Gildan Activewear Inc. reported its fiscal second-quarter 2016 sales, ended July 3.
The numbers were slightly below company expectations due to headwinds in printwear, the exit of some private label programs and unfavorable foreign exchange.
The company also lowered it’s 2016 earnings guidance, while inching up its revenue forecast to reflect the expected contribution from the acquisitions of Alstyle Apparel, LLC, which closed on May 26, 2016, and July 27’s announced acquisition of Peds.
Consolidated net sales in the second quarter of 2016 amounted to $688.9 million, down 3.5 percent compared to the second calendar quarter of 2015 and reflecting sales decreases of 1.4 percent in the printwear segment and 7.9 percent in branded apparel. The decline in consolidated net sales compared to the same quarter last year was mainly due to anticipated, unfavorable impacts from the company’s decision to exit certain non-core retailer private label programs and lower net selling prices as well as the impact of distributor inventory de-stocking and the negative impact of foreign currency exchange related to a stronger U.S. dollar compared to last year, officials said.
“These factors more than offset the benefit of positive sell-through in U.S. and international printwear markets and the impact on sales of approximately $19.5 million from the acquisition of Alstyle,” officials said.
Consolidated gross margins in the second quarter of 2016 increased to 27.4 percent, up 70 basis points compared to the second calendar quarter last year. The increase in gross margins was primarily due to lower raw material and other input costs, and manufacturing cost savings, which more than offset lower net selling prices, the near-term dilutive impact of the acquisition of Alstyle and the negative impact of foreign exchange. Consolidated gross margins for the second quarter of 2016 improved sequentially, by 100 basis points, compared to the first quarter of the year.
SG&A expenses of $83.6 million in the quarter were up $3.5 million compared to the prior year due primarily to the impact of the acquisition of Alstyle. Adjusted operating margins totaled 15.3 percent compared to 15.5 percent in the same period last year due to the 20 basis point dilutive impact of Alstyle. Net earnings totaled $94.7 million, or $0.40 per share, on a diluted basis for three months ending July 3, 2016, compared with net earnings of $99.4 million, or $0.41 per share, for the three months ended July 5, 2015.
Excluding after-tax restructuring and acquisition-related costs of $1.7 million in the quarter and $3.2 million in the same quarter last year, Gildan reported adjusted net earnings of $96.4 million, or $0.41 per share on a diluted basis, for the second quarter of 2016, slightly down from $102.6 million, or $0.42 per share in the prior year quarter.
Gildan generated strong free cash flow of $130.2 million in the second quarter of 2016 compared to $18.5 million of free cash flow in the same quarter last year. The $111.7 million increase in free cash flow reflected more favorable changes in working capital and a decrease in capital expenditures compared to the second calendar quarter of last year, as the Company’s spending on the yarn spinning initiative is winding down with the full ramp-up of its last new facility expected to be completed by the end of 2016.
Capital expenditures of $32.4 million for the quarter related primarily to investments in yarn-spinning and in textile and sewing capacity expansion projects. During the second quarter of 2016, the company repurchased 5.2 million common shares under its NCIB which it initiated on February 26, 2016 at a total cost of $159.2 million. In addition, the Company repurchased 1.7 million common shares in July, completing the maximum allotment under the program’s initial size.
Gildan ended the quarter with net debt of $683.4 million and a net debt leverage ratio of 1.3 times net debt to adjusted EBITDA. During and immediately following the second quarter, the company raised long-term debt to support its previously communicated net debt leverage target of 1 to 2 times adjusted EBITDA. During the second quarter, the company entered into an unsecured five-year term loan agreement for a total principal amount of $300 million. In addition, on July 26, 2016, the company entered into a Note Purchase Agreement providing for the issuance by the company of a total aggregate principal amount of $300 million of unsecured notes to accredited investors in the U.S. private placement market.
Net sales for Gildan’s printwear segment for the second quarter of 2016 amounted to $471.2 million, down from $477.8 million in the same calendar quarter last year, due to the impact of distributor inventory destocking, lower net selling prices and the negative impact of foreign exchange. These factors more than offset positive POS growth in the quarter in U.S. and international markets and the impact of approximately $19.5 million on sales from the Alstyle acquisition. Unit sales volume growth was particularly strong in fashion basics and performance products, with double digit growth in both product categories. Sales volumes in international printwear markets increased by 15 percent, offset in part by the impact of weaker international currencies relative to the U.S. dollar.
Operating income in printwear for the three months ended July 3, 2016 totaled $111 million, down slightly from $113.5 million for the same period last year, mainly due to lower sales in the quarter. Operating margins for printwear were 23.5 percent, down 30 basis points compared to the same quarter in 2015, due primarily to the short-term dilutive impact on margins from the acquisition of Alstyle, as integration synergies from the transaction are only expected to flow through starting in 2017. Excluding the acquisition of Alstyle, operating margins in the quarter were up 30 basis points, reflecting the benefit of lower raw material costs and manufacturing cost savings which more than offset the impact of the lower net selling prices, unfavorable foreign currency exchange, and higher SG&A expenses.
Net sales for Gildan’s Branded Apparel segment in the quarter were $217.6 million, down from $236.3 million in the second calendar quarter of 2015, mainly due to the impact from the exit of certain private label programs and lower sales to department stores and national chains due to continued weakness in this channel. Momentum in unit market share penetration for the Gildan brand in the men’s socks and underwear product categories continued to build in the quarter.
In addition, during the quarter Gildan’s men’s underwear programs gained improved in-store placement at various retailers. The company believes this improved in-store placement will continue to drive further market share gains for the Gildan brand in the men’s underwear category. Operating income in branded apparel amounted to $17.1 million in the three months ended July 3, 2016, down from operating income of $19.4 million in the same quarter last year due mainly to the sales decline in the quarter. Branded apparel operating margins of 7.8 percent were slightly down from operating margins of 8.2 percent in the same quarter last year primarily as a result of lower sales in the quarter, including higher promotional spending, partly offset by the benefit of lower raw material and other input costs and manufacturing cost savings.
For full year 2016, the company is now projecting adjusted diluted EPS to be in the range of $1.50-$1.55 compared to its prior range of $1.50-$1.60 and adjusted EBITDA of approximately $545-$555 million compared to the company’s previous projection of $545-$570 million. Consolidated net sales for the year are now projected to be approximately $2.65 billion reflecting projected sales of approximately $1.65 billion in printwear and branded apparel sales of approximately $1 billion. This compares to the company’s prior sales guidance of consolidated net sales in excess of $2.6 billion consisting of printwear sales in excess of $1.6 billion and branded apparel sales in excess of $1 billion.
The company’s updated 2016 full year guidance reflects its sales performance in the second quarter, tempered sales expectations for the balance of the year and the impact of the acquisitions of Alstyle and Peds. The company has lowered its assumption for printwear fleece sales in the third quarter as a result of lower-than-anticipated pre-order bookings to date. In addition, the company is projecting a continuation of the current softness in the retail environment. The acquisitions of Alstyle and Peds are projected to contribute aggregate sales of approximately $115 million in 2016, while the impact from the acquisitions on the company’s net earnings is expected to be minimal in 2016. The company expects strong integration synergies from these transactions to flow through in 2017 and 2018, with EPS accretion projected to reach an exit run rate in excess of $0.13 by the end of 2018.
“Despite current market conditions, the company continues to believe it is well-positioned to deliver strong, organic sales growth in branded apparel in the second half of the year,” officials said. “This business is expected to start to benefit from increased shelf space gains and new retail programs secured for 2016 while the impact from the exit of private label programs is expected to subside in the second half of the year.”
The company is now projecting capital expenditures for the full year of approximately $150-$175 million in 2016 compared to its previous projection of capital expenditures of approximately $200 million. The lower-than-previously-anticipated capital expenditures for 2016 reflect modifications to the company’s plans for capacity expansion, in light of the acquisition of Alstyle, which included a large basics textile facility in Mexico. The company is currently increasing capacity utilization at the Mexican facility and has the capability to significantly expand the facility’s capacity for the production of basics textile going forward. Given this flexibility, the company has adjusted its start-up plan for the Rio Nance 6 facility, which is now expected to start operations in the second quarter of 2017.
