Gildan Activewear’s Profits Soar 42 Percent in Q3

Year-ago results were adjusted for last year’s comparative results to reflect a
restructuring charge of U.S. 1 cent a share related to the
consolidation of U.S. retail distribution activities. All figures are in U.S. dollars.

EPS was 7 cents ahead of the company’s guidance for the third
quarter of approximately 70 cents, which it had provided on May 11,
2011, due primarily to more favorable net selling prices which more
than offset the impact of lower than projected unit sales volumes and
unfavorable product-mix.

Net sales in the third quarter amounted to U.S. $529.8 million, up 34.0
percent from $395.3 million in the third quarter of fiscal 2010.
The company had previously forecast that third quarter sales would be
close to $550 million. Sales of activewear and underwear amounted
to $424.6 million, up 20.9 percent from fiscal 2010, and sales of
socks were $105.2 million, up 139.1 percent from last year.

Gross margins in the third quarter were 28.3 company compared to 27.1 company in the third quarter of fiscal 2010, due to manufacturing efficiencies and the impact of the Gold Toe Moretz acquisition. The impact of higher net selling prices on percentage gross margins offset the impact in the quarter of the higher cost of cotton. Gildan’s cost of cotton in the third quarter was approximately U.S. $1.25 per pound, compared to $0.64 per pound in the third quarter of fiscal 2010, and in line with the company’s forecast for the quarter. Gross margins for the third quarter had been projected to be in the range of 26 company-26.5 company. The higher than projected gross margins in the third quarter were due to more favourable net selling prices, partially offset by unfavourable product-mix due to the later timing of fleece programs which are being shipped in the fourth quarter.

SG&A expenses in the third quarter were $56.5 million, or 10.7 company of net sales, compared with $39.9 million, or 10.1 company of net sales, in the third quarter of fiscal 2010. Excluding the impact of the acquisition of Gold Toe Moretz, SG&A expenses were approximately U.S. $3.5 million higher than the third quarter of last year due primarily to increased retail marketing expenses and a $1.4 million write-off of obsolete assets.

Cash Flow and Financial Position

The company ended the third quarter with cash and cash equivalents of $89.0 million and $252.0 million of bank indebtedness, as a result of financing the acquisition of Gold Toe Moretz for approximately U.S. $350 million during the quarter. The company announced on June 30, 2011 that it had increased the amount of its revolving bank credit facility from $400 million to U.S. $800 million, in order to ensure continuing financing flexibility to take advantage of potential acquisition opportunities which complement its organic growth strategy.

EBITDA in the third quarter amounted to $115.4 million. The company generated free cash flow of $22.9 million during the third quarter after financing $51.2 million of increases in non-cash working capital, due primarily to seasonal increases in accounts receivable and the higher cost of cotton and other cost inputs in inventories, and $33.4 million of capital expenditures.

Year-To-Date Sales and Earnings

Net sales for the first nine months amounted to $1,244.3 million, up 32.0 company from $942.5 million in the first nine months of fiscal 2010. The growth in sales revenues was due to increased unit sales volumes for activewear and underwear and higher net selling prices, as well as the impact of the acquisition of Gold Toe Moretz, partially offset by lower organic sock sales. Unit sales growth in activewear and underwear of 13.0 company reflected the recovery in market conditions in the U.S. wholesale distributor channel in the first half of the fiscal year, the company’s penetration in other screenprint markets and increased shipments of activewear and underwear to mass-market retailers, partially offset by weaker market demand in the third fiscal quarter.

Net earnings for the first nine months amounted to $191.4 million or U.S. $1.56 per share, up 35.3 company and 34.5 company respectively from $141.5 million or U.S. $1.16 per share in the first nine months of fiscal 2010. Adjusted net earnings before restructuring and other charges were U.S. $194.7 million or $1.59 per share, up 33.9 company and 33.6 company respectively from $145.4 million or $1.19 per share in the first nine months of last year. The growth in earnings and EPS was due to increased sales revenues for activewear, which, together with the earnings and EPS accretion attributable to the Gold Toe Moretz acquisition and lower income taxes, more than offset the impact of lower organic sock sales, lower gross margins in the first fiscal quarter, higher cotton and other input costs, and increased selling, general and administrative expenses.

Outlook

The company believes it is prudent to develop its business plans and provide updated guidance for the fourth quarter of the fiscal year based on the assumption of continuing weak economic and market conditions. The company’s guidance for the fourth quarter reflects the assumption that overall industry unit shipments from U.S. distributors to U.S. screenprinters will decline by approximately 5 company compared to the fourth quarter of fiscal 2010. The company’s previous guidance had assumed positive demand growth of 3 company in the fourth quarter. In addition, the company is assuming weak consumer demand in mass-market retail and low inventory replenishment by retailers.

In view of this assumed environment, the company has recently initiated promotional discounting in the U.S. distributor channel, in order to stimulate industry demand and reinforce its market share leadership.

Based on the above assumptions, the company is projecting sales revenues in the fourth quarter of slightly below U.S. $500 million, gross margins of approximately 22 company and EPS of approximately U.S. $0.40, resulting in projected full year fiscal 2011 sales revenues in excess of U.S. $1.7 billion and full year adjusted diluted EPS of approximately U.S. $2.00, compared to its guidance provided on May 11, 2011 of sales of approximately U.S. $1.8 billion and EPS of U.S. $2.00 – U.S. $2.10. Gross margins for fiscal 2011 are projected to be slightly above the company’s previous guidance provided in May of 25.5 company. The company is assuming cotton costs of approximately U.S. $1.60 per pound in its cost of goods sold in the fourth quarter, in line with its prior guidance. SG&A expenses for fiscal 2011 are projected to be slightly higher than the company’s previous guidance of 11.5 company of sales.

The company plans to continue to run all of its manufacturing facilities at full production capacity during the fourth quarter, in spite of the uncertain economic environment, in order to rebuild inventories to optimal levels and to position the company to take advantage of any improvement in market conditions and pursue its growth initiatives in fiscal 2012. The company continues to project full year capital expenditures in excess of U.S. $150 million in fiscal 2011 and to be committed to proceeding with the ramp-up of its new Rio Nance V textile facility in fiscal 2012. The company currently intends to initiate sales and earnings guidance for fiscal 2012 when it reports its results for its fourth quarter and full fiscal year in early December. While it is premature to provide guidance for fiscal 2012 at this time, the company notes that it has completed the fixation of cotton to be consumed in cost of sales in the first two quarters of fiscal 2012, and is projecting cotton costs in the first two quarters to be successively lower than in the fourth quarter of fiscal 2011. The company currently expects that its cotton costs will continue to decrease in the second half of fiscal 2012, based on current prices for cotton futures.