Gildan Activewear, Inc. reported net sales declined 8 percent to $720 million for the fourth quarter ended January 1, compared to the prior-year comparable quarter.

Activewear sales were down 5 percent to $595 million and sales in the hosiery and underwear category were down 21 percent of $125 million. The decline in activewear sales was due to lower volumes resulting from a combination of lower POS in retail end-markets, and to a lesser extent, at North American distributors, as well as the absence of inventory replenishment versus a year ago, partly offset by higher net selling prices and the favorable impact of the mix. International sales in the quarter were up 16 percent over the prior-year period, benefiting from inventory replenishment and higher net selling prices. In the hosiery and underwear category, the sales decline compared to last year was due to weak POS in retail and the impact of retailers continuing to reduce inventory levels with these impacts slightly offset by higher net selling prices.

Gross margin of 32.6 percent in the quarter was up 340 basis points over 2021 due mainly to the impact of additional hurricane insurance recoveries recognized in the fourth quarter of 2022. Before reflecting the net impact of accrued insurance recoveries in both years, adjusted gross margin of 29.1 percent was down 150 basis points compared to 30.6 percent last year. The decline over 2021 was primarily due to higher raw material costs and manufacturing costs which more than offset higher net selling prices and a favorable product mix.

SG&A expenses for the fourth quarter of $76 million were down $5 million, or 6 percent, compared to last year due to lower volumes, lower variable compensation expenses, and cost containment efforts, which more than offset the impact of cost inflation. SG&A expenses, as a percentage of net sales, increased slightly by 20 basis points to 10.5 percent compared to 10.3 percent last year, as the benefit of lower expenses was more than offset by sales deleverage.

In the fourth quarter, Gildan recorded a non-cash impairment charge for the company’s Hosiery CGU of $62 million relating to intangible assets acquired in previous sock and hosiery business acquisitions with this charge driven by current market conditions. Under International Financial Reporting Standards (IFRS) Gildan needs to test for impairment annually and the charge compares to a net reversal of impairment of $32 million recorded in the fourth quarter of 2021 for the same CGU. After reflecting the net impact of the above items for both years, operating income in the fourth quarter of $93 million was down from $177 million last year.

On an adjusted basis, before reflecting the net impact of intangible asset impairment charges and reversals, accrued insurance recoveries, and restructuring and acquisition-related costs in both years, Gildan generated an adjusted operating income1 of $136 million, or 18.8 percent of sales, compared to $160 million, or 20.4 percent of sales, in the fourth quarter of 2021. The year-over-year decrease in adjusted operating income reflected lower sales and lower adjusted gross margin, partly offset by lower SG&A expenses, while the 160 basis point decrease in adjusted operating margin1 was due to the decrease in adjusted gross margin. Net financial expenses of $13 million were up $8 million over the prior year. As a result, Gildan reported net earnings of $84 million, or $0.47 per diluted share, for the fourth quarter of 2022 and adjusted net earnings1 of $117 million, or $0.65 per diluted share. This compared to net earnings of $174 million, or $0.89 per diluted share, and adjusted net earnings of $149 million, or $0.76 per diluted share, respectively, in the fourth quarter of last year.

Driven by strong working capital management in the fourth quarter, cash flow from operating activities increased to $189 million, up $35 million from the prior year of $154 million. Capital expenditures of $245 million for the full year, which included $80 million in the fourth quarter, came in line with the company’s target range of 6 percent to 8 percent of annual sales and related to capacity and vertical integration projects, including the construction of the company’s new large-scale, low cost manufacturing complex in Bangladesh which is progressing well and planned to start production ramp-up at the end of the first quarter of 2023.

Gildan generated free cash flow in the quarter totaling $131 million, bringing the total for the year to $198 million in 2022, down from $594 million last year. The decrease in free cash flow reflected increases in inventory levels, from below optimal levels in the fourth quarter of the prior year, which have now put us in a strong position to service the company’s customers, as well as higher capital expenditures. The Company ended the fourth quarter of 2022 with net debt of $874 million, up from $530 million at the end of 2021 and a net debt leverage ratio1 of 1.1 times adjusted EBITDA1.

Full Year 2022 Results
Net sales for the year ended January 1, 2023, were $3,240 million in 2022, up 11 percent over the same period last year, reflecting a 17 percent increase in activewear, partly offset by a decline of 14 percent in the hosiery and underwear category. The year-over-year increase in activewear sales where Gildan generated sales of $2,763 million was primarily driven by higher net selling prices and a favorable product mix. The decline in the hosiery and underwear category, where Gildan generated sales of $478 million, 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 full year 2022, Gildan realized gross margins of 30.6 percent compared to 32.2 percent, in the prior year. On an adjusted basis, gross margin for 2022 was 29.8 percent of sales, compared to 30.9 percent of sales in the same period last year reflecting higher raw material and other manufacturing costs, and the impact of the non-recurrence of an $18 million (or 60 basis points) one-time USDA cotton subsidy in connection to the Pandemic Assistance for Cotton Users program which was recorded in the first quarter of 2021. These factors were 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 recognition of higher net hurricane insurance gains last year of approximately $20 million (or 70 basis points) and the one-time USDA cotton subsidy described above.

SG&A expenses in 2022 of $324 million were up $10 million compared to 2021 due to the impact of inflation on overall costs, partially offset by lower variable compensation expenses and the benefit of the company’s cost containment measures. As a percentage of sales, the 80 basis point improvement in SG&A expenses primarily reflected the benefit of sales leverage.

For the full year 2022, Gildan generated an operating income of $603 million or 18.6 percent of sales, down from $652 million or 22.3 percent of sales in the same period last year, reflecting the non-cash impairment charge for the company’s Hosiery CGU taken in 2022 versus a reversal of impairment taken in 2021, and lower insurance accounting gains compared to last year. On an adjusted basis, Gildan generated operating income1 of $639 million, which translated to an adjusted operating margin1 of 19.7 percent compared to $591 million and 20.2 percent, respectively, last year. The increase in adjusted operating income for 2022 was driven primarily by the 11 percent full-year increase in sales, partly offset by a lower operating margin. The decrease of 50 basis points on an adjusted basis largely reflected lower gross margins which offset the benefit of SG&A leverage. As a result, the company’s GAAP net earnings for 2022 came in at $542 million down 11 percent compared to last year, with the company’s adjusted net earnings1 for 2022 at $575 million up 7 percent compared to last year. After reflecting the impact of share repurchases made under the company’s NCIB programs, full-year GAAP diluted EPS of $2.93 was down 5 percent, and adjusted diluted EPS1 of $3.11 was up 14 percent, compared to GAAP diluted EPS of $3.07 and adjusted diluted EPS of $2.72 last year.

In the first part of 2023, Gildan expects continued headwinds tied to the demand environment and to strong comparative periods, particularly as Gildan cycles post-pandemic inventory replenishment in the first quarter. Gildan also expects increased margin pressure in early 2023 as Gildan works through higher raw material and input costs currently in the company’s inventories. However, as Gildan moves past the first quarter, Gildan expects these headwinds to abate, enabling us to resume the company’s growth trajectory and the company’s path towards delivering on performance targets. Accordingly, for 2023 Gildan expect the following:

Revenue growth for the full year to be in the low single-digit range:

  • Full-year adjusted operating margin to fall within the company’s 18 percent to 20 percent annual target range, despite expected margin pressure in the first quarter driving us 200 to 300 basis points below the low end of the company’s target range;
  • CAPEX to come in at the lower end of the company’s previously stated 6 percent to 8 percent range;
  • Free cash flow generation as investments in the company’s inventories, which have put it in a strong position to service the company’s customers, are now mostly behind it; and
  • Adjusted diluted EPS in line with 2022, which assumes the continuation of share repurchases aligned with the company’s capital allocation targets of purchasing approximately 5 percent of the outstanding public float in 2023.