Despite increasing demand for recycled materials, Unifi hasn’t seen much success during the new year. The Greensboro, N.C.-based manufacturer of recycled synthetic fibers and yarns, had an even worse second quarter than the first. But the company is hoping to turn things around.
In a Nutshell: “Our second quarter fiscal 2023 performance was significantly impacted by a sequential decline in apparel production beyond our prior expectations,” Eddie Ingle, CEO of Unifi, said. “Our team remained proactive and executed numerous cost reduction initiatives and other saving measures during the period, but the headwinds caused by near-term inventory destocking efforts impacted demand from many of our apparel customers.”
Unifi has started cutting costs by reducing labor hours, tightening up discretionary spending, extending product shutdown periods and taking its time when filling open positions, according to the company’s conference call presentation.
On Oct. 28, 2022, Unifi renewed and amended its existing credit facility to expand the borrowing capacity and extend the maturity date. The amended credit agreement increases the borrowing capacity from $200 million to $230 million, extends the maturity date from December 2023 to October 2027 and contains pricing, terms and conditions generally consistent with those in place before the amendment. In connection with the refinancing, a loss on debt extinguishment of $300,000 was recorded to interest expense in the second quarter of fiscal 2023.
Debt principal was $130.4 million on Jan. 1 compared to $114.3 million on July 3, 2022. Cash and cash equivalents decreased by $2.5 million as operational losses were partially offset by cost and working capital diligence. Accordingly, net debt was $79.6 million on Jan. 1 compared to $61 million in July last year. On the first of the year, the revolving credit facility had outstanding borrowings of $3.4 million and availability of $64.7 million.
“The good news is that our customers’ supply chains are beginning to normalize and the drivers of our mid- and long-term growth engines remain fully intact,” Ingle said. “Further, our customers are forecasting a stronger second half of the calendar year as they work through their remaining excess inventory and short-term headwinds.”
Net Sales: Net sales were significantly lower than what Unifi predicted.
Second quarter net sales dropped 32.4 percent to $136.2 million from $201.4 million, primarily driven by lower sales volumes. In its last earnings call, Unifi predicted 10 to 15 percent lower net sales than the first quarter of fiscal year 2023. The demand for apparel production declined significantly in the first half of fiscal 2023 as brands and retailers took action to reduce their inventory levels and normalize supply chains. This caused the Americas and Asia segments to experience revenue dips from customers across both U.S. and foreign markets. Repreve fiber products comprised 31 percent ($42.9 million) of net sales versus 40 percent ($81.5 million) for the second quarter of fiscal 2022.
“Profitability in the Americas during the quarter was primarily pressured by higher material costs from December, with the loss of asset leverage on lower volumes,” Ingle said. “We are glad to see that input costs stabilized during the December quarter, and our pricing is healthy against current levels, putting us in a solid position moving into the third quarter.”
Gross loss was $8 million compared to gross profit of $16.9 million in the second quarter of fiscal 2022. The Americas segment saw gross profit drop $13.9 million, primarily because of lower sales volumes driving weaker productivity and cost absorption. The Brazil segment gross profit decreased $6.2 million due to selling price pressures from foreign imports against high-cost inventory. The Asia segment maintained a strong gross margin rate but was impacted by weaker sales volume, driving a gross profit decrease of $4.8 million.
The operating loss was $19.8 million compared to the operating income of $4.6 million in the second quarter of fiscal 2022, primarily due to the decrease in gross profit. Net loss was $18 million (or $1 per share) compared to net income of $900,000 (or $0.05 per share), impacted by the weaker profitability in the United States. On an adjusted basis, EPS was $1.21, which includes a $3.8 million recovery of prior years’ income taxes in Brazil, compared to $0.05 in the previous year’s period. Adjusted EBITDA was $13 million, compared to $10.9 million, consistent with the change in operating income.
“In the interim, we will continue to invest prudently with an eye towards supporting long-term growth, while simultaneously controlling costs and building efficiencies,” Ingle said. “We remain confident our position as a global leader for sustainable solutions and in the long-term demand profile for our Repreve products and other innovative solutions.”
Net Earnings: Unifi’s net sales were $315.7 million compared to $397.4 million, down approximately 20.6 percent. Revenues from Repreve fiber products represented 29 percent of sales—or $92 million—compared to 39 percent, or $153.4 million, compared to year-to-date fiscal 2022.
“Repreve continues to gain traction, with a mix of cobranded product launches, social media partnerships, activations and PR placements,” Ingle said. “During Q2, several brands launched new Repreve cobranded products, including Asics, Arcade Belt, Tom & Tailor and H&M.”
The gross margin was 0.5 percent compared to 10.8 percent. Operating loss was $24.5 million compared to operating income of $17.8 million, and net loss was $25.9 million compared to net income of $9.6 million.
The operating environment and textile demand trends for the apparel market are expected the recover at a modest pace during calendar 2023. For the third quarter, Unifi expects revenue to increase sequentially but adversely impacted by the Lunar New Year holiday in Asia, sequential operating performance improvement, continued volatility in effective tax rate and slightly lower sequential capital expenditures, with further reductions anticipated during the fourth quarter.
CEO’s Take: “Although current economic conditions have impacted our financial results in the first half of the fiscal year, our team has taken the proper actions to mitigate these headwinds,” Ingle said. “We believe we have positioned the business to return to strength in the second half of the fiscal year. We have also made positive changes to our capital structure by amending and expanding our credit facility, and we maintain a strong and flexible balance sheet. As the apparel markets recover, we expect to see our business bounce back fairly quickly and are confident we have the right strategic plan to drive long-term growth and value for all our stakeholders.”