Gildan Activewear Inc. slightly lowered its guidance for the year due to lower than anticipated results in the third quarter and tempered branded apparel sales expectations in the fourth quarter.

In the third quarter, results in the printwear segment were in line with the company’s expectations, while continued softness in the retail environment, including weak traffic trends and unseasonably warm weather, contributed to slightly lower than expected branded apparel sales. Operating income and EPS reflected solid performance and cash generation in the quarter was strong, with free cash flow totaling $184.9 million, up 23.9 percent compared to the same period last year.

While market conditions in retail continued to be challenging, the company was pleased with the sales performance of its Gildan branded products during the quarter. In particular, Gildan branded underwear drove double-digit point of sales (POS) and revenue growth in the third quarter, reflecting the benefit from improved in-store placement. The company also continued to gain ground in the faster-growing fashion and performance basics segments in the U.S. printwear market as well as in international printwear markets. During the third quarter, the company made solid progress on the integration of the Alstyle operations, which are starting to benefit from efficiencies in textile and sewing production costs and higher production levels. In addition, integration efforts related to the Peds acquisition in the sales and marketing and supply chain areas are well underway.

Consolidated Results
The company’s consolidated net sales of $715 million in the third quarter of 2016 grew 6 percent compared to the corresponding quarter in 2015, reflecting sales increases of 4.9 percent in the printwear segment and 8.2 percent in branded apparel. Organic sales growth from increased shelf space and new program shipments for the branded apparel business, positive POS in printwear’s U.S and international channels, and the contribution from the acquisitions of Alstyle and Peds more than offset expected headwinds from the company’s decision to exit certain private label programs in Branded Apparel, lower net selling prices, distributor inventory de-stocking and unfavorable product mix and foreign exchange.

Consolidated gross margin in the third quarter of 2016 was 30.4 percent, down 100 basis points compared to the same period last year, as the benefit of lower raw material and other input costs and manufacturing cost savings related to the company’s capital investments was more than offset by lower net selling prices, unfavorable product mix and foreign currency exchange. SG&A expenses of $86.8 million in the quarter were up $8.4 million compared to the prior-year quarter, due primarily to the impact of the Alstyle and Peds acquisitions. Adjusted operating margins totaled 18.3 percent compared to 19.8 percent in the same period last year, reflecting the gross margin decline and the transitional dilutive impact of acquisition activity primarily on SG&A.

Net earnings totaled $114.4 million, or 49 cents per share on a diluted basis, for the three months ended October 2, 2016, compared with net earnings of $123.1 million, or 50 cents per share, for the three months ended October 4, 2015. Excluding after-tax restructuring and acquisition-related costs of $2.0 million in the quarter and $3.3 million in the same quarter last year, Gildan reported adjusted net earnings of $116.4 million, or 50 cents per share on a diluted basis, for the third quarter of 2016, down from $126.4 million, or 52 cents per share, in the prior-year quarter.

Gildan generated strong free cash flow of $184.9 million in the third quarter of 2016 compared to $149.2 million in the same quarter last year. The $35.7 million increase in free cash flow was mainly due to favourable changes in working capital. Capital expenditures of $41 million in the third quarter were primarily for investments in textile capacity, including investments for the development of Rio Nance 6 and textile capacity expansion in Bangladesh. During the third quarter of 2016, the company completed the initial 12.2 million common share maximum allotment under the NCIB, which it initiated on February 26, 2016, with the repurchase of 1.7 million common shares at a total cost of approximately $52.3 million. As announced in its press release dated July 27, 2016, the company subsequently amended and increased the size of the program to 20.7 million common shares. Gildan ended the quarter with net debt of $630.6 million and a leverage ratio of 1.2 times net debt to adjusted EBITDA.

Segmented Operating Results
Net sales for the printwear segment for the third quarter of 2016 amounted to $461.9 million, in line with company expectations and up 4.9 percent from $440.5 million in the same calendar quarter last year. The increase in net sales compared to the prior-year quarter was mainly due to the $38.6 million sales contribution of the Alstyle acquisition, continued POS growth in the faster-growing performance and fashion basics product segments in the U.S printwear channel and double-digit volume growth in international printwear markets. The benefit of these factors was partially offset by lower net selling prices, the impact of distributor inventory de-stocking and the impact of unfavorable foreign currency exchange on international sales.

Operating income in printwear for the three months ended October 2, 2016 totaled $123.4 million, essentially flat compared to $124.4 million for the same period last year. Operating margins for printwear were 26.7 percent, down 150 basis points compared to the same quarter in 2015 due primarily to the short-term dilutive impact on margins from the acquisition of Alstyle. Excluding the acquisition of Alstyle, operating margins in the quarter were down 30 basis points, as the benefit of lower raw material costs and manufacturing cost savings was more than offset by the impact of lower net selling prices and unfavorable product-mix and foreign currency exchange.

Net sales for the branded apparel segment in the quarter were $253.1 million, up 8.2 percent from $234.0 million in the third calendar quarter of 2015. The increase in branded apparel sales was mainly due to organic unit sales volume growth from increased shelf space and new retail program shipments and a contribution of $9.6 million from the acquisition of Peds. The benefit of these factors was partially offset by an approximate $10 million impact from the exit of certain private label programs, unfavorable product mix as continued weakness in department stores and national chains negatively affected sales of higher value products in this channel and higher promotional spending in the quarter compared to the same period last year. Excluding the impact from the exit of private label programs and the Peds acquisition, Branded Apparel organic sales growth in the quarter was 8.5 percent.

Operating income in Branded Apparel of $29.5 million in the three months ended October 2, 2016 was essentially flat compared to $30.2 million in the same quarter last year. Branded Apparel operating margins of 11.7 percent were down from operating margins of 12.9 percent in the same quarter last year, primarily as a result of unfavorable product mix and higher promotional spending, which more than offset the benefit of lower raw material and other input costs and manufacturing cost savings. On a sequential basis, operating margins in the quarter improved by approximately 400 basis points compared to the second quarter of 2016, due primarily to the positive impact of higher sales volumes combined with lower raw material costs and manufacturing cost savings.

Year-to-date Consolidated Sales And Earnings
Consolidated net sales of $1.9972 billion in the first nine months of 2016 were down 1.4 percent compared to $2.0249 billion in the same period last year, reflecting slight declines in both operating segments. The decrease in consolidated net sales was mainly due to lower net selling prices, the impact of lower distributor inventory replenishment in printwear, the exit of certain non-core retailer private label programs and unfavorable product mix and foreign currency exchange. These factors more than offset the benefit of positive POS growth in printwear, organic sales volume growth in branded apparel excluding the exit of private label programs, and the acquisitions of Alstyle and Peds.

Net earnings for the first nine months of 2016 were $272.3 million, or $1.15 per share on a diluted basis, compared to $278.5 million, or $1.14 per diluted 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 $281.8 million, or $1.19 per diluted share, in the first nine months of 2016 compared to adjusted net earnings of $286.5 million, or $1.18 per diluted share, in the same period last year. The decline in net earnings and adjusted net earnings was primarily due to increases in income taxes and financial charges, partially offset by higher operating income and adjusted operating income. Diluted and adjusted diluted EPS were positively impacted by the share repurchases during the period under the company’s NCIB.

Outlook
For full-year 2016, the company expects to achieve adjusted diluted EPS of $1.48 to $1.50 compared to its previous projection of $1.50 to $1.55. Adjusted EBITDA for 2016 is now estimated to be approximately $530 million to $535 million compared to the company’s previous projection of approximately $545 million to $555 million. Consolidated net sales for the year are now expected to be approximately $2.6 billion compared to the company’s prior guidance of approximately $2.65 billion. The company continues to project printwear sales of approximately $1.65 billion, while branded apparel sales are now projected to be approximately $960 million compared to the company’s prior guidance of approximately $1 billion.

The updated 2016 full-year guidance primarily reflects the lower than anticipated results in the third quarter and tempered branded apparel sales expectations in the fourth quarter, in light of current retail market conditions. In addition, projected Branded Apparel sales for the year also reflect the later than previously projected timing of shipments of a new licensed program to a large national chain retailer, previously planned to be shipped in the fourth quarter of this year and now requested for shipment in the first quarter of 2017.

The company expects capital expenditures for 2016 toward the lower end of its previous projected range of $150 million to $175 million. Given the company’s strong cash generation to date and its projection for the fourth quarter, the company expects to generate record free cash flow for the full year in the range of $325 million to $350 million.

The company is well-positioned to drive strong earnings growth in 2017, with projected space and program gains at retailers and further penetration in the U.S. printwear market, particularly in the fashion and performance basics categories, as well as in international printwear markets. In addition, the company expects to see improvement in earnings from the non-recurrence of certain headwinds in 2016, including improved product mix. Earnings growth is also expected to reflect the benefit from further manufacturing cost savings and the accretive impact of acquisitions completed in 2016. On a per share basis, earnings will reflect the benefit of share repurchases under the company’s NCIB.

Photo courtesy Gildan Activewear