Gildan Activewear Inc. announced its results for the third quarter ended September 30, 2018 and updated its full year guidance.
During the third quarter, the company continued to see good momentum in the key growth areas of its business. Total sales grew 5.3 percent compared to last year, despite the impact of Hurricane Florence, which limited shipments during September. Adjusted diluted EPS of 57 cents per share was up 7.5 percent over the same quarter last year and in line with Wall Street’s consensus estimate. The company generated free cash flow of $118.4 million.
From a sales perspective, the company continued to gain ground during the quarter in faster-growing areas, including fashion basics, international markets, global lifestyle brands, and e-commerce, and is starting to capitalize on the shifting emphasis by mass retailers toward their own private label brands. During the third quarter, the company secured a new private label underwear program for 2019 with its largest mass retail customer. Shelf space allocated to the company’s current men’s underwear program with this retailer will be increasing and will be dedicated to the retailer’s private label underwear brand offering in 2019, which the company will be manufacturing. On the cost side, the company is generating SG&A cost reductions as planned, with third quarter SG&A expenses as a percentage of sales down 150 basis points versus the same quarter last year, with continued strong focus on driving further efficiencies going forward. Free cash flow continues to build and the company’s strong balance sheet positions it well to continue to execute on its capital allocation priorities.
During the third quarter, sales growth was constrained due to the impact of Hurricane Florence in the month of September, which disrupted the company’s distribution operations in the Carolinas, impacting overall sales by approximately $30 million in total. Despite this impact, net sales for the third quarter ended September 30, 2018 of $754.4 million were up 5.3 percent compared to the prior year driven by a 12.1 percent increase in activewear sales, partly offset by a 16.6 percent decline in the hosiery and underwear category. The increase in the activewear category, where we generated $612.4 million in sales for the quarter, was driven by higher unit sales volume and net selling prices. Activewear unit volume growth reflected higher shipments of imprintable products, including fashion basics, combined with higher unit sales of global lifestyle brand products and a 27.6 percent increase in international sales. The decline in the smaller hosiery and underwear category, where we saw $142.0 million in overall sales, was mainly due to lower sock volumes, primarily in mass, and lower licensed brand sales. Distribution disruptions due to the impact of Hurricane Florence resulted in approximately $15 million in lost sales in this category as the company was unable to fulfill certain replenishment orders in September.
Gross margin in the third quarter of 2018 of 29.0 percent was down 200 basis points over the same period last year, largely in line with our expectations. The decrease in gross margin compared to the prior year quarter was primarily due to higher raw material and other input costs, partly offset by the benefit of higher net selling prices. Gross margin was also impacted by activewear growth ramp up costs and costs related to disruptions in our supply chain in Central America, which we incurred during the second quarter as previously communicated.
SG&A expenses for the third quarter this year totaled $88.1 million, down $6.7 million, or 7.1 percent, compared to the third quarter last year. SG&A expenses as a percentage of sales improved 150 basis points to 11.7 percent in the quarter compared to the prior year quarter, primarily reflecting the benefit of cost reductions stemming from the company’s recent organizational consolidation.
For the third quarter of 2018, the company generated operating income of $127.6 million and adjusted operating income1 of $130.7 million, up $2.7 million and $3.3 million, respectively, compared to the same period last year. Operating margin of 16.9 percent and adjusted operating margin1 of 17.3 percent were both down 50 basis points compared to the third quarter of 2017, reflecting the decline in gross margin partly offset by SG&A leverage.
Net earnings for the three months ended September 30, 2018 amounted to $114.3 million, or $0.55 per share on a diluted basis, compared with net earnings of $116.1 million, or $0.52 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 net earnings of $118.1 million, which were essentially flat compared to last year as higher sales and the reduction in SG&A expenses offset the decline in gross margin and higher financial expenses. Adjusted diluted EPS of $0.57 for the third quarter of 2018 were up 7.5 percent from $0.53 per share in the same quarter last year, reflecting the benefit of a lower share count compared to the prior year.
The company generated $118.4 million of free cash flow in the third quarter of 2018, down from $149.9 million in the same quarter last year due mainly to less favourable changes in working capital and higher capital expenditures. During the third quarter, capital expenditures totaled $33.6 million and were for investments primarily in textile capacity and related sewing expansion, distribution, and information technology. During the third quarter of 2018, the company repurchased 1,740,858 common shares at a total cost of approximately $50 million pursuant to its normal course issuer bid (NCIB). The company ended the third quarter of 2018 with net debt1 of $819.0 million and a net debt leverage ratio1 of 1.4 times net debt to trailing twelve months adjusted EBITDA.
Net sales of $2,165.8 million for the nine months ended September 30, 2018 were up 3.3 percent, or $68.7 million, compared to the same period last year, driven by an 11.0 percent increase in activewear sales, partly offset by a 20.4 percent decline in the hosiery and underwear sales category. The increase in the activewear category was mainly due to volume growth in imprintable products in the U.S., strong shipments internationally across the company’s major markets, as well as increased shipments to retailers and global lifestyle brands. 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, lower licensed brand and Gold Toe sales, 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 nine months of 2018 of 28.2 percent was down 160 basis points over the prior year, primarily due to increases in raw material and other input costs, and additional manufacturing costs related to the optimization and ramp up of capacity, as well as 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 nine months of the year were 12.6 percent, 40 basis points better than the same period last year as cost reductions resulting from the company’s recent organizational consolidation more than offset planned increases in expenses related to the enhancement of e-commerce and distribution capabilities. Operating margin and adjusted operating margin for the first nine months of 2018 were 15.0 percent and 15.6 percent, respectively, compared to 16.2 percent and 16.7 percent in the same periods of the prior year.
Net earnings for the first nine months of 2018 were $291.2 million, or $1.37 per share on a diluted basis, compared to net earnings of $307.4 million, or $1.36 per share on a diluted basis, for the same period last year. Before reflecting after-tax restructuring and acquisition-related costs, adjusted net earnings for the first nine months of 2018 were $304.2 million, or $1.43 per share on a diluted basis, compared to adjusted net earnings of $319.3 million, or $1.41 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 and higher financial expenses, partly offset by the contribution of higher sales. On a diluted per share basis, net earnings and adjusted net earnings also reflected the benefit of a lower share count compared to the prior year.
The company narrowed its projected adjusted diluted EPS range for the full year to $1.85 to $1.87, within its previous range of $1.85 to $1.90. The company continues to project net sales growth for the full year to be in the mid-single-digit range driven by expected double digit growth in activewear sales. After incorporating the impact of lost orders as a result of shipping limitations caused by Hurricane Florence during the third quarter and lower than previously anticipated licensed brand sock sales, the company is now projecting sales in the hosiery and underwear category to be down approximately $125 million for the full year compared to its previous projection of a decline of approximately $85 million. Adjusted EBITDA is projected to come in towards the lower end of our previous guidance range of $605 to $620 million, and free cash flow for 2018 is projected to be between $400 to $425 million, versus previous guidance of in excess of $425 million, due to higher than previously anticipated year end working capital requirements as we move into 2019. Guidance for capital expenditures remains at approximately $125 million for 2018. Finally, for the fourth quarter of 2018, the company is projecting adjusted diluted EPS to be in the range of $0.42 to $0.44, double digit activewear sales growth, and a strong improvement in SG&A leverage over the prior year quarter.
Photo courtesy Gildan