Dan River posts 2Q loss despite home sales spike

DANVILLE, VA — With margins under crushing pressure in a highly promotional retail environment, and further eroded as it idled its plants to work down stockpiles, Dan River Inc. recorded a second-quarter loss of $6.9 million, compared with a year-ago profit of $3.0 million.

Despite a persistently weak retail environment, the diversified textiles producer leveraged strong sales of juvenile products and a Martha Stewart program at Kmart into a double-digit gain in home fashions sales, which climbed by 10.7 percent, to $117.0 million from $105.6 million a year ago.

But with sales of apparel fabrics still battered by imports and a retail downturn, overall sales were held largely in check, edging ahead just 2.9 percent, to $161.9 million from $157.2 million.

Offsetting the remarkable gain in home of almost 11 percent, apparel fabrics sales tumbled 11.6 percent, to $33.8 million from $38.3 million last year. And the engineered fabrics division, which sells specialty products to car makers, declined by 17.1 percent, to $11.1 million from $13.3 million.

Bloodying the bottom line, average gross margin was slashed virtually in half, to 10.7 percent from 20.3 percent a year ago, weakened by promotional pricing, an unfavorable mix of business, and slowdowns in its plants, said Joseph Lanier Jr., chairman and ceo. Plants in the core home fashions business were idled for 13 days in the quarter, mostly in greige goods, to bring supply into line with demand, Lanier told analysts and investors in a conference call. In the hard-hit apparel fabrics business, "we continue to face very weak demand, and plants there operated at less than 80 percent," he said.

Dick Williams, president and coo, said home fashions margins were pressured by a more promotional skew to the business. "Business has been very promotional, very difficult, for the past 18 months. All the customers are trying to get their inventories down out there," he said.

On the plus side, Lanier pointed out, inventories were cut by about $15 million during the second quarter, and for the six months year-to-date are down by 13.9 percent, or $28.7 million, to $177.5 million from $206.2 million. The inventory workdown, added Lanier, has allowed the company to pare its overall debt by more than $21 million since the beginning of the year.

Looking ahead, Lanier said, "We are seeing a pickup in demand for our home fashions products from recent levels, but our apparel fabrics order position has gotten weaker. This means that we will have to take some additional downtime in apparel fabrics during the third quarter, which will negatively impact profits." No further downtime is expected in home fashions plants, added Lanier, as sales continue to get a lift from a strong juvenile business.

With apparel acting as a drag, Lanier said the company expects to post a third-quarter loss of 20 to 25 cents per share, and a narrowing fourth-quarter deficit of about 15 cents a share.

On the plus side, the home fashions business remains strong, and Barry Shea, executive vp, cfo, told investors in the conference call that third-quarter sales are expected to total about $120 million, while fourth-quarter sales reach $125 to $130 million.

Dan River's big Bed in a Bag business continues to grow, said Williams, even in the face of stepped up competition.

Overall, Lanier suggested, the worst may be over.

"It looks to us like business has stopped weakening and is beginning to firm up," he added.