Unifi, Inc. reported an operating loss in the first quarter ended Oct. 2, as sales declined 8.4% due to temporary disruption of demand in the Americas and Asia largely linked to destocking in the clothing sector. The fabrics company withdrew its guidance for the year due to uncertainty over the timing of a recovery in the apparel sector.

Overview of the first quarter of fiscal 2023

  • Net sales were $179.5 million, down 8.4% from the first quarter of Fiscal 2022, primarily due to a temporary disruption in demand in the Americas and Asia segments due to destocking measures taken by clothing brands and retailers.
  • Revenue from Repreve Fiber products represented 27% of net sales, or $49.2 million, compared to 37%, or $71.9 million, in the first quarter of Fiscal 2022, impacted by lower volumes of sales in Asia.
  • Gross margin was $6.6 million, compared to $26.1 million for the first quarter of Fiscal 2022, primarily impacted by lower plant utilization. Gross margin was 3.7%, compared to 13.3% for the first quarter of fiscal 2022.
  • Operating loss was $4.7 million compared to operating profit of $13.3 million for the first quarter of fiscal 2022.
  • Net loss was $7.8 million, or $0.44 per share, compared to net earnings of $8.7 million, or $0.46 per share, for the first quarter of the year. fiscal year 2022.
  • Adjusted EBITDA was $2.3 million, compared to $19.8 million for the first quarter of fiscal 2022.
  • In October 2022, an existing credit facility was amended and extended to support future growth and provide additional liquidity.
  • Frank Blake, non-executive chairman of Delta Air Lines, Inc., joined the board, adding decades of business leadership experience.

Adjusted EBITDA and net debt are non-GAAP financial measures. The tables included in this press release reconcile each non-GAAP financial measure to its most directly comparable GAAP financial measure.

Eddie Ingle, CEO of Unifi, said, “Our first quarter fiscal 2023 results were impacted by a challenging demand environment and a volatile global market. As brand and retailer inventories have recently reached historic highs, apparel companies and retailers have reduced orders and postponed some programs to the 2023 calendar. As a result, our demand visibility has rapidly diminished. While we believe these destocking measures will be temporary, the duration of this disruption is uncertain. As a result, we quickly implemented significant cost reduction measures in North America to improve short and long term profit margins. Our business remains well positioned to support the continued acceleration in demand for sustainable fibers.

First Quarter of Fiscal 2023 vs. First Quarter of Fiscal 2022
Net sales decreased by 8.4% to $179.5 million from $196.0 million, mainly due to lower sales volumes for the Americas and Asia segments in connection with a recent decline in demand for textile products from clothing brands. This decline was partially offset by higher selling prices after months of inflationary cost increases. Demand for apparel production fell significantly in the first quarter of fiscal 2023 as brands and retailers took temporary measures to reduce inventory levels. As a result, the Americas and Asia segments experienced lower revenue following a reduction in customer ordering habits in the US and global markets. Conversely, the Brazil segment generated solid commercial performances in its domestic market where demand for clothing had not suffered.

Gross profit fell from $26.1 million to $6.6 million. Gross profit for the Americas segment decreased by $14.1 million, primarily due to lower sales volumes resulting in lower productivity and lower cost absorption. Brazil segment gross margin decreased by $3.2 million, consistent with the normalization of gross margin levels that occurred in calendar year 2022 following the strong performance of the Brazil segment during the pandemic recovery period. The Asia segment maintained a high gross margin rate but was impacted by weaker demand for apparel production.

Operating loss was $4.7 million compared to operating profit of $13.3 million in the first quarter of fiscal 2022, mainly due to lower gross profit. Net loss was $7.8 million, or $0.44 per share, compared to net income of $8.7 million, or $0.46 per share, impacted by weaker profitability in the United States, contributing to a higher effective tax rate. Adjusted EBITDA was $2.3 million, compared to $19.8 million, which corresponds to the change in operating profit.

Principal of debt was $127.0 million as of October 2, 2022, compared to $114.3 million as of July 3, 2022. As part of previously planned investments in new yarn texturing innovations and working capital to support future growth, cash and cash equivalents decreased to $47.2 million as of October 2, 2022 from $53.3 million as of July 3, 2022. Consequently, net debt was 79.8 million as of October 2, 2022, compared to $61.0 million as of July 3, 2022.

Credit facility update
On October 28, 2022, Unifi renewed and amended its existing credit facility to increase borrowing capacity and extend the maturity date. The Amended Credit Agreement allows for an increase in borrowing capacity from $200.0 million to $230.0 million, extends the maturity date from December 2023 to October 2027, and contains prices, terms and conditions generally consistent with those in force before the modification.

Outlook
The operating environment and textile demand trends for the apparel market are expected to remain subdued for the remainder of calendar year 2022. Future demand visibility has declined due to changing forecasts of a number of customers. While Unifi expects a significant recovery in demand and an acceleration in profitability to occur following the destocking measures currently underway at major apparel brands and retailers, the timing of a recovery in clothing production is uncertain. Accordingly, Unifi is withdrawing its previously published full-year 2023 outlook and forecasts the following for the second quarter of Fiscal 2023:

  • net sales approximately 10-15% lower than in the first quarter of fiscal 2023;
  • continued pressures on profitability and a performance similar to the first quarter of fiscal 2023, mainly attributable to weak cost absorption in the Americas segment in connection with a period of seasonal pressure which includes annual customer closures and holidays exacerbated by lower than normal sales and productivity levels Consolidated adjusted EBITDA between $5.0 million and $0.0 million;
  • continued volatility and unfavorable effective tax rate; and
  • capital expenditure of approximately $10.0-12.0 million as Unifi continues to invest in new yarn texturing machines in the United States, El Salvador and Brazil.

Ingle continued, “While the current operating environment is challenging, we are optimistic about our efforts to remain the global leader in sustainable fibers. Our Repreve products continue to generate a high level of interest from our customers, and we continue to invest in marketing and awareness of our flagship brand.

Ingle concluded: “We are pleased to have the additional liquidity provided by our amended credit facility. As retail apparel inventory levels decline and demand normalizes, we expect our revenue and profitability to accelerate in the second half of fiscal 2023. We will continue to control costs, improve efficiency and to invest prudently in areas of business growth that will support strong long-term business expansion and value creation for all our stakeholders.

Photo courtesy Unifi

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