Gildan Activewear Inc. reported net earnings in the second quarter slid 14.3 percent to $99.4 million, or 41 cents per share, compared with net earnings of $116.0 million or $0.47 per share on a diluted basis for the three months ended July 6, 2014.

Before reflecting restructuring and acquisition-related costs of approximately $3.2 million after-tax in the quarter relating primarily to the integration of acquisitions, Gildan reported adjusted net earnings of $102.6 million or $0.42 per share for the three months ended July 5, 2015, compared with adjusted net earnings of $116.6 million or $0.47 per share for the same period last year.

Consolidated net sales in the second calendar quarter of 2015 amounted to $714.2 million, up 2.9 percent from $693.8 million in the corresponding quarter of the prior year, reflecting an increase of 12.3 percent in sales for Branded Apparel, partially offset by a 1.2 percent decline in Printwear sales largely due to the selling price reductions implemented in December of 2014 and the lower number of shipping days compared to the corresponding quarter of last year. Sales in the second calendar quarter of 2014 included an extra week to realign the 52-week fiscal year with the calendar year. Consolidated net sales in the quarter were below the company's guidance of net sales of $750 million, which it provided on May 14, 2015 primarily as a result of lower than anticipated inventory replenishment by a major retail customer and lower than anticipated Printwear sales in Europe.

Net earnings for the second calendar quarter of 2015 continued to reflect the impact of the Printwear selling price reductions implemented in December 2014, in advance of the benefit of lower manufacturing and cotton costs. The positive earnings impact of higher sales and operating margins in Branded Apparel and lower income taxes was more than offset by lower Printwear sales and operating margins and higher financial expenses. Adjusted diluted EPS of $0.42 for the quarter ended July 5, 2015 were slightly below the guidance provided by the company on May 14, 2015 of adjusted EPS of $0.43 – $0.45 due to lower than anticipated net sales.

During the three months ended July 5, 2015, the company generated $18.5 million of free cash flow after financing capital expenditures of $67.3 million and seasonal working capital changes. Capital investments were primarily for new yarn-spinning facilities in the U.S., textile projects in Rio Nance and the expansion of the company's printwear distribution centre in Eden, NC. The company ended the quarter with cash and cash equivalents of $44.6 million and outstanding bank indebtedness of $593.0 million.

Segmented operating results

Net sales for the Printwear segment for the three months ended July 5, 2015 amounted to $477.8 million, down $5.6 million or 1.2 percent from $483.4 million in the corresponding quarter of the prior year. Printwear sales included the benefit of strong growth in demand in the printwear market following the pricing actions implemented in December 2014, the impact of the acquisition of Comfort Colors and sales growth of approximately 35 percent in Asia-Pacific and Latin America. The positive impact of these factors was more than offset by lower net selling prices, the negative impact of the devaluation of international currencies relative to the dollar, lower unit sales volumes in Europe and the non-recurrence of the extra week included in the second quarter of the prior year.

Operating income in Printwear for the three months ended July 5, 2015 totalled $113.5 million, down from $129.7 million in the same period last year. Operating margins for Printwear were 23.8 percent compared with 26.8 percent in the corresponding quarter of last year. The decline was mainly due to the timing of printwear selling price reductions in the U.S., which were implemented on December 4, 2014, in advance of anticipated manufacturing cost savings from the company's yarn-spinning investments and other capital projects and lower cotton costs, as well as the impact of the decline in international currencies relative to the dollar. However, in the second quarter the company started to benefit from the decline in cotton costs.

Net sales for the Branded Apparel segment were $236.3 million, up 12.3 percent from $210.4 million in the same quarter of last year. The increase in Branded Apparel sales reflected an increase of approximately 70 percent in sales of Gildan branded programs, including the impact of converting private label programs, as well as increased sales of licensed and global lifestyle brands and the acquisition of Doris. The positive impact of these factors was partially offset by lower sales of private label and Gold Toe branded products and the impact of the non-recurrence of the extra week included in the second calendar quarter of the prior year. Growth in shipments of Gildan branded products reflected continued strong growth in all product categories, including the shipment of new underwear programs to new retail customers and the conversion of the company's largest private label sock program to the Gildan brand during the quarter. The impact of inventory destocking by a major retailer limited sell-through to consumers of Gildan branded products in the quarter. The company is working collaboratively with its retail partners to optimize replenishment and support strong consumer demand for the Gildan brand.

Operating income in Branded Apparel was $19.4 million in the three months ended July 5, 2015, compared to operating income of $15.6 million in the corresponding quarter of the prior year. Operating margins of 8.2 percent in the quarter were slightly higher than 7.4 percent in the corresponding quarter of 2014 even after taking account of continued increased investment in marketing and advertising to support the Gildan brand. Compared to the first calendar quarter this year, operating margins in the second calendar quarter of 2015 improved by more than 700 basis points from the low levels in the previous quarter when the company was still consuming high-cost opening inventories, which reflected the impact of transitional manufacturing costs relating to the integration of new retail products during 2014, as well as higher cotton costs.

Consolidated Net Sales and Earnings for the Six Months Ended July 5, 2015

Consolidated net sales of $1,350.4 million in the first six months of calendar 2015 were up 8.7 percent compared to $1,242.6 million in the same period last year reflecting a 5.5 percent increase in Printwear segment sales and 15.9 percent sales growth in Branded Apparel. The increase in net sales was primarily due to unit sales volume growth in both operating segments, including the impact of higher than normal seasonal inventory replenishment in the distributor channel in the first calendar quarter of 2015, the impact of the acquisitions of Doris and Comfort Colors and favourable Printwear product-mix. These factors more than offset lower Printwear net selling prices, the impact of the devaluation of foreign currencies relative to the dollar and the non-recurrence of the extra week included in the second quarter of the prior year.

Net earnings for the first six months of calendar 2015 were $155.4 million, or $0.64 per share on a diluted basis, compared to $195.2 million, or $0.79 per share for the same period of the prior year. Before reflecting after-tax restructuring and acquisition-related costs in both years, adjusted net earnings were $160.1 million or $0.66 per share in the first six months of 2015 down 18.2 percent and 16.5 percent respectively compared to adjusted net earnings of $195.8 million or $0.79 per share in the same period last year. The decrease in net earnings was mainly due to lower gross margins in both operating segments due primarily to the timing of Printwear selling price reductions, the impact of the transitional manufacturing costs in Branded Apparel, and the impact of the decline in international currencies relative to the dollar. The decline in net earnings for the first six months of 2015 also reflected increased SG&A and financial expenses, partially offset by lower income taxes compared to the same period last year.

Outlook

The company is now projecting adjusted diluted EPS for the 12 months ending January 3, 2016 to be at the bottom of its previous guidance range of $1.50 – $1.55 on projected sales of close to $2.6 billion primarily to reflect the less favourable than projected results in the second quarter of 2015 and the continuing impact of the issues affecting second quarter sales and earnings. The company was previously projecting net sales of slightly in excess of $2.65 billion. Sales growth in Printwear for the full calendar year is now projected to be in excess of 10 percent compared to the company's previous projection of approximately 12 percent due to lower sales in Europe. Sales growth in Branded Apparel is now expected to be approximately 15 percent compared to previously anticipated sales growth in excess of 20 percent. The lower projected sales growth in Branded Apparel primarily reflects the sales shortfall in the second calendar quarter and the company has assumed the continuation of lower retailer replenishment in the third calendar quarter. Branded Apparel sales in the fourth calendar quarter are projected to be slightly higher than previously projected due to the initial sales impact of additional new retail programs. Adjusted EBITDA for the 12 months ending January 3, 2016 is now projected to be close to the bottom end of the company's previous range of $525 – $540 million.

The company is projecting adjusted EPS of $0.51 – $0.53 for the September quarter, on projected sales revenues of close to $700 million, compared with adjusted EPS of $0.50 on sales revenues of $666.0 million in the corresponding quarter of the prior year. Results in the third quarter of calendar 2014 were favourably impacted by the recognition of a $5.0 million tax recovery. Adjusted EBITDA is projected to increase by approximately 15 percent – 19 percent compared to the third quarter of calendar 2014.

The company is projecting continuing strong Printwear unit sales volume growth which is projected to be largely offset by lower printwear selling prices and unfavourable mix. The change in the company's distributor incentive programs announced in December 2014 is assumed to result in a shift of some high-valued fleece shipments from the third calendar quarter to the fourth calendar quarter. Operating margins in both operating segments are expected to improve on a sequential basis compared to the second quarter of calendar 2015 due to continuing lower manufacturing and cotton costs.

During the second calendar quarter the company began shipments of Gildan branded programs to new food and drug and mass retailers. The company is continuing to achieve new Gildan branded retail programs with existing retail customers and is expanding current programs to additional retail doors. By the end of the 2015 holiday season, Gildan branded underwear is expected to be in approximately 18,000 retail doors, or almost double the number of retail doors from the end of the June quarter due to penetration of new retailers.

The company expects to end the fiscal year with strong sales and earnings momentum in the fourth quarter, which will position the company for continued earnings growth in calendar 2016. The company expects to benefit in calendar 2016 from continuing volume growth and further manufacturing cost reductions, including the benefit of ramping up the company's new yarn-spinning facilities combined with lower cotton costs. The company has essentially completed its cotton fixations for cost of sales for the first half of 2016.

Capital expenditures for the 12 months ending January 3, 2016 are still projected to be approximately $250 – $300 million. The company believes that it is on track to achieve its projected 3-year target of $100 million in annual cost savings from its major capital investment projects.

CFO Succession

The company announced that Rhodri J. Harries will be assuming the role of Executive Vice-President, Chief Financial and Administrative Officer of Gildan effective August 17, 2015. The company announced the appointment of Mr. Harries in its press release dated April 29, 2015. Laurence G. Sellyn will continue with the company for a period of time after August 17 in order to ensure an orderly transition of his responsibilities to Mr. Harries.