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Repreve Maker Cites Customer Inventory Glut in Slashing Outlook

Unifi’s net sales for the first quarter fell 8.4 percent to $179.5 million, primarily attributable to temporary demand disruption.

In a Nutshell: Unifi Inc., makers of recycled and synthetic yarns such as Repreve, released operating results for the first quarter of fiscal 2023. It said with the operating environment and textile demand trends for the apparel market expected to remain suppressed for the remainder of calendar 2022, it was updating its fiscal 2023 outlook.

The company anticipates net sales in the fiscal 2023 second quarter to come in about 10 percent to 15 percent lower than the first quarter. It also expects continued profitability pressures and performance resembling the first quarter, primarily attributable to weak cost absorption in the Americas segment in connection with a seasonally pressured period that includes annual customer shutdowns and holidays exacerbated by lower-than-normal sales and productivity levels driving consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) between a loss of $5 million and break even; continued volatility and unfavorability in the effective tax rate, and capital expenditures of approximately $10 million to $12 million, as it continues investing in new yarn texturing machinery within the U.S., El Salvador and Brazil.

Unifi said future demand visibility has diminished due to changing forecasts from a number of customers. While the company expects significant demand recovery and profitability acceleration to occur following the inventory destocking measures currently in progress at major apparel brands and retailers, the timing of an apparel production recovery is uncertain.

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“While the current operating environment is challenging, we are optimistic about the efforts we’re making to remain the global sustainable fiber leader,” CEO Eddie Ingle said. “Our Repreve products continue to see a high level of interest from our customers, and we are continuing to invest in marketing and building awareness of our flagship brand. We are pleased to have the additional liquidity afforded by our amended credit facility. As retail apparel inventory levels decline and demand normalizes, we expect to see our revenue and profitability accelerate in the second half of fiscal 2023. We will continue to control costs, drive efficiencies, and invest prudently in growth areas of the business that will support strong long-term business expansion and value creation for all of our stakeholders.”

On Oct. 28, Unifi renewed and amended its existing credit facility to expand the borrowing capacity and extend the maturity date. The amended credit agreement allows for an increase in borrowing capacity from $200 million to $230 million and extends the maturity date from December 2023 to October 2027.

Sales: Net sales for the first quarter ended Oct. 2 decreased 8.4 percent from the first quarter of fiscal 2022 to $179.5 million, primarily attributable to temporary demand disruption in the Americas and Asia segments from inventory destocking measures taken by apparel brands and retailers, and a recent decline in demand for textile products from apparel brands. The decline was partially offset by higher selling prices following months of inflationary cost increases.

Revenues from Repreve fiber products represented 27 percent of net sales, or $49.2 million, compared to 37 percent, or $71.9 million, in the first quarter of fiscal 2022, impacted by lower sales volume in Asia.

Earnings: Unifi saw a net loss of $7.83 million, or 44 cents per share, compared to net income of $8.68 million, or 46 cents per share, for the first quarter of fiscal 2022.

Gross profit was $6.6 million compared to $26.1 million for the first quarter of fiscal 2022, primarily impacted by lower facility utilization. Americas segment gross profit decreased $14.1 million, primarily as a result of lower sales volumes driving weaker productivity and cost absorption. Brazil segment gross profit decreased $3.2 million, which was consistent with the normalization of gross profit levels that occurred during calendar 2022 following the Brazil segment’s strong performance during the pandemic recovery period. The Asia segment maintained a strong gross margin rate but was impacted by weaker demand for apparel production.

Gross margin was 3.7 percent compared to 13.3 percent for the first quarter last year. Operating loss was $4.7 million compared to operating income of $13.3 million in the first quarter of fiscal 2022, primarily due to the decrease in gross profit

CEO’s Take: Ingle said: “Our first quarter fiscal 2023 results were adversely impacted by a difficult demand environment and volatile global market. With brand and retailer inventories recently reaching historically high levels, apparel companies and retailers reduced orders and delayed certain programs into calendar 2023. As a result, our demand visibility diminished quickly.”

“While we believe these destocking measures will be temporary, the duration of this disruption is uncertain,” Ingle added. “Accordingly, we quickly implemented meaningful cost savings actions in North America to improve the profit margins in the short- and long-term periods. Our business remains well-positioned to support the continued acceleration in the demand for sustainable fibers.”