Gildan Activewear reported an earnings gain of 1.2 percent in the second quarter as a 6.8 percent sales gain and expense controls offset lower gross margins. The company slightly raised its outlook for sales and earnings for the year.
Gildan said its record second quarter sales and adjusted diluted EPS ahead of its expectations, setting the company on the path to achieve the higher end of its full year guidance range for both sales and adjusted diluted EPS. Strong sales momentum in key growth areas such as fashion basics and international markets continued during the second quarter. Adjusted diluted EPS for the quarter was up 6.1 percent, largely in line with sales growth, despite higher manufacturing and supply chain costs in the quarter, partly offset by a 50 basis point improvement in SG&A expenses as a percentage of sales. SG&A leverage reflected the benefit of cost reductions resulting from the company’s recent organizational consolidation which is progressing well. During the second quarter, the company generated $98 million of free cash flow and now expects its free cash flow for the full year to be in excess of $425 million, compared to its previous guidance of in excess of $400 million. Shortly after the end of the second quarter, the company completed the repurchase of the full share allotment pursuant to its NCIB program and today announced Board and Toronto Stock Exchange approval to increase the size of its program to up to 10 percent of the public float as at February 15, 2018.
Operating results
Net sales of $764.2 million in the second quarter ended July 1, 2018, were up 6.8 percent compared to the prior year driven by a 17.3 percent increase in activewear sales. The sales increase in activewear was driven by strong shipments of imprintable products, as well as increased shipments to global lifestyle brand customers and retailers. International sales in the second quarter were up 35.2 percent, reflecting strong growth momentum across all markets. The increase in activewear sales also reflected higher net selling prices, including the impact of foreign exchange, and favourable product-mix, driven by strong double digit growth in fleece shipments and growth in fashion basics. The hosiery and underwear category declined 23.8 percent during the quarter mainly due to the unit volume decline in socks at mass retailers, which are shifting emphasis toward their own private label brands, and lower licensed and Gold Toe® brand sales. In addition, underwear shipments were down on a year over year basis for the quarter, primarily due to the non-recurrence of shipments related to the initial fill of expanded space gains in the prior year.
Gross margin in the second quarter of 2018 totaled 28.3 percent, reflecting a 150 basis point decrease over the same period last year. The decline was mainly due to higher raw material and other input costs and additional manufacturing expenses resulting from disruptions within our supply chain in Central America. The unfavourable impact of these factors more than offset the benefit of higher net selling prices, including foreign exchange, and the positive impact of a richer product-mix.
As a percentage of sales, SG&A expenses for the second quarter were 12.0 percent, down 50 basis points from the prior year quarter. The improvement was mainly due to the benefit of cost reductions resulting from the company’s recent organizational consolidation, which more than offset increased costs related to the enhancement of the company’s e-commerce and distribution capabilities.
For the second quarter of 2018, the company generated operating income of $121.0 million and adjusted operating income1 of $124.0 million, flat compared to the same period last year. Operating margin of 15.8 percent and adjusted operating margin1 of 16.2 percent were both down 110 basis points compared to the second quarter of 2017 reflecting the decline in gross margin partly offset by SG&A leverage.
Net earnings for the three months ended July 1, 2018 amounted to $109.0 million, or $0.51 per share on a diluted basis, compared with net earnings of $107.7 million, or $0.48 per share on a diluted basis for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs, Gildan reported adjusted EPS of $0.52 per share on a diluted basis for the second quarter of 2018, up 6.1 percent from $0.49 per share on a diluted basis in the same quarter last year. The increase in adjusted diluted EPS was mainly due to higher sales and the benefit of a lower share count compared to the prior year, partly offset by a lower operating margin.
The company generated $98.0 million of free cash flow in the second quarter 2018 compared to $162.1 million in the same quarter last year. The decline was mainly due to less favourable changes in working capital and higher capital expenditures compared to the same period last year, partly offset by higher net earnings. Capital expenditures of $32.3 million in the quarter were primarily for investments in textile and sewing capacity expansion, distribution, and information technology. During the second quarter of 2018, the company repurchased 7,170,880 common shares at a total cost of approximately $209 million, pursuant to its NCIB. The company ended the second quarter of 2018 with net debt1 of $858.6 million and a net debt leverage ratio1 of 1.5 times net debt to trailing twelve months adjusted EBITDA.
Year-to-date results
Net sales of $1,411.5 million for the six months ended July 1, 2018 were up $30.8 million, or 2.2 percent compared to the same period last year. The sales increase was driven by a 10.5 percent increase in activewear sales, partly offset by a 22.2 percent decline in the hosiery and underwear sales category. Activewear sales grew mainly as a result of strong shipments in the second quarter across all major regions, including a 30.2 percent year-to-date increase in international sales. Activewear sales growth also reflected the benefit of higher net selling prices, including foreign exchange, and favourable product-mix compared to the same period last year. The decline in the hosiery and underwear sales category was mainly due to lower unit sales of socks, particularly to mass retailers which are shifting emphasis toward their own private label brands, as well as the impact of the non-recurrence of the initial roll-out of certain program gains which occurred during the first half of the prior year.
Gross margin for the first six months of 2018 of 27.8 percent was down 130 basis points over the prior year, largely as a result of increases in raw material and other input costs and additional manufacturing costs related to disruptions within our supply chain in Central America. These factors were partly offset by higher net selling prices and the benefit of a richer product-mix compared to the prior year.
SG&A expenses as a percentage of sales for the first half of the year were 13.1 percent slightly up from 12.9 percent in the same period last year, primarily due to planned increases in expenses related to the enhancement of e-commerce and distribution capabilities, partly offset by cost reductions resulting from the company’s recent organizational consolidation. Operating margin and adjusted operating margin for the first six months of 2018 were 14.0 percent and 14.6 percent respectively, compared to 15.5 percent and 16.2 percent in the same period in the prior year.
Net earnings for the first six months of 2018 were $176.9 million, or $0.82 per share on a diluted basis compared to net earnings of $191.2 million, or $0.84 per share on a diluted basis for the same period last year. Before reflecting after-tax restructuring and acquisition-related costs in both years, adjusted net earnings were $186.1 million, or $0.86 per share on a diluted basis in the first six months of 2018, compared to adjusted net earnings of $200.6 million, or $0.88 per share on a diluted basis in the same period last year. The decrease in net earnings and adjusted net earnings was mainly due to a lower operating margin, partly offset by the contribution from higher sales and a lower income tax expense. On a diluted per share basis, the decrease in net earnings and adjusted net earnings was also partly offset by the benefit of a lower share count compared to the prior year.
Outlook
The company updated its full year 2018 financial guidance and is now projecting adjusted diluted EPS to be in the range of $1.85 to $1.90 compared to its previous guidance of $1.80 to $1.90. Net sales growth is now projected to be in the mid-single-digit range, the upper end of the company’s previous range of low to mid-single digit growth. The company expects adjusted EBITDA to be in the range of $605 to $620 million compared to $595 to $620 million previously, and free cash flow for 2018 is now expected to be in excess of $425 million for the year, higher than its previous estimate of in excess of $400 million. Guidance for capital expenditures remains at approximately $125 million for 2018.
The company’s updated guidance reflects better than anticipated performance in the second quarter and higher projected activewear sales, to be partly offset by lower projected sock sales and higher manufacturing and supply chain costs than previously anticipated. The company is projecting double digit growth in activewear sales for the full year, including continued strong growth trends in fashion basics, fleece, and international markets. American Apparel® sales are now expected to be at an exit run rate of close to $100 million by the end of the year. Hosiery and underwear sales for 2018 are now projected to be down approximately $85 million due to lower than previously anticipated sock sales. SG&A cost savings resulting from the company’s organizational consolidation are on track, positioning the company to generate expected improved SG&A as a percentage of sales in the range of 100 to 200 basis points in the third and fourth quarters of the year compared to the prior year, as previously guided. Adjusted operating margin for the year is now expected to be slightly down compared to the prior year, as the company absorbs incremental manufacturing expenses which were not anticipated in its initial guidance. For the balance of 2018, the company is projecting adjusted diluted EPS growth in the high-single-digit to low-double-digit range in the third quarter, and strong double-digit adjusted diluted EPS growth in the fourth quarter.
Gildan is a manufacturer of everyday basic apparel under a diversified portfolio of company-owned brands, including Gildan, American Apparel, Comfort Colors, Gildan Hammer, Gold Toe, Anvil, Alstyle, Secret, Silks, Kushyfoot, Secret Silky, Therapy Plus, Peds and MediPeds, and under the Under Armour brand through a sock licensing agreement providing exclusive distribution rights in the United States and Canada. The company’s product range includes activewear, underwear, socks, hosiery, and legwear.
