseph Lanier Jr., chairman and ceo, said, "Softness in retail demand for home fashions and apparel products and our efforts to reduce inventories caused us to sell a more promotional mix during the first quarter. We also experienced higher manufacturing costs due to plant curtailments and increases in energy and wages during the quarter. This combination of factors severely impacted our margins."

Taking another small bite out of the bottom line, costs climbed higher by 60 basis points, to 10.3 percent of sales from 9.7 percent a year ago. In absolute dollars, costs climbed higher by 5.3 percent, or $5.3 million. Interest costs moved up by 17.9 percent, to $8.6 million from $7.3 million, costing the company an extra $1.3 million.

On a positive note, Dan River managed to work down its stockpiles by $14 million during the quarter, and by $28 million since the end of last year's third-quarter. "We remain focused on inventory reduction, so we anticipate having some short running schedules during the second quarter and that there will be a continuation of the promotional sales mix we experienced during the quarter," said Lanier.

That, he added, spells continued margin pressure and an anticipated loss during the second quarter of 10 to 15 cents per share on a modest sales increase. "We have limited visibility with respect to our sales levels in the back half of the year, but our manufacturing operations have improved and this should have a positive impact on our third-quarter results. As the expected pick-up in retail demand occurs during the back half of the year, our operating margins should begin to return to more traditional levels."

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