Trevose, Pennsylvania-based Broder Bros. Co. announced results for its second quarter ended June 27, 2009.
Second Quarter 2009 Results Compared to Second Quarter 2008
Second quarter 2009 net sales were $177.7 million compared to $257.6 million for the second quarter 2008. Income from operations for the second quarter 2009 was $1.0 million compared to income from operations of $8.5 million for the second quarter 2008. Including an extraordinary gain of $19.9 million in the second quarter 2009 resulting from the exchange of senior notes, net income was $15.2 million compared to a net loss of $0.7 million for the second quarter 2008. For the second quarter 2009, the company reported earnings before interest, other financing costs, taxes, depreciation, amortization and the extraordinary item (EBITDA) of $5.4 million compared to EBITDA of $13.3 million for the second quarter 2008. A reconciliation of EBITDA to net income (loss) is set forth at the end of this press release.
Results include the impact of certain restructuring and other highlighted charges discussed below. Excluding these highlighted charges, EBITDA was $5.8 million for the second quarter 2009 and $14.8 million for the second quarter 2008.
Second quarter 2009 gross profit was $30.2 million compared to $45.4 million for the second quarter 2008. Second quarter 2009 gross margin was 17.0 percent compared to gross margin of 17.6 percent in the prior period. The decrease in gross profit primarily resulted from lower unit volume due to weak demand in the market, insufficient vendor financing during the first half of the quarter and customer concerns about Broder’s future. Volumes were impacted by soft demand for the products the company sells due to weakened U.S. economic conditions and were reflected in a 17 percent decline in overall industry unit shipments as reported by STARS. The decline in the market was an improvement over the first quarter 2009, in which industry unit volumes were 18 percent lower than the first quarter 2008. Volumes were also impacted by insufficient vendor financing through mid-May 2009 when the company announced that it had successfully completed its exchange offer for 95 percent of its $225.0 million in aggregate principal amount of 11 ¼ percent senior notes due 2010. Despite having increased credit limits from key suppliers restored to sufficient levels immediately following the exchange offer, the company’s inventory quality had not improved until June 2009 due to inventory lead times.
The company has three operating segments: “Broder,” “Alpha” and “NES.” The Broder division generated second quarter 2009 net sales of $71.8 million compared to $98.8 million in the second quarter 2008. The Alpha division generated second quarter 2009 revenue of $80.9 million compared to $124.3 million in the second quarter 2008. The NES division generated net sales of $25.0 million in the second quarter 2009 compared to $34.5 million in the second quarter 2008.
Business Outlook
Having successfully completed the financial restructuring, management is refocusing its attention on marketing and selling initiatives. Management believes that the company can outgrow its competition by having high-quality inventory, high-quality operations and competitive pricing.
After the successful completion of the exchange offer, management worked with suppliers to obtain the trade credit necessary for restocking its depleted inventory. Even prior to the conclusion of the exchange offer, Broder developed purchase orders for what was required to return depleted inventory to appropriate levels of inventory based on market conditions. Once the exchange offer was successful, suppliers began to ship the large quantities of goods so that Broder would be in-stock.
As soon as inventory levels reached target levels, Broder communicated to customers that it was in-stock through a series of promotions. Since then Broder has begun to restate its value proposition to its customers with “three promises.” The first of the three promises is that Broder will be in-stock in the most popular products. The second is that Broder will ship the order accurately. The third is that Broder will not be under-sold. During the first three weeks since restating Broder’s value proposition, Broder’s strong product availability, high-quality operations and competitive pricing have resulted in few service failures, minimal claims expense and an encouraging improvement in sales performance relative to second quarter 2009 performance.
Management sees no reason not to expand its in-stock guarantee to all of its popular products as supply chain improvements increase the quality of its inventory.
Management continues to focus on strengthening operations. Distribution centers and call centers continue to increase both productivity and quality. Fixed costs which were eliminated in the fourth quarter 2008 and first quarter 2009 resulted in $4.1 million of savings in the second quarter 2009. Excess inventory is being depleted through sales at normal margins.
