Gildan Activewear’s Q3 Sales Jump 33 Percent

Gildan Activewear Inc. reported significant earnings improvement in the third quarter ended October 3. Record third-quarter sales of $802 million, was up 33 percent over the prior year and 8 percent over Q3 2019
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“Our record performance for the third quarter was driven by the improved economics of our business, underpinned by our Back to Basics model, the operational excellence of our team and the ongoing recovery in demand, which drove sales volumes which are now above pre-pandemic levels,” said Glenn J. Chamandy, Gildan president and CEO. “Further, I feel confident that our team will continue to navigate through the tight supply chain environment, manage inflationary pressures and deliver results for our shareholders as we continue to move forward.”

We generated sales of $802 million for the quarter, up 33 percent over the prior year and 8 percent above the third quarter of 2019. Strong gross margin expansion drove operating margin of 25.1 percent, and adjusted operating margin of 21.5 percent which was up approximately 930 basis points versus last year and 500 basis points compared to the third quarter of 2019. Sales above pre-pandemic levels, combined with a stronger margin profile, drove record earnings for the quarter with GAAP diluted EPS of $0.95 and adjusted diluted EPS of $0.80 which was up 51 percent compared to the third quarter of 2019. Free cash flow of $232 million was also a record for a third quarter, bringing our year-to-date total to $478 million. Following our announcement of the restart of our normal course issuer bid (NCIB) program in August, we repurchased over 3.3 million common shares at a total cost of approximately $127 million during the quarter. Nonetheless, given the significant free cash flow generation in the quarter, our net debt1 position declined to $287 million, reducing our net debt to adjusted EBITDA1 ratio to 0.4 at the end of the quarter, leaving us with strong ongoing return of capital capability.

Q3 2021 Operating Results
Gildan said, “Sales for the third quarter ending October 3, 2021, totaled $802 million, up 33 percent over the prior year, consisting of activewear sales of $656 million, up 44 percent, and sales in the hosiery and underwear category of $146 million, in line with the prior-year level. The overall sales increase was driven primarily by higher unit sales of activewear and underwear, favorable product mix, as well as lower imprintables promotional spending and accruals. Activewear shipments were up in imprintables channels both in North America and internationally, as well as in North American retail channels, compared to the third quarter last year. Year-over-year in-line hosiery and underwear sales reflected higher underwear unit sales volumes and favorable product mix, offset by lower unit sales of socks, which were impacted by supply tightness for certain products.

“We were pleased to see sales in the quarter grow from pre-pandemic levels, up 8 percent compared to sales of $740 million in the third quarter of 2019. The increase was driven primarily by higher activewear and underwear unit sales volumes and favorable product mix. Increased activewear sales volumes reflected higher POS in North American imprintables, which turned positive compared to the third quarter of 2019, as well as higher sell-through in retail channels, while international POS continued to trend lower than the same period in 2019. Sales in the hosiery and underwear category were up 21 percent, driven by the strength in underwear sales volumes which more than doubled over third quarter 2019 levels, partly offset by lower sales of socks.

“We generated gross profit of $282 million in the quarter and before reflecting a net insurance gain of approximately $30 million, our adjusted gross profit1 totaled $252 million, up 108 percent and 86 percent, respectively, over the prior year, driven by our growth in sales and strong margin performance. Gross margin of 35.1 percent in the quarter was up 1,260 basis points and adjusted gross margin1 of 31.4 percent was up 890 basis points compared to the third quarter of 2020. The significant improvement in adjusted gross margin was primarily due to favorable product mix, lower imprintables promotional spending and accruals, the impact of the non-recurrence of COVID-related costs incurred last year when facilities were running below normal capacity utilization levels, as well as cost benefits stemming from our Back to Basics initiatives.

“Compared to the third quarter of 2019, adjusted gross margin in the third quarter of 2021 was up 400 basis points primarily due to Back to Basics cost efficiencies and lower raw material costs, while net selling prices were essentially in line with third-quarter 2019 levels.

“SG&A expenses for the third quarter of $81 million were up approximately $20 million compared to SG&A expenses of $61 million last year. The year-over-year increase was primarily due to higher variable compensation expenses, partly offset by cost savings stemming from our Back to Basics initiatives. SG&A expenses as a percentage of net sales improved slightly to 10.1 percent compared to 10.2 percent last year, as volume leverage and cost savings more than offset higher variable compensation.

“Compared to the third quarter of 2019, SG&A expenses were up slightly by $2 million, as higher volume-driven distribution expenses and higher variable compensation expenses were largely offset by cost savings stemming from our Back to Basics SG&A rationalization initiatives. Consequently, as a percentage of sales, SG&A expenses of 10.1 percent in the quarter improved by 60 bps compared to 10.7 percent in the third quarter of 2019.

“We generated operating income of $201 million, or 25.1 percent of sales and adjusted operating income1 of $172 million, or 21.5 percent of sales, in the third quarter of 2021 compared to operating income of $69 million, or 11.4 percent of sales, and $74 million, or 12.2 percent of sales, on an adjusted basis last year. The increase in operating and adjusted operating income was driven by higher sales, strong gross and adjusted gross margin performance, partly offset by higher SG&A expenses. Net financial expenses were down $6 million over the prior year, offsetting higher income taxes. Consequently, we reported net earnings of $188 million, or $0.95 per share on a diluted basis, for the three months ended October 3, 2021, and adjusted net earnings1 of $159 million, or $0.80 per share on a diluted basis, compared to net earnings of $56 million, or $0.28 per diluted share, and adjusted net earnings of $59 million, or $0.30 per diluted share in the third quarter last year.

“Adjusted operating margin of 21.5 percent in the third quarter this year was up 500 basis points compared to 16.5 percent in the third quarter of 2019, demonstrating that our Back to Basics strategy which began prior to and accelerated during the pandemic has allowed us to emerge as a stronger more profitable company. Combined with the return to above pre-pandemic sales levels, we delivered adjusted diluted EPS growth of 51 percent in the quarter, compared to adjusted diluted EPS of $0.53 in the third quarter of 2019.

“We generated record third-quarter free cash flow of $232 million, bringing our year-to-date total to $478 million driven by strong earnings, improved working capital management and the timing of insurance collections related to the 2020 hurricanes. The company ended the third quarter of 2021 with net debt of $287 million and a net debt leverage ratio of 0.4 times net debt to trailing twelve months adjusted EBITDA.”

Year-to-Date Operating Results
Gildan said,  “Net sales for the nine months ended October 3, 2021, of $2,138 million were up 66 percent over the same period last year, reflecting increases of 81 percent in activewear sales and 21 percent in the hosiery and underwear category. The year-over-year increase in activewear sales where we generated sales of $1,738 million was primarily driven by volume increases in all channels and a favorable product mix. Higher imprintables sales volumes were driven by positive POS and the impact of the non-recurrence of significant destocking by distributors which occurred last year. Similarly, the increase in the hosiery and underwear category where we generated sales of $401 million in the first nine months of 2021 was also driven by higher sales volumes in both underwear and in sock products compared to last year, as well as favorable product mix.

“On a year-to-date basis, we generated gross profit of $711 million and gross margin of 33.3 percent compared to a gross profit of $94 million and gross margin of 7.2 percent in the prior year. Adjusted gross profit for the first nine months of 2021 totaled $663 million, or 31.0 percent of sales, up from an adjusted gross profit of $128 million and adjusted gross margin of 9.8 percent in the same period last year. The significant year-over-year improvement in gross and adjusted gross margin was mainly due to the non-recurrence of COVID and certain Back to Basics related charges incurred primarily in the first half of 2020, cost benefits from our Back to Basics initiatives, stronger product mix, lower promotional spending and accruals this year and lower raw material costs. Gross margin in the first nine months of 2021 also included the impact of net insurance gains of $49 million and lower year-over-year SKU rationalization charges which were taken in the first half of the prior year.

“SG&A expenses in the first nine months of 2021 totaled $234 million, up $33 million from last year primarily attributable to higher variable compensation expenses and higher volume-driven distribution costs, partly offset by cost savings stemming from our Back to Basics initiatives. As a percentage of sales, SG&A expenses improved 460 basis points to 10.9 percent of sales compared to 15.5 percent in the same period last year reflecting the benefit of volume leverage and unit cost efficiencies.

“On a year-to-date basis, we generated operating income of $475 million, or 22.2 percent of sales compared to an operating loss of $260 million last year. Adjusted operating income totaled $431 million, or 20.2 percent of sales, compared to an adjusted operating loss of $88 million last year. The improvement in operating and adjusted operating income was driven by the significant year-over-year sales recovery, strong gross and adjusted gross margin performance and SG&A leverage. The increase in operating income also reflected the non-recurrence of the goodwill impairment charge of $94 million incurred in the first quarter of 2020 and lower year-over-year restructuring and acquisition-related costs tied primarily to our Back to Basics initiatives. Consequently, we reported net earnings of $433 million, or $2.18 per share on a diluted basis and adjusted net earnings of $390 million or $1.96 per diluted share, for the first nine months of 2021, compared to a net loss of $293 million, or $1.48 per diluted share, and an adjusted net loss of $126 million, or $0.64 per diluted share, respectively, in the same period last year.”

Outlook Commentary
Gildan said, “The recovery from the pandemic continues to progress well in North America driving positive POS trends compared to pre-COVID 2019 levels. Further, while supply chain tightness in certain areas and rising inflationary pressure are creating headwinds across the industry, we believe our relative positioning is strong given our vertically-integrated manufacturing platform. This combined with recent pricing actions implemented in the fourth quarter this year, gives us confidence that we are well-positioned to manage through current inflationary pressures and to continue to be in a position to deliver on our operating margin target. More importantly, as our focus shifts to a capacity, innovation and ESG-driven, sustainable growth strategy, it gives us confidence that we are well placed to capitalize on market share opportunities and create long-term value for our shareholders.”

Photo courtesy Gildan