Gildan Activewear reported earnings rose 8.7 percent in its fourth quarter ended Sept. 29. on an 11.8 percent revenue gain. The growth in earnings was due to strong gains in revenues in both its Printwear and Branded Apparel segments as well as lower cotton costs.
Highlights of the quarter included:
- Fourth Quarter Adjusted EPS of U.S. $0.83 at High End of Prior Guidance
- Adjusted EPS Guidance for Fiscal 2014 Initiated at U.S. $3.00-$3.10
- Announcement of Further New Branded Retail Programs and Brand License
- Capital Expenditures of U.S. $300-$350 Million Projected for Fiscal 2014, Including New Yarn-Spinning Facilities and Initial Investment in New Textile Facility
- Capital Investments in Major Cost Reduction Projects Expected to Generate Savings Starting in Fiscal 2015
- 20 percent Increase in Quarterly Dividend
Fourth Quarter Results
Net earnings were U.S. $96.8 million or U.S. $0.79 per share on a diluted basis for the fourth fiscal quarter ended September 29, 2013, compared with net earnings of U.S. $89.0 million or U.S. $0.73 per share for the fourth quarter of fiscal 2012. Net earnings for the fourth quarter of fiscal 2013 included a U.S. $4.7 million after-tax charge for the cost of unwinding interest rate swaps, which was discussed in previous quarterly press releases, and U.S. $0.5 million after-tax restructuring and acquisition-related costs. Net earnings for the fourth quarter of fiscal 2012 included after-tax restructuring and acquisition- related costs amounting to U.S. $5.9 million. Before reflecting these items in both years, adjusted net earnings for the fourth quarter of fiscal 2013 were U.S. $102.0 million or U.S. $0.83 per share, up 7.5 percent and 6.4 percent respectively compared to adjusted net earnings of U.S. $94.9 million or U.S. $0.78 per share in the fourth quarter of the previous year.
The growth in earnings and EPS in the fourth quarter compared to last year was due to strong growth in sales revenues in both the company’s operating segments and lower cotton costs, partially offset by higher selling, general and administrative expenses and higher income taxes. Adjusted net earnings before income taxes in the quarter increased by 12.2 percent compared to the fourth quarter of fiscal 2012.
Net sales in the fourth quarter amounted to U.S. $626.2 million, up 11.5 percent from U.S. $561.7 million in the fourth quarter of fiscal 2012. The company had projected that net sales for the quarter would be in excess of U.S. $600 million.
Net sales for the Printwear segment amounted to U.S. $423.9 million, up 12.5 percent from U.S. $376.8 million in the fourth quarter of fiscal 2012. Unit sales volumes increased by 18.7 percent from the fourth quarter of last year due to increased shipments in the U.S. printwear market, the non-recurrence of inventory destocking which occurred in the U.S. distributor channel in the fourth quarter of fiscal 2012 and a 37 percent increase in international sales volumes. The positive impact on net sales of higher unit sales volumes was partially offset by lower net selling prices compared to the fourth quarter of last year.
Net sales for Branded Apparel were U.S. $202.2 million, up 9.4 percent from U.S. $184.8 million in the fourth quarter of last year. The growth in sales for the Branded Apparel segment was due to the impact of new Gildan® branded underwear and activewear programs for retail customers, as well as higher sock sales compared to the fourth quarter of last year, partially offset by the company’s strategy to exit certain retailer private label programs.
The company was pleased with the continuing strong consumer demand and resulting retailer sales of its national branded underwear program. The company has also continued to achieve placement of new Gildan® and Gold Toe® branded programs, including the introduction of its premium Gildan PlatinumTM brand and the Gold Toe® G® brand at department stores and a major national retail chain. In addition, the company is pleased to announce that it has obtained the worldwide license for the Mossy Oak® brand for activewear, underwear and socks.
Consolidated gross margins in the fourth quarter were 28.3 percent, compared to 28.5 percent in the fourth quarter of last year. The positive impact of lower-cost cotton and increased supply chain and manufacturing efficiencies was offset by the impact of lower net selling prices for Printwear.
SG&A expenses in the fourth quarter were U.S. $69.7 million, compared with U.S. $64.1 million in the fourth quarter of last year. The increase in SG&A expenses continued to reflect increased marketing and advertising expenses and increased variable performance-driven compensation expenses. As a percentage of sales, SG&A expenses declined slightly to 11.1 percent from 11.4 percent a year ago.
The effective income tax rate in the fourth quarter was approximately 3 percent compared with an income tax recovery in the fourth quarter of fiscal 2012. The increase in the income tax rate was primarily due to the improved operating income for Branded Apparel.
In the fourth quarter, the Printwear segment reported operating income of U.S. $112.0 million, up 11.2 percent compared to U.S. $100.7 million in the fourth quarter of fiscal 2012. The more favourable results for the Printwear segment were primarily due to the unit sales volume growth and the lower cost of cotton, partially offset by lower net selling prices. The Branded Apparel segment reported quarterly operating income of U.S.$18.1million, up 19.7 percent compared with U.S. $15.1 million in the fourth quarter of fiscal 2012. The improved results for Branded Apparel were due to lower cotton costs, sales volume growth and a higher-valued branded product-mix.
During the fourth quarter of fiscal 2013, the company generated free cash flow of U.S. $111.5 million, after capital expenditures of U.S. $74.3 million, which was utilized to repay the remaining amount of the company’s bank indebtedness and pay the quarterly dividend. The company ended the fourth quarter of the fiscal year with no outstanding indebtedness and U.S. $97.4 million of cash and cash equivalents.
Full Year Results
Net sales revenues for fiscal 2013 amounted to U.S. $2,184.3 million, up 12.1 percent from U.S. $1,948.3 million in fiscal 2012. The increase in net sales versus fiscal 2012 was due to the acquisition of Anvil, organic growth in Printwear unit sales volumes, and growth in sales of Gildan® branded activewear and underwear to retail customers. These factors were partially offset by lower net selling prices for Printwear.
Net earnings for fiscal 2013 were U.S.$320.2million or U.S.$2.61 per share on a diluted basis, compared to U.S. $148.5 million or U.S. $1.22 per share in fiscal 2012. Adjusted net earnings before restructuring and acquisition-related costs and the fourth quarter charge for unwinding the interest rate swaps amounted to U.S. $330.3 million or U.S. $2.69 per share, compared to U.S. $157.3 million or U.S. $1.29 per share in fiscal 2012. The increase in adjusted EPS in fiscal 2013 compared to last year reflected significantly improved results in both Printwear and Branded Apparel, due to lower cotton costs, higher unit sales volumes, including the impact of the acquisition of Anvil, more favourable product-mix and lower financial expenses, partially offset by lower Printwear net selling prices, increased SG&A expenses, and higher income taxes.
The company generated free cash flow of U.S. $263.1 million in fiscal 2013, which exceeded the company’s most recent guidance of approximately U.S. $225 million. Capital expenditures for the full year amounted to U.S. $167 million compared to the most recent projection of approximately U.S. $175 million.
Outlook
The company is initiating its guidance for fiscal 2014 with projected net sales revenues of approximately U.S. $2.35 billion, compared with U.S. $2.184 billion in fiscal 2013, and projected adjusted EPS of U.S. $3.00-$3.10, up 11.5 percent-15.2 percent from U.S. $2.69 in fiscal 2013. Net sales revenues for Printwear are projected to be slightly in excess of U.S. $1.5 billion, compared to U.S. $1.469 billion in fiscal 2013. Net sales revenues for Branded Apparel are expected to be in excess of U.S. $825 million, up in excess of 15 percent compared to U.S. $716 million in fiscal 2013. The company’s guidance assumes no material change in the current economic environment, including the continuation of current soft retail market conditions.
The projected growth in consolidated EPS in fiscal 2014 is due to higher unit sales volumes in both Printwear and Branded Apparel and increased manufacturing cost efficiencies, partially offset by lower net selling prices for Printwear, inflationary cost increases and higher income tax expense. SG&A expenses are projected to decline as a percentage of sales to approximately 12 percent, compared to 12.9 percent in fiscal 2013. The income tax rate for fiscal 2014 is projected to be approximately 5.5 percent.
The average cost of cotton in fiscal 2014 is currently expected to be comparable to the average cost for fiscal 2013. However, results in the first half of the year are expected to be impacted by sequentially higher cotton costs, compared to the fourth quarter of fiscal 2013. The increased cotton costs are not currently projected to be passed through into higher net selling prices as cotton costs have recently declined significantly from these levels. The decline in cotton costs is expected to benefit results primarily in the fourth quarter of fiscal 2014. Adjusted EPS in the first quarter, which is seasonally the lowest sales quarter in the fiscal year in Printwear, is projected to be U.S. $0.33-$0.35, on projected sales revenues of approximately U.S. $450 million.
For the full fiscal year, the impact of assumed lower average net selling prices in Printwear in fiscal 2014, compared to the average pricing in fiscal 2013, is expected to partially offset the benefit of projected unit volume growth of approximately 5 percent in Printwear, including approximately 20 percent growth in target international markets and the introduction of new high-value products.
Strong growth in sales and earnings is projected for Branded Apparel in fiscal 2014 due to volume growth as a result of new branded programs, increased retail shelf-space and increased sales to global lifestyle brands, partially offset by the discontinuation of a private label underwear program. The company is continuing to achieve success in increasing the retail distribution of its branded programs, based on its brand value proposition to consumers combining superior product quality features with lower prices. Operating margins for Branded Apparel are also projected to continue to increase in fiscal 2014, as the company leverages the SG&A investment in this business with volume growth. Plans for fiscal 2014 include the continuation of significant investments in marketing and advertising in support of the Gildan® and Gold Toe® brands as in fiscal 2013.
The company is projecting U.S. $300-$350 million in capital expenditures in fiscal 2014, including approximately U.S. $150 million for its previously announced investments in yarn-spinning, as well as expenditures for the continuing ramp-up of Rio Nance I, the initial investment in a new textile manufacturing facility, the modernization of the former Anvil manufacturing facility in Honduras, a new sewing facility in the Dominican Republic, further investments in energy saving projects, and the new distribution centre in Honduras. These major capital investments are expected to provide new production capacity to support the company’s sales growth opportunities in all of its target markets. In addition, they are anticipated to further reinforce its position as a global low-cost producer by generating significant manufacturing cost reductions in fiscal 2015-2017 and further differentiate the company’s branded product offering in both Printwear and Branded Apparel. The company is projecting that the capital investment projects which it is currently undertaking will generate approximately U.S. $100 million of cost savings net of depreciation expense by fiscal 2017, which are expected to phase in gradually during fiscal 2015-2017.
The company is currently evaluating two potential locations in Central America for its planned new textile facility. A decision is expected to be finalized in the second fiscal quarter. The investment in the new facility is expected to begin early in the second half of fiscal 2014 and it is projected to be built and ramped up in fiscal 2015 and 2016.
The company is continuing to expand its production capacity because it believes that it is well positioned to build on its competitive strengths in order to achieve continuing sales and earnings growth in Printwear in both the U.S. and international markets, and to continue to achieve new branded programs in Branded Apparel. In addition, results for both of its operating segments are expected to benefit starting in fiscal 2015 from the company’s continuing major capital investments in its vertically-integrated manufacturing which are being undertaken in fiscal 2013 and 2014.
The company is continuing to seek acquisition opportunities which would complement its organic growth, and provide attractive returns on investment in excess of its risk-adjusted cost of capital. The company is well positioned to finance further acquisitions as it ended fiscal 2013 with no outstanding indebtedness and expects to generate free cash flow of U.S. $50-$100 million in fiscal 2014, after capital investments and increased working capital to support the company’s ongoing sales growth initiatives.
Increase in Quarterly Dividend
Although the company is continuing to focus on pursuing its growth strategies, as a result of the company’s continuing positive outlook for earnings growth and free cash flow generation the Board of Directors has approved a 20 percent increase in the amount of the current quarterly dividend and has declared a cash dividend of U.S. $0.108 per share, payable on January 6, 2014 to shareholders of record on December 12, 2013. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.
Disclosure of Outstanding Share Data
As of October 31, 2013, there were 121,918,353 common shares issued and outstanding along with 1,211,293 stock options and 772,206 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share from treasury at the end of the vesting period, without any monetary consideration being paid to the company. However, the vesting of at least 50 percent of each Treasury RSU grant is contingent on the achievement of performance conditions that are primarily based on the company’s average return on assets performance for the period as compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts, or as determined by the Board of Directors.
Gildan is a leading supplier of quality branded basic family apparel, including T-shirts, fleece, sport shirts, socks and underwear. The company sells its products under a diversified portfolio of company-owned brands, including the Gildan®, Gold Toe® and Anvil® brands and brand extensions, as well as under licensing arrangements for the Under Armour® and New Balance® brands. The company distributes its products in printwear markets in the U.S. and Canada, where Gildan® is the industry-leading brand, and the company is increasing its penetration in international printwear markets. The company is also one of the largest suppliers of branded athletic, casual and dress socks for a broad spectrum of retailers in the U.S. In addition to socks, the company is developing Gildan® as a consumer brand for underwear and activewear.
