Dan River profits up, but 2Q less certain

DANVILLE, VA — With profits more than doubling in its core home fashions business as margins gained strength, Dan River Inc. posted a $2.8 million first-quarter profit, compared with a $25.8 million loss the year before, when the company took a hit on the Kmart bankruptcy and recorded a $21 million non-cash accounting charge.

But the good news was forgotten fast when the company warned that the sales outlook remains clouded. It said it will record a small loss during the second quarter as it adds up all of the costs tied to a recently completed refinancing that will ultimately provide the company with more breathing room.

All Wall Street needed to hear was "loss," and not the reasons for it, and investors knocked the company's stock down by almost 17 percent in value, by 64 cents a share, to $3.20.

Earnings improved sharply despite a shortfall in sales in each of the company's operating segments:

• Home fashions' operating profits more than doubled, climbing by 117.9 percent, to $11.5 million from $5.3 million last year.
• Sales declined by 6.5 percent, to $108.4 million from $116.1 million.
• The apparel fabrics business narrowed its loss by almost 60 percent, to $636,000 from $1.6 million last year, as sales declined by 9.0 percent, to $29.1 million from $31.9 million.
• The Engineered Products division almost tripled its loss, to $852,000 from $303,000 last year. Sales dropped off by 5.5 percent, to $9.9 million from $10.5 million.

Average gross margin improved substantially, by 510 basis points, or 5.1 percentage points, to 18.8 percent from 13.7 percent last year. The gain came, said Joseph Lanier Jr., chairman and ceo, from "sales of a better product mix, lower raw material prices and the benefits of the plant consolidation efforts that were put into place last year."

He added: "While the company's earnings for the first quarter came in better than expected, the immediate outlook is very hazy. The uncertainties imposed by the soft economy, high unemployment and the war in Iraq have depressed consumer spending. This is reflected in the negative same-store sales comparisons reported by most retailers. In reaction, our customers are very skittish about placing new business and are very conservative in their order quantities. We expect this difficult retail environment to have a negative impact on our second-quarter operating results."

Pushing the company into the loss column, he said, will be the writeoff of deferred financing fees in connection with the refinancing of the company's debt, and higher interest during a one-month period of the second quarter, when the company's old and new bond issues briefly overlap.