Gildan reported net earnings of $21.4 million and diluted EPS of 18 cents for the fourth quarter of fiscal 2008, down 47.7% from earnings of $40.9 million, or 34 cents per share, during the fourth quarter of fiscal 2007. Fourth quarter results in fiscal 2008 included restructuring and other charges of $1.0 million after tax. Comparative results for fiscal 2007 included restructuring and other charges of $4.9 million after tax, or 4 cents per share. Restructuring and other charges in both years were primarily related to the restructuring and ongoing carrying costs pursuant to the closure of Canadian and U.S. manufacturing facilities.
Before reflecting the impact of restructuring charges in both fiscal years, adjusted net earnings were $22.4 million in the fourth quarter of fiscal 2008, compared to adjusted net earnings of $45.8 million in the fourth quarter of fiscal 2007. The $23.4 million decrease in adjusted net earnings was due to a $26.9 million, or 22 cents per share, one-time income tax charge resulting from the settlement of the Canada Revenue Agency (“CRA”) audit, which is described in a separate press release issued today. Excluding the impact of the tax charge, adjusted net earnings in the fourth quarter of fiscal 2008 were $49.3 million, or 41 cents per share. Compared to the fourth quarter of last year, higher activewear selling prices, higher activewear unit sales volumes, increased manufacturing efficiencies from the consolidation of textile facilities and the accretive impact of the acquisition of V.I. Prewett & Son, Inc. (“Prewett”) were partially offset by higher cotton and energy costs, more unfavourable activewear product-mix, higher selling, general and administrative and depreciation expenses and the non-recurrence of income tax benefits in the amount of $1.9 million recognized in the fourth quarter of fiscal 2007 relating to a prior taxation year which became statute-barred during fiscal 2007.
Sales in the fourth quarter of fiscal 2008 amounted to $324.7 million, up 27.4% from $254.9 million in the fourth quarter of last year. The increase in sales revenues was due to the impact of the acquisition of Prewett, an approximate 10.2% increase in activewear unit selling prices and an 8.5% increase in unit sales volumes for activewear and underwear. The growth in activewear unit sales in the fourth quarter was due to continuing market share penetration in all product categories in the U.S. wholesale distributor channel, as overall industry shipments from U.S. wholesale distributors to screenprinters declined by 3.1% in the quarter, while unit sales of Gildan products increased by 7.2% in spite of inventory constraints during the quarter which limited Gildan's ability to service demand in the U.S. screenprint channel, as well as demand in Europe. The overall decline in U.S. industry shipments primarily reflected lower demand for promotional white T-shirts. The table below summarizes data from the S.T.A.R.S. report produced by ACNielsen Market Decisions, which tracks unit volume shipments from U.S. wholesale distributors to U.S. screenprinters, for the quarter ended September 30, 2008.
Gildan Industry
Gildan Gildan Unit Growth Unit Growth
Market Share Market Share Q4 2008 vs. Q4 2008 vs.
Q4 2008 Q4 2007 Q4 2007 Q4 2007
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53.4% 48.2% All activewear 7.2% (3.1%)
products
54.4% 49.1% T-shirts 7.8% (2.5%)
49.9% 45.5% Fleece 5.2% (4.2%)
37.8% 35.7% Sport shirts (8.7%) (13.8%)
Gross margins of 32.1% in the fourth quarter of fiscal 2008 were essentially flat compared to last year. The positive gross margin impact of higher activewear selling prices and favourable manufacturing efficiencies from the consolidation of textile facilities was offset by higher cotton and energy costs, unfavourable product-mix and a higher proportion of U.S. manufactured socks due to the acquisition of Prewett, which provide lower gross margins than the company's activewear products and socks produced in Gildan's new sock manufacturing facility in Honduras.
Selling, general and administrative expenses were $39.1 million, or 12.1% of sales, compared to $27.9 million, or 10.9% of sales in the fourth quarter of fiscal 2007. The increase in selling, general and administrative expenses was due to the acquisition of Prewett, higher distribution and transportation expenses, a provision of $1.5 million for non-collection of accounts receivable, and higher corporate infrastructure costs. The increase of $5.4 million in depreciation and amortization expenses was primarily due to the ramp-up of major capacity expansion projects and the acquisition of Prewett, including the amortization of acquired intangible assets.
The company recorded an income tax expense of $25.3 million in the fourth quarter of fiscal 2008, compared to an income tax recovery of $4.6 million in the fourth quarter of fiscal 2007. The current year expense includes a one-time income tax charge of $26.9 million, or 22 cents per share, related to the settlement of the CRA audit. The fourth quarter of fiscal 2007 included a one-time income-tax recovery of $1.9 million relating to a prior taxation year which became statute-barred during fiscal 2007.
Full Year Sales and Earnings
Sales for fiscal 2008 were $1,249.7 million, up 29.6 % from $964.4 million in fiscal 2007. The increase in sales was due to a $151.5 million increase in sock sales, primarily due to the acquisition of Prewett, an increase of approximately 6.7% in activewear selling prices and a 10.2% increase in unit sales volumes for activewear and underwear.
Net earnings were $144.6 million, or $1.19 per share on a diluted basis, in fiscal 2008, compared to net earnings of $130.0 million, or $1.07 per share in fiscal 2007. Results included restructuring and other charges of $4.9 million after tax, or 4 cents per share, in fiscal 2008 and $27.3 million after tax, or 22 cents per share, in fiscal 2007.
Before reflecting restructuring and other charges in both years, adjusted net earnings were $149.5 million, compared to adjusted net earnings of $157.3 million in fiscal 2007. The decrease in adjusted net earnings was due to a one-time income tax charge of $26.9 million related to the settlement of the CRA audit. Excluding the one-time income tax charge, adjusted earnings and adjusted earnings per share in fiscal 2008 were $176.4 million and $1.45, respectively. Compared to fiscal 2007, higher cotton and energy costs, production inefficiencies in the Dominican Republic facility, increased selling, general and administrative, depreciation and interest expenses, and the non-recurrence of income tax benefits totaling $7.6 million relating to a prior taxation year which became statute-barred in fiscal 2007 were more than offset by the favourable impact of higher activewear selling prices, growth in activewear unit sales volumes, favourable manufacturing efficiencies resulting from the consolidation of textile facilities, and the accretive impact of the Prewett acquisition.
Adjusted diluted EPS of $1.45 excluding the income tax charge and the restructuring charges were at the low end of the company's most recent EPS guidance range of $1.45 to $1.50, which did not assume the income tax charge related to the settlement of the CRA audit. The company was at the low end of its guidance range due to lower than projected results in the fourth quarter. In the fourth quarter, favourable activewear selling prices, due to lower than projected promotional discounts, were more than offset by lower activewear unit sales, as a result of inventory constraints, more unfavourable activewear product-mix due to a lower than anticipated proportion of sport shirts and fleece, lower than planned sock sales due to a weak back-to-school season in retail, and a doubtful account provision of $1.5 million.
Fiscal 2008 Cash Flows
The company generated free cash flows of $148.4 million in fiscal 2008. Cash flows from operating activities for fiscal 2008 amounted to $238.9 million, which, together with increased accounts payable of $27.7 million, was used to finance a $32.1 million increase in inventories, capital expenditures of $97.0 million mainly related to major textile sand sock manufacturing capacity expansion projects and the acquisition of Prewett, effective October 15, 2007, for a purchase price of $126.8 million, plus a contingent payment of $10.0 million.
Outlook for Fiscal 2009
Industry demand in the U.S. screenprint channel during the first two months of the first quarter of fiscal 2009 has been extremely weak, mirroring the rapid and severe downturn in overall economic and stock market performance and sentiment during October and November, which has resulted in a dramatic curtailment of consumer and corporate spending. According to the S.T.A.R.S. report for the month of October, overall industry shipments from U.S. wholesale distributors to screenprinters across all product categories declined by 12.5% compared to October 2007. Although the S.T.A.R.S. report indicates that Gildan achieved significant increases in market share, the company's unit volume shipments to distributors in October declined from last year, due to the decline in end-use demand combined with high inventories at the distributor level in the context of the current market conditions.
Although final S.T.A.R.S. data for the month of November is not yet available, market conditions in the U.S. screenprint channel have deteriorated further. Preliminary S.T.A.R.S. data for November indicate that overall industry shipments in the month declined from last year by close to 20%. Consequently, Gildan expects its sales and EPS in the first quarter of fiscal 2009 to decline materially from the first quarter of last year as a result of lower unit shipments and severe promotional discounting in the month of December, combined with significantly higher cotton costs compared with the first quarter of fiscal 2008, and the consumption of inventories produced when energy and commodity costs were at peak levels. Based on these assumptions, the company is currently forecasting first quarter fiscal 2009 adjusted EPS of approximately breakeven to 5 cents per share, compared with adjusted EPS of 23 cents in the first quarter of fiscal 2008.
While the first quarter is seasonally the lowest sales quarter of the fiscal year and as such may not be indicative of full year trends, the company is currently planning for the balance of fiscal 2009 on the basis of assuming a continuing negative outlook for industry demand in the U.S. screenprint channel throughout the year. The company's current planning scenario for fiscal 2009 assumes that overall industry unit shipments in the U.S. screenprint channel will decline by approximately 10% compared with fiscal 2008, and that the ensuing unfavourable industry supply/demand balance will result in significant discounting of industry selling prices, which has already started to occur.
Based on the assumption of continuing unfavourable market conditions and the assumptions set out below, the company is initiating EPS guidance for fiscal 2009 with a wide range of $1.10-$1.30 in fiscal 2009, before restructuring charges which are not expected to be material.
The company's EPS guidance assumes an increase of approximately 8% in Gildan's activewear and underwear unit volumes compared with fiscal 2008, to approximately 48 million dozens, as the company is implementing strategies to maximize its unit volume growth in its target markets, including an increasing focus on servicing its international markets, for the balance of the year. In addition, the company expects EPS in fiscal 2009 to be favourably impacted by the improved performance of the Dominican Republic facility in line with the company's expectations, together with lower projected energy costs. However, these positive factors are now forecast to be more than offset by significant selling price discounting, which is expected to result in a reduction in average activewear selling prices of 7%-9% in fiscal 2009 compared to fiscal 2008, and by the impact of higher cotton costs, which are expected to increase by approximately 10% in fiscal 2009 compared to fiscal 2008.
The company is assuming weaker market conditions in fiscal 2009 in the mass-market retail channel. However, the company will continue its efforts to optimize its product-mix and cost structure for mass-market retail, and to successfully manage the transition to major new retailer private label brands, in order to be well positioned to pursue its growth strategy in retail when new production capacity comes on-stream in fiscal 2010. The company's guidance takes into account the projected impact of cost reduction initiatives arising from the consolidation of sock manufacturing, and also assumes the non-recurrence of acquisition integration issues and charges which occurred in fiscal 2008. No selling price increases in socks are assumed in fiscal 2009.
In the event these assumptions are not realized, or that economic conditions are less or more favourable than assumed in the company's forecast, EPS may be lower or higher than projected.
In the assumed economic environment, the company will place emphasis on careful management of its capital expenditures in fiscal 2009. The company intends to undertake an incremental capacity expansion of its Dominican Republic textile facility, at a low capital cost, and is also incrementally expanding its Rio Nance I textile facility in Honduras. These expansions of existing facilities will increase annual production capacity by approximately 7-8 million dozens, and allow the company to support its projected sales growth while preserving liquidity and proceeding more slowly and cautiously with its major capital investment in its new Rio Nance 5 textile facility in Honduras. However, the company has not changed its plans to construct both Rio Nance 5 and its second sock facility in Honduras, which are integral to its long-term strategic growth and cost reduction initiatives. The company today announced plans to phase out sock finishing operations in the U.S. by the end of June and consolidate operations in Honduras, in order to remain globally competitive in the current economic conditions. Gildan regrets the impact on its U.S. employees affected by this consolidation. Any costs associated with the closure of sock finishing facilities will be accounted for as restructuring and other charges in fiscal 2009.
Gildan is now projecting total capital expenditures of approximately $115 million in fiscal 2009, compared with its previous estimate of approximately $160 million. The company's objective in fiscal 2009 is to remain cash positive after taking account of capital expenditures, approximately $70 million of projected additional working capital to support its planned growth in fiscal 2010 and the cash payments required following the settlement of the CRA audit.
