Dan River 1Q looks up

Don Hogsett, May 6, 2002

DANVILLE, VA — Nicked by a $1.4 million bad-debt charge stemming from the Kmart bankruptcy and taking on another $2.8 million one-time accounting charge tied a change in the tax law, Dan River Inc. posted a first-quarter loss of $5.1 million, an improvement over a year-ago loss of $6.5 million.

But clearing away the thicket of one-time items that obscure the company's operations, the diversified textiles producer actually turned in a better-than-expected performance, recording a much smaller loss of $1.5 million, which is less than a fourth the size of last year's loss.

And even the one-time charge tied to a change in the tax law works sharply in the company's favor. By giving up $2.8 million in future tax benefits, the company will receive a tax refund of $5.7 million, using losses generated last year to offset taxable income earned as far back as 1996.

And in a substantially improved performance, Dan River boosted its operating income to $3.9 million, recovering from a year-ago operating loss of $1.6 million, with substantially stronger margins providing a big lift. And despite a dip in home fashions sales, the core home business posted a dramatic increase in earnings, up more than ten-fold to $5.3 million from just $485,000 last year.

Wall Street cheered the improvements and sent Dan River stock soaring up by more than 30 percent in the days after the news came out. In the 48-hour period following the earnings release, the company's stock, extending its recent winning streak, climbed by 30.2 percent, to $4.01 a share from $3.08 last week. The stock has now climbed by more than 22 times in value from its 52-week low of just $0.18 a share.

One Wall Streeter, Jeff Stewart, a high-yield analyst at Wachovia Securities, boosted his rating on Dan River bonds to a "buy," citing the better-than-expected quarter and "the company's dramatically changed outlook."

The solid earnings improvement came despite a shortfall in sales, and first-quarter sales declined by 3.4 percent, to $158.4 million from $164 million a year ago. Home fashions sales slipped to $116.0 million from $120.5 million last year, but sales in the troubled apparel fabrics business appeared to be stabilizing, and dipped a slender 0.8 percent, to $31.9 million from $32.2 million.

Helping to boost operating profits despite the dip in sales, Dan River improved its average gross margin by 390 basis points, or 3.9 percentage points, to 13.7 percent from 9.8 percent a year ago, due largely to "a much better mix of home fashions products in the first quarter," said Joseph Lanier Jr., chairman and ceo. "Due to our successful inventory reduction efforts we are no longer weighed down with excess inventories that need to be sold off at little or no margin"

Additionally, said Lanier, "Our order book has grown substantially from the end of 2001 in each of our three divisions, and our plants operated at or near planned capacity during the first quarter of 2002."

Dan River Inc.

Qtr. 3/30 (x000) 2002 2001 % chg
(loss) a-First-quarter results include a one-time increase in income tax expense of $2.8 million stemming from tax-law changes associated with the Job Creation and Worker Assistance Act of 2002; and a $1.4 million pre-tax bad debt charge stemming from the Kmart bankruptcy. Including the one-time tax increase, the company recorded a total income-tax provision for the quarter of $1.8 million, compared with an income-tax benefit of $3.6 million in the prior-year quarter.
Sales $158,418 $164,000 -3.4
Oper. income (EBIT) 3,939 (1,571)
Net income (5,135)a (6,519)a
Per share (diluted) (0.24) (0.30)
Average gross margin 13.7% 9.8%
SG&A expenses 11.2% 10.3%

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