Gildan Activewear Inc. announced its results for the third quarter ended October 1, 2017, updated its full year guidance for 2017 and announced that it has increased the common share allotment of its current normal course issuer bid (NCIB) program.

The company generated strong earnings per share growth during the third quarter, with EPS of 52 cents a share and adjusted EPS of 53 cents, up 6 percent compared to the prior year. Stronger than expected adjusted EPS was due to more favorable product mix in Printwear, earnings contribution from the impact of the American Apparel transaction and lower income taxes, partly offset by lower-than-expected Branded Apparel sales, reflecting the continuation of a challenging retail market. With stronger adjusted EPS year-to-date, the company increased its full-year guidance range for adjusted EPS to $1.70-$1.72, which at the midpoint of the range represents projected growth of 13 percent compared to last year.

During the quarter, the company continued to make good progress with the American Apparel integration, including the continued ramp up of production and the successful launch of the American Apparel consumer e-commerce platform. From a free cash flow perspective, Gildan continued to deliver strong free cash flow with approximately $150 million generated in the third quarter, bringing the total cumulative free cash flow year-to-date in excess of $350 million. As a result of increased profitability and stronger working capital management, the company now expects its free cash flow for the full year to be in excess of $450 million, compared to its previous guidance of in excess of $425 million.

Consolidated Results
Consolidated net sales of $716.4 million in the third quarter ended October 1, 2017, were essentially flat compared to the prior year as Printwear sales growth of 4.1 percent was offset by a 6.9 percent decline in Branded Apparel sales compared to the third quarter of last year.

Consolidated gross margin in the third quarter came in at a strong 31 percent, reflecting a 60 basis point increase over the same period last year. The increase was mainly due to higher net selling prices and favorable product mix in Printwear, partly offset by unfavorable product mix in Branded Apparel, and higher raw material and other input costs compared to the third quarter of 2016 as forecasted.

Consolidated SG&A expenses as a percentage of sales were 13.2 percent in the third quarter compared to 12.1 percent in the same quarter last year, primarily due to the impact of the American Apparel acquisition. The company generated a strong adjusted operating margin for the quarter of 17.8 percent, slightly down from 18.3 percent in the prior year quarter.

Net earnings for the three months ended October 1, 2017, amounted to $116.1 million, or 52 cents per share on a diluted basis, compared with net earnings of $114.4 million, or 49 cents per share on a diluted basis for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs of $2.5 million in the quarter and $2 million in the prior year quarter, Gildan reported adjusted net earnings of $118.6 million, or 53 cents per share on a diluted basis for the third quarter of 2017, up from $116.4 million, or 50 cents per share on a diluted basis in the same quarter last year. The 6 percent increase in adjusted diluted EPS in the quarter was mainly driven by a higher gross margin, lower income taxes, and the benefit of share repurchases, partly offset by higher SG&A expenses due in part to the American Apparel acquisition.

Gildan generated strong free cash flow of $149.9 million in the third quarter bringing total free cash flow for the first nine months of 2017 to $353.3 million, up $96.8 million from $256.5 million in the same period last year. The increase was driven by higher earnings, working capital improvements, and lower capital expenditures compared to the first nine months of 2016. Capital expenditures of $18.7 million in the quarter and $61.2 million for the first nine months of the year were primarily for investments in textile capacity, distribution and garment dyeing expansion. Pursuant to its NCIB program, the company repurchased 3,872,980 common shares at a total cost of $119.3 million during the third quarter and 9,829,852 common shares at a total cost of $276.6 million during the first nine months of the year. The company ended the third quarter with net debt of $657.8 million and a leverage ratio of 1.1 times net debt to trailing twelve months adjusted EBITDA.

Segmented Operating Results
Printwear net sales for the third quarter of 2017 were $480.7 million, up $18.8 million, or 4.1 percent over the same period last year. The increase reflected a sales contribution of $15.4 million from the acquisition of American Apparel, continued strong growth in fashion and performance basics which contributed to favorable product mix, double digit unit sales volume growth in international markets, and higher net selling prices, partly offset by lower sales of basics.

Printwear segment operating income for the three months ended October 1, 2017, totaled $127.5 million, up 3.3 percent compared to $123.4 million for the same period last year. Printwear operating margin for the quarter was 26.5 percent, effectively in line with the third quarter last year. The benefit of higher net selling prices and favorable product mix mitigated the unfavorable impact of higher raw material and other input costs, as well as the impact of higher SG&A expenses primarily due to the acquisition of American Apparel.

Net sales for the Branded Apparel segment in the quarter were $235.7 million, down $17.4 million, or 6.9 percent compared to the third quarter of 2016, mainly due to weakness in the sock category, particularly in department stores and national chains, as well as the sporting goods channel, combined with the unfavorable impact from the transition to a new sock program at a mass-retailer. Lower sock sales in the quarter were partly offset by higher sales of Gildan branded men’s underwear compared to the third quarter of 2016 and strong performance of activewear.

For the three months ended October 1, 2017, Branded Apparel generated operating income of $25.3 million compared to $29.5 million in the same quarter last year. Branded Apparel operating margin of 10.7 percent was down from 11.7 percent in the same quarter last year, primarily as a result of unfavorable product mix due to lower sales of higher-margin sock products.

Year-To-Date Sales And Earnings
Consolidated net sales of $2,097.1 million in the first nine months of 2017 was up $99.9 million, or 5 percent compared to the same period last year, reflecting sales increases of 6.1 percent in the Printwear segment and 2.8 percent in Branded Apparel. The increase in consolidated net sales was mainly due to the impact of the 2016 acquisitions of Alstyle and Peds and the American Apparel acquisition which closed during the first quarter of 2017, as well as higher net selling prices, increased unit sales volumes of printwear fashion and performance products, and favorable product mix. These positive factors were partly offset by lower unit sales volumes of Printwear basics and Branded Apparel, particularly lower sock sales, as well as the planned exit of private label programs and the impact of unfavorable foreign exchange.

Gross margin for the nine months ended October 1, 2017, of 29.8 percent was up 160 basis points compared to the same period last year, driven by higher gross margins in both operating segments. The increase was mainly due to the positive net impact of net selling prices and manufacturing and raw material costs compared to the same period in the prior year. SG&A expenses as a percentage of sales for the first nine months of 2017 were 13 percent, up from 12.5 percent of sales in the same period last year, mainly due to the impact of acquisitions and other expenses, including higher receivable provisions. Consolidated adjusted operating margins in the first nine months of 2017 totaled 16.7 percent, up 100 basis points over the same period last year.

Net earnings for the first nine months of 2017 were $307.4 million, or $1.36 per share on a diluted basis, up from net earnings of $272.3 million, or $1.15 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 $319.3 million or $1.41 per share on a diluted basis in the first nine months of 2017, up 13.3 percent and 18.5 percent, respectively, compared to adjusted net earnings of $281.8 million or $1.19 per share on a diluted basis in the same period last year. The increase in adjusted net earnings was mainly due to the improvement in operating margins, the impact of acquisitions, and lower income taxes, partly offset by higher financial expenses. EPS and adjusted EPS growth also reflected the benefit of share repurchases.

Outlook

After reflecting third quarter earnings per share results and more tempered sales expectations for Branded Apparel in the current retail environment, the company updated its guidance for the full year. Consolidated net sales growth for the full year is now projected to be in the mid to high single digit range compared to the company’s previous estimate of high single digit net sales growth. The company continues to expect strong full year Printwear net sales growth in the high single digit range, while it is now projecting Branded Apparel net sales growth in the low single digit range versus its previous projection of high single digit growth, given current retail market conditions.

Due to stronger adjusted EPS to date, the company is now projecting adjusted diluted EPS for the full year to be in the range of $1.70 to $1.72, up 13 percent at the mid-point of the range compared to adjusted EPS of $1.51 in the prior year. This compares to the company’s previous guidance expecting adjusted diluted EPS to be at the high end of $1.60-$1.70. The company also updated its expectation for adjusted EBITDA for 2017 to be in the range of $580 -$590 million, up from its prior estimate of adjusted EBITDA at the high end of the $555-$585 million guidance range. Full year capital expenditures continue to be projected to be approximately $100 million. Finally, as a result of stronger than previously anticipated profitability and working capital improvements, the company is now projecting free cash flow in excess of $450 million for the year compared to its previous estimate of in excess of $425 million.

Gildan is a leading manufacturer and marketer of quality branded basic family apparel, including T-shirts, fleece, sport shirts, underwear, socks, hosiery, and shapewear. The Company sells its products under a diversified portfolio of company-owned brands, including the Gildan, Gold Toe, Anvil, Comfort Colors, American Apparel, Alstyle, Secret, Silks, Kushyfoot, Secret Silky, Peds, MediPeds, and Therapy Plus brands. Sock products are also distributed through the Company’s exclusive U.S. sock license for the Under Armour brand, and a wide array of products are also marketed through a global license for the Mossy Oak brand.

Photo courtesy Gildan