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Delta Galil See Second-Half Profits After Shaky Q2

While the economic impact of the coronavirus pandemic led to a net loss in Q2, Delta Galil sees a return to profitability in the third quarter.

In a Nutshell: In reporting financial results for the second quarter, Delta Galil Industries, a global manufacturer and marketer of branded and private-label apparel products including 7 For All Mankind, Tommy Hilfiger and Maidenform, said overall sales and net income continued to be negatively impacted by the Covid-19 pandemic.

The company also noted that its results for the latest quarter reflected a one-time restructuring charge of $39.2 million to maximize operational efficiencies, improve cost structures and enhance production flexibility.

Delta Galil noted that actions taken to further strengthen its financial flexibility included a companywide hiring freeze, senior management salary reductions, furloughs and reduced working hours. It also eliminated and/or scaled back marketing spend, travel and consulting fees.

The company also negotiated rent reductions, tightly managed working capital items, drew down $79 million from its credit facilities, received government-supported loans for $40 million under attractive terms, and increased committed and uncommitted credit facilities to a total of $258 million, of which $79 million were utilized as of June 30.

As a result of the company’s agility to respond and execute appropriate cost-cutting initiatives, the second-quarter operating loss before one-time items was kept at similar levels to the first quarter, but sales were significantly lower, as the pandemic’s effects on Delta Galil were more impactful in the period due to the store closures enacted in the company’s markets.

Delta Galil, based in Tel Aviv, said its operating cash flow improved by approximately $46.4 million to $80.9 million in the quarter from $34.5 million a year earlier. A “strong balance sheet” was highlighted by $255.6 million in cash and $410.4 million in equity.

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The company said its inventory balance was significantly reduced by $88 million to $290 million from June 2019. Net debt was reduced by $54.5 million from June 2019.

Delta Galil estimates that its operating results will return to profitability in the second half of this year.

Sales: Sales for the quarter ended June 30 for the company, which also makes of leisurewear, activewear and denim, were down 27 percent to $270.9 million from $373.9 million reported in the second quarter of 2019.

Delta Galil noted that the disruption caused by COVID-19 and related business closures and public quarantine measures resulted in decreased wholesale volume and lower retails sales due to store closures, which were partially offset by higher web and e-commerce customer sales. The company reported a 163 percent increase in its own website sales.

The impact of COVID-19 reduced second quarter sales by approximately $147 million. The decrease in sales was primarily due to reduced volume in most business segments and markets following the outbreak of COVID-19, partly offset by sales from The Bogart Group, acquired in July 2019.

Earnings: Delta Galil posted a net loss of $53.3 million in the period, including the restructuring charge, compared to net income of $5.1 million last year. Excluding one-time charges, the net loss was $23 million, compared to net income of $7.9 million for the year-ago quarter.

The impact of COVID-19 reduced second quarter earnings before interest and taxes (EBIT) sales by approximately $37 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $6.7 million in the quarter compared to $37.3 million in the 2019 period.

The operating loss for the second quarter was $55.4 million, compared to operating profit of $14.3 million in the second quarter of 2019. Diluted loss per share was $2.08 for the quarter compared to earnings per share of 20 cents in the year-ago period.

CEO’s Take: Isaac Dabah, CEO of Delta Galil, said: “While our second quarter results reflect the continued global impact of the COVID-19 pandemic, we are pleased to report that our financials were better than we expected as of last quarter. We finished Q2 with strong performance in direct-to-consumer e-commerce across all of our businesses, and we see strong recovery in brick-and-mortar sales in Israel that presented a growth in May and June, and in our European brands.”

“During the quarter, we initiated a significant strategic restructuring plan across all business units, which we expect to deliver efficiencies in our cost structure, operations and productivity starting already in Q3,” Dabah added. “We have a solid plan in place, a strong balance sheet, many of our customers are gradually recovering, and we continue to focus on developing new products to drive sustainable profitable growth and long-term shareholder value. We started the third quarter with strong results for July and expect to get back to profitability in the third quarter.”