Gildan Activewear Inc. reported net sales fell 19.2% to $307.8 million in the fiscal third quarter ended July 5 from $380.8 million in the third quarter of last year. Sales of activewear and underwear were $258.1 million, down 15.6% from $305.9 million last year, and sales of socks were $49.7 million, down 33.6% from $74.9 million in the third quarter of fiscal 2008.
The decrease in sales of activewear and underwear was due to more unfavorable product-mix, primarily as a result of a lower proportion of sales of higher-valued fleece and long-sleeve T-shirts, a 2.6% decline in net selling prices for activewear, due to increased promotional activity compared to last year, the impact of the stronger U.S. dollar on Canadian and international sales, and a 3.5% decline in unit sales volumes.
The third quarter of Gildan's current fiscal year included one week fewer than the third quarter of fiscal 2008. The third quarter of fiscal 2008 included an extra week in order to align the company's 52-week reporting cycle with the calendar year.
The reduction in unit sales volumes compared to last year was primarily due to a 16.6% decline in overall industry shipments to screenprinters in the U.S. wholesale distributor channel, as well as the non-recurrence of the extra week of sales included in the third quarter of fiscal 2008. These factors were largely offset by increased market share, replenishment of distributor inventories, and increased shipments to international markets and imprinted private label customers.
Net earnings of $41.5 million and diluted EPS of 34 cents for its third fiscal quarter ended July 5, compared with net earnings of $54.5 million and diluted EPS of 45 cents in the third quarter of fiscal 2008. Results in both years included after-tax restructuring charges, amounting to $3.4 million and $2.3 million respectively. Restructuring charges in the third quarter of fiscal 2009 related primarily to the previously announced consolidation of sock finishing operations. Net earnings before restructuring charges in the third quarter of fiscal 2009 amounted to $44.9 million or 37 cents per diluted share, compared to $56.8 million or 47 cents per share a year ago. The reduction in net earnings and EPS before restructuring charges was primarily due to lower unit sales volumes, as a result of weak economic conditions, and lower gross margins, primarily as a result of unfavorable product-mix and lower activewear net selling prices, partially offset by lower SG&A and financial expenses, and the impact of income tax recoveries. EPS in the third quarter of fiscal 2009 included a 5 cents per share benefit of income tax recoveries related to prior fiscal years. Before the impact of income tax recoveries, adjusted EPS in the third fiscal quarter was 32 cents per share.
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 calendar quarter ended June 30, 2009:
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Three months ended Three months ended
June 30, June 30,
2009 vs. 2008 2009 2008
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Unit Growth Market Share
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Gildan Industry Gildan
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All products (9.6)% (16.6)% 55.7% 51.9%
T-shirts (9.3)% (16.2)% 56.4% 52.6%
Fleece (13.1)% (15.0)% 52.7% 51.7%
Sport shirts (18.6)% (26.6)% 38.1% 34.6%
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Overall inventories in the U.S. wholesale distributor channel at June 30, 2009 were down by 13.2% compared with a year ago, and Gildan's share of distributor inventories was 49.5%, compared with its market share of 55.7% in the third quarter as shown above.
In addition to the impact of one week less of sales in the third quarter of fiscal 2009, the reduction in sock sales in the mass-retailer channel was due to the discontinuance of sock product-lines in fiscal 2008, combined with the timing impact of year-over-year fluctuations in retailer inventory levels including the impact in the current year of the changeover to new retailer private label brands. Sales of Gildan products by major retail customers to consumers continue to perform well, in the context of the market, and in particular the company is pleased with the strong initial performance of new private label sock brands.
The company is progressing well in its discussions with mass retailers to secure new retail programs, and continues to expect new retail programs to enhance its sales growth in fiscal 2010 compared to fiscal 2009.
Gross margins in the third quarter were 24.4%, compared to 26.6% last year and 15.8% in the second quarter of the current fiscal year. The reduction in gross margins compared to last year was primarily due to lower net selling prices for activewear, the negative impact of currency fluctuations, more unfavorable product-mix and higher cotton costs. These factors were partially offset by lower manufacturing and energy costs, which favorably impacted gross margins in the third quarter by approximately 450 basis points, in spite of manufacturing downtime taken in the third quarter to balance activewear inventories with projected sales demand.
Gross margin trends improved on a monthly basis during the third quarter. Gross margins are expected to improve slightly in the fourth quarter compared to the third quarter, as more favorable product-mix and lower manufacturing, energy and cotton costs compared to the third quarter are expected to more than offset the impact of assumed increased promotional selling price activity.
Selling, general and administrative expenses, were $36.2 million in the third quarter, or 11.8% of sales, compared to $39.8 million, or 10.5% of sales, in the third quarter a year ago. The decrease in SG&A expenses was primarily due to reduced distribution costs, the impact of the lower-valued Canadian dollar on corporate administrative expenses, and the non-recurrence of an accounts receivable provision recorded in the prior year, partially offset by the timing of variable compensation expense and higher professional and legal fees.
An income tax recovery of $5.8 million in the third quarter primarily reflected a $5.6 million recovery to recognize previously unrecorded tax benefits from prior years. Excluding the impact of the tax recoveries and the tax benefit relating to restructuring charges, the effective income tax rates for the third quarter and the first nine months of fiscal 2009 were 2% and 3% respectively, compared with 5.8% and 6.7% for the corresponding periods of fiscal 2008. The reduction in the effective income tax rate compared with last year reflects a lower proportion of profits earned in higher tax-rate jurisdictions.
Net sales for the nine months ended July 5, 2009 were $736.6 million, down $188.4 million or 20.4% compared to the same period last year. The decrease in net sales was due to a 13.3% decline in activewear unit volumes, unfavorable activewear product-mix, a $39.2 million decrease in sock sales primarily due to the elimination of unprofitable sock product-lines during fiscal 2008, and the negative impact of the stronger U.S. dollar on Canadian and international activewear sales. The lower unit sales volumes for activewear were primarily due to the decline in overall industry unit shipments by U.S. wholesale distributors to screenprinters and inventory reductions by U.S. wholesale distributors, which more than offset Gildan's market share gains in the U.S. screenprint channel during the nine months ended July 5, 2009.
Net earnings for the first nine months were $52.9 million, or $0.44 per share on a diluted basis, compared with net earnings of $124.5 million or $1.02 per share for the same period last year. Before restructuring charges in both years, net earnings for the first nine months of fiscal 2009 were $57.4 million, or $0.47 per share, compared to $128.4 million, or $1.06 per share, for the same period last year. The reduction in net earnings and EPS in the first nine months of fiscal 2009 was due to significantly lower activewear unit sales volumes and gross margins, partially offset by lower SG&A and financial expenses and the impact of the income tax recoveries in the third quarter.
Cash flows from operating activities less cash flows from investing activities resulted in free cash flow generation of $78.5 million in the third quarter.
Inventories at the end of the third quarter were reduced by $40.4 million compared to the end of the second quarter, but were $48.8 million higher than at the end of the third quarter of fiscal 2008, when inventory levels were affected by production constraints. Further manufacturing downtime will be scheduled as required prior to the year-end in order to continue to control activewear inventories, based on the outlook for end-use demand and the level of replenishment of distributor inventories.
Trade accounts receivables were reduced to 41 days of sales outstanding at the end of the third quarter, compared to 51 days at the end of the third quarter a year ago and 45 days at the end of second fiscal quarter. The company continues to be comfortable with its receivables collections and trade credit exposures.
The company ended the third quarter of fiscal 2009 with net indebtedness of $18.5 million, and continues to have significant financing capacity and flexibility under its revolving bank credit facility, which matures in 2013. Capital expenditures for fiscal 2009 are currently projected to be approximately $60-$70 million, in line with the company's projection at the end of the second quarter.
The company continues to expect to have no debt outstanding under its bank credit facility at the fiscal year-end.
Financial Highlights
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(in US$ millions, except
per share amounts or Q3 2008 YTD 2008
otherwise indicated) Q3 2009 Recast(i) YTD 2009 Recast(i)
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Net sales 307.8 380.8 736.6 925.0
Gross profit 75.1 101.3 152.7 251.4
Selling, general and
administrative
expenses (SG&A) 36.2 39.8 100.6 106.1
Operating income 34.5 59.2 46.6 141.4
EBITDA (1) 58.1 79.0 99.1 186.3
Net earnings and
comprehensive income 41.5 54.5 52.9 124.5
Adjusted net
earnings (2) 44.9 56.8 57.4 128.4
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Diluted EPS 0.34 0.45 0.44 1.02
Adjusted diluted
EPS – (2) 0.37 0.47 0.47 1.06
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Gross margin 24.4% 26.6% 20.7% 27.2%
SG&A as a percentage
of sales 11.8% 10.5% 13.7% 11.5%
Operating margin 11.2% 15.6% 6.3% 15.3%
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Cash flows from
operations 80.6 40.7 47.1 168.4
Free cash flow (3) 78.5 21.5 19.4 92.2
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July 5, October 5, July 6,
As at 2009 2008 2008
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Inventories 339.6 316.2 290.8
Accounts receivable 194.1 222.2 254.5
Net indebtedness (4) 18.5 40.6 95.3
