Gildan Activewear, Inc. reported that adjusted earnings per share rose 5 percent in the third quarter ended October 2 year over year. Sales advanced 6 percent as a 13 percent increase in activewear sales offset a 26 percent decline in the hosiery and underwear category.

“The strength of our activewear business, driven by North American imprintables sales, together with the benefits from our vertically-integrated manufacturing model, allowed us to deliver another strong quarter,” said Glenn J. Chamandy, Gildan’s president and CEO. “These results are a testament to the progress we are making under the Gildan Sustainable Growth strategy, which we remain fully focused on as we continue to drive to deliver on our three-year targets.”

Gildan said in its earnings statement, “We generated record third quarter sales of $850 million, up 6 percent year-over-year, as activewear sales to North American imprintable distributors held up well in the quarter, driven by higher net selling prices and sales volumes. We also delivered strong gross margin performance of 29.7 percent in the quarter, despite inflationary cost pressures, and SG&A came in better than anticipated at 9.3 percent of sales, resulting in operating and adjusted operating margins of 20.5 percent and 20.0 percent, respectively, at the high end of our target range. With record sales and strong margin performance in the quarter, GAAP and adjusted diluted EPS totaled $0.84, with adjusted diluted EPS up 5 percent over the prior year. After funding higher working capital requirements, primarily related to higher inventories, we generated cash flows from operating activities in the quarter of $66 million which were used to fund higher capital expenditures, resulting in approximately $7 million of free cash flow1 consumed in the quarter. During the third quarter, we repurchased approximately 3.2 million shares under our normal course issuer bid (NCIB) programs. We ended the quarter with net debt1 of $944 million, bringing our net debt leverage ratio1 to 1.2, at the lower end of the company’s target range.”

Q3 2022 Operating Results
Gildan said, “Net sales for the third quarter ended October 2, 2022, were $850 million, up from $802 million in the third quarter last year and consisted of activewear sales of $742 million, up 13 percent, and sales in the hosiery and underwear category of $108 million, down 26 percent over the prior year. The increase in activewear sales was due to higher net selling prices, partly offset by lower sales volumes, as increased unit sales to North American distributors were more than offset by lower unit sales volumes of activewear stemming from demand weakness in retail and international markets. In the hosiery and underwear category, the sales decline compared to last year was driven by weak demand in retail and the impact of retailers managing their inventory levels.

“We generated gross and adjusted gross profit1 of $252 million in the quarter, down $30 million from gross profit of $282 million last year. After adjusting for the benefit of a net insurance gain of approximately $30 million recorded in the third quarter of 2021, adjusted gross profit was flat year over year, as the sales growth in the quarter was offset by lower gross and adjusted gross margin1 compared to last year. Although we have been able to sustain strong margin performance, gross and adjusted gross margins of 29.7 percent in the quarter were down 540 basis points and 170 basis points, respectively, compared to last year. The decline in gross margin on a GAAP basis included the impact of the non-recurrence of a net insurance gain which benefited gross margin last year by close to 375 basis points. Excluding this impact, the gross margin and adjusted gross margin decline reflected the impact of higher raw material and other manufacturing costs, offset in part by higher net selling prices and a favorable product mix.

“SG&A expenses for the third quarter totaled $79 million, down slightly from $81 million in the same quarter last year, as lower variable compensation expenses and our cost containment efforts more than offset the impact of cost inflation and higher selling expenses. SG&A expenses as a percentage of net sales improved 80 basis points to 9.3 percent compared to 10.1 percent last year, as the benefit of lower variable compensation costs and sales leverage more than offset the impact of cost inflation.

“We generated operating income of $175 million, or 20.5 percent of sales in the quarter and adjusted operating income of $170 million, or 20.0 percent of sales, compared to operating income of $201 million, or 25.1 percent of sales, and adjusted operating income of $172 million, or 21.5 percent of sales in the third quarter last year. The decrease in GAAP and adjusted operating income was primarily due to lower operating margins, which more than offset the growth in sales. On a GAAP basis, the operating income decline also reflected the non-recurrence of the approximate $30 million net insurance gain recognized in the third quarter last year. After reflecting increased net financial expenses due to higher interest rates and average borrowing levels and higher GAAP income taxes, as well as the benefit of a lower outstanding share base, we reported GAAP and adjusted diluted EPS for the quarter of $0.84, down from GAAP diluted EPS of $0.95, but up 5 percent on an adjusted basis compared to $0.80 in the third quarter of 2021.

“Our cash flows from operating activities in the third quarter totaled $66 million and after higher capital expenditures compared to the third quarter last year, we consumed approximately $7 million of free cash flow in the quarter. This is compared to free cash flow of $232 million generated in the third quarter of 2021. The decrease in free cash flow reflected higher inventory levels including the impact of higher unit costs, planned increases in capital expenditures which are tracking in line with our target range of 6 percent to 8 percent of annual sales and the impact of the non-recurrence of the approximate $30 million net cash benefit from insurance proceeds received in the third quarter last year. The increase in capital expenditures primarily relate to capacity projects, including expenditures for the construction of our new large-scale vertically-integrated textile and sewing facility in Bangladesh which is currently underway. The company ended the third quarter of 2022 with net debt of $944 million and a leverage ratio of 1.2 times net debt to trailing twelve months adjusted EBITDA.”

Year-To-Date Operating Results
Gildan said, “Net sales for the nine months ended October 2, 2022, were $2,520 million, up 18 percent over the same period last year, reflecting an increase of 25 percent in activewear sales, partly offset by a decline of 12 percent in the hosiery and underwear category. The year-over-year increase in activewear sales where we generated sales of $2,167 million was primarily driven by higher net selling prices, higher unit sales volumes and favorable product mix. Activewear volume growth reflected the meaningful recovery in demand from COVID-19, particularly in the first half of the year, and our ability to better service demand this year due to stronger inventory levels as compared to the prior year, which was impacted by the hurricanes in Central America in 2020 and yarn labor shortages. The decline in the hosiery and underwear category, where we generated sales of $353 million in the first nine months of 2022, primarily reflected the impact of lower unit sales volumes due to weaker demand in retail and the continued impact of tight inventory management at the retailer level.

“For the first nine months of 2022, we generated gross profit of $758 million, or 30.1 percent of sales compared to gross profit of $711 million, or 33.3 percent of sales for the same period last year. On an adjusted basis, gross profit totaled $756 million, or 30.0 percent of sales compared to adjusted gross profit of $663 million, or 31.0 percent of sales in the same period last year. The $47 million and $93 million increase in gross and adjusted gross profit, respectively, was primarily driven by the 18 percent growth in sales, partly offset by gross and adjusted gross margin declines of 320 and 100 basis points, respectively, compared to the same period last year. Lower gross and adjusted gross margins were primarily the result of higher raw material and other manufacturing costs and the impact of the non-recurrence of an $18 million (or 85 basis points) one-time USDA cotton subsidy in connection to its Pandemic Assistance for Cotton Users program which was recorded in the first quarter of 2021. The unfavorable impact of these factors was partly offset by the benefit of higher net selling prices and product-mix. The year-over-year decline in gross margin on a GAAP basis also reflected the impact of the non-recurrence of net insurance gains of approximately $49 million or 230 basis points recognized in the first nine months of last year.

“SG&A expenses in the first nine months of 2022 totaled $248 million, or 9.9 percent of sales, up $14 million from $234 million, or 10.9 percent of sales, in the same period last year. The increase in SG&A expenses was primarily due to higher selling expenses and the impact of inflation on overall costs, partially offset by lower variable compensation expenses and the benefit of our cost containment measures. As a percentage of sales, the 100 basis point improvement in SG&A expenses primarily reflected the benefit of sales leverage.

“On a year-to-date basis, we generated operating income of $511 million or 20.3 percent of sales, up from $475 million or 22.2 percent of sales in the same period last year. On an adjusted basis, we generated an operating income1 of $504 million, which translated to a year-to-date operating margin of 20.0 percent compared to $431 million and 20.2 percent, respectively, last year. The increase in operating and adjusted operating income for the first nine months of 2022 was driven primarily by the 18 percent year-to-date increase in sales, partly offset by lower operating margins. The year-to-date 190 basis-point declines in operating margin and a slight decrease of 20 basis points on an adjusted basis largely reflected lower gross margins which offset the benefit of SG&A leverage. As a result, our GAAP and adjusted net earnings1 for the first nine months of 2022 came in at $458 million, up 6 percent and 17 percent, respectively, compared to last year. Year-to-date GAAP and adjusted diluted EPS totaled $2.46, up 13 percent and 26 percent, respectively compared to diluted EPS of $2.18 and adjusted diluted EPS of $1.96 last year, the increases of which also reflected the benefit of share repurchases made under the company’s NCIB programs.”

Outlook
Gildan said, “We believe our business and the actions we have taken continue to position us well to navigate through any near-term challenges related to the current environment. Importantly, our large North American business geared toward imprintables channels continues to benefit from demand driven by travel, tourism and large events and is expected to remain relatively stable. On the other hand, where we are seeing continued weakness is with our national account or retail-related customers, which represent a smaller part of our business. Further, in international markets we are also continuing to see ongoing softness in demand. On the cost side, although the impact of higher raw material costs will become more pronounced in the fourth quarter, we remain focused on delivering on our operating profitability target range of 18 percent to 20 percent. More importantly, our proven operational excellence in both good and tough environments as well as the progress we continue to make on the key pillars of our sustainable growth strategy gives us confidence in our ability to deliver on our three-year growth targets outlined in February of this year.”