Gildan Activewear, Inc. reported in its fourth quarter release that despite a challenging macro-economic backdrop and tough year-over-year comparative periods, 2023 was a year of strong progress on Gildan’s Sustainable Growth strategy and its three key pillars focused on innovation, manufacturing capacity and ESG. Gildan said it finished the year with strong sales growth in the fourth quarter, an adjusted operating margin at the high end of the company’s target range and a return to growth in EPS. In addition, 2023 cash flow generation was said to be robust and the company closed the year with a healthy balance sheet, all of which is said to position Gildan well for 2024.

“Outstanding operational execution by our highly skilled team of employees across our global footprint delivered strong Q4 results,” said Vince Tyra, president and CEO of Gildan Activewear Inc. “As the company celebrates its 40th anniversary this year, I see a bright future ahead, where we can leverage our strengths and continue to enhance value for all stakeholders. Since joining the company, I’ve had the opportunity to visit with hundreds of employees in Montreal and Honduras and I’ve met with many of our key customers during the recent industry trade shows in Las Vegas, Nevada and Long Beach, CA, which fueled my excitement for the future.”

Fourth Quarter 2023 Results
Net sales were $783 million in the fourth quarter ending December 31, 2023, up 9 percent from the prior-year Q4 period, consisting of Activewear sales of $644 million, up 8 percent, and sales of $139 million in the Hosiery and Underwear category, which was up 11 percent.

The increase in Activewear sales was said to be due to higher volumes, driven by POS as well as higher levels of customer replenishment than the prior-year quarter. POS also reflected strength in key product categories including fleece and ring-spun products, which also drove a favorable mix.

The increase in the Hosiery and Underwear category was said to be mainly due to higher volumes, driven by a combination of better POS and the rollout of new programs in the mass retail channel. Despite continued industry-wide weak demand for men’s underwear and socks, Gildan said it achieved a solid performance in the category.

While the company said it saw some POS recovery in International markets, sales were down 24 percent for the period, reflecting continued macroeconomic challenges in these markets and the lack of inventory replenishment compared to the prior-year period.

Gross profit was $237 million, or 30.2 percent of sales, in the fourth quarter, compared to $235 million, or 32.6 percent, in the prior-year Q4 period which included an insurance gain of $25.6 million.

On an adjusted basis, gross profit was $237 million, or 30.2 percent of sales, an increase of $28 million year-over-year. The resulting adjusted gross margin improvement of 110 basis points was said to be primarily due to lower raw material costs slightly offset by lower net selling prices.

“As expected, we saw a sequential improvement of 270 basis points to our adjusted gross margin, as pressure from the flow-through of peak cotton costs subsided significantly in the fourth quarter,.” The company said in its release.

SG&A expenses were $88 million, or 11.3 percent of sales, in the fourth quarter, up $15 million compared to Q4 2022, reflecting higher volumes, as well as a charge of $6 million related to CEO separation costs and related advisory fees on shareholder matters.

Adjusting for this charge, adjusted SG&A expenses as a percentage of sales was 10.5 percent of sales in the quarter compared to 10.2 percent in the prior-year period, as the impact of higher expenses more than offset the benefit of sales leverage.

In the quarter, Gildan said it incurred restructuring and acquisition-related costs of $11 million, mainly due to the previously announced closure of a yarn-spinning plant in the U.S., compared to $6 million of restructuring and acquisition-related costs in the prior year. Given fiscal 2023 performance and profitability projections related to hosiery sales, the company also recorded a $41 million reversal of prior hosiery-related impairment charges.

After reflecting the net impact of these items in both years, Q4 operating income of $178 million was up from $93 million in the prior-year quarter. On an adjusted basis, operating income of $155 million, or 19.7 percent of sales, compares to $136 million, or 18.8 percent of sales in the prior-year quarter. The increase in adjusted operating income reflected higher sales and higher adjusted gross margin. The 90 basis point improvement in adjusted operating margin was mainly due to the increase in adjusted gross margin.

After reflecting net financial expenses of $21 million, up $8 million over the prior year due to higher interest rates and average net borrowing levels, and the positive benefit of a lower outstanding share base, Gildan reported diluted EPS and adjusted diluted EPS of 89 cents and 75 cents, up 89 percent and 15 percent, respectively, versus diluted EPS and adjusted diluted EPS of 47 cents and 65 cents respectively, in the corresponding quarter of the prior year.

Cash flow from operating activities increased to $239 million in the fourth quarter, and to $547 million for the full year, up respectively $50 million and $133 million from the prior year.

Capital expenditures of $208 million for the full year, which included $36 million in the fourth quarter, came in, as expected, closer to the lower end of the company’s target range for 2023. These investments were said to be related to capacity and vertical integration projects, including the construction of a new large-scale, low-cost manufacturing complex in Bangladesh which continues to ramp up.

Gildan said it generated a free cash flow of $203 million in the fourth quarter, bringing the total for the year to $392 million in 2023, up respectively $72 million and $194 million versus the prior year. For both periods, the increase in free cash flow reflected lower working capital investments versus the prior year when the company brought inventories to higher and more optimal levels, as well as lower capital expenditures. The company ended 2023 with net debt of $993 million, up from $874 million in 2022 and a net debt leverage ratio of 1.5 times adjusted EBITDA, said to be well within its targeted debt levels.

Full Year 2023 Results
For the year ended December 31, 2023, net sales were $3.20 billion, down 1 percent year-over-year, as expected, reflecting a decrease of 3 percent in Activewear sales and a 10 percent increase in the Hosiery and underwear category.

Activewear sales were $2.67 billion, down $95 million, said to be primarily due to lower sales volumes compared to the prior year where Gildan said it saw stronger levels of distributor inventory replenishment, partly offset by slightly higher net selling prices. While overall Activewear POS was soft for the full year, the company said it saw year-over-year POS trends for this category improve sequentially through the first three quarters of the year before stabilizing in the fourth quarter.

Hosiery and Underwear category sales were $528 million, up $50 million year-over-year, was reportedly driven by growth stemming from the expansion of the company’s private label offering and the roll-out of new underwear programs in the mass retail channel, as well as strength in hosiery. Additionally, while industry-wide demand remained weak for these categories, Gildan said it benefited from a more favorable demand environment in comparison to 2022, along with the normalization of inventories at retailers.

International sales of $225 million were down 17 percent versus the prior year, said to be mainly due to the non-recurrence of prior year restocking in addition to distributors’ cautious inventory management throughout the year, in a challenged market.

Gross margin was 27.5 percent of sales for the full year, down 310 basis points year-over-year, which reportedly includes the recognition of hurricane insurance recoveries representing 70 basis points. On an adjusted basis, a gross margin of 27.4 percent was down 240 basis points, said to be mainly a result of the flow-through impact of peak fiber costs on the cost of sales earlier in the year and higher manufacturing input costs, as anticipated, partly offset by slightly higher net selling prices.

SG&A expenses were $330 million, or 10.3 percent of net sales, reflecting the impact of CEO separation costs and related advisory fees on shareholder matters and inflation on overall costs, which were mostly offset by the impact of lower volumes, lower variable compensation expenses and the benefit from cost containment measures. On an adjusted basis, SG&A expenses as a percentage of sales came in line with the prior year, at 10.1 percent of net sales.

Gildan generated operating income of $644 million, or 20.1 percent of sales, for the full year, which included the benefit of a $77 million net insurance gain, a $41 million non-cash reversal of a portion of a prior-year hosiery-related impairment charge, and a $25 million gain from the sale and leaseback of one of the company’s U.S. distribution facilities, partly offset by higher restructuring costs of $46 million. Operating income of $603 million in 2022, or 18.6 percent of sales, included the non-cash impairment charge of $62 million for hosiery, partly offset by an insurance accounting gain of $26 million.

On an adjusted basis, the company generated an operating income of $553 million in 2023, which translated to an adjusted operating margin of 17.3 percent compared to $639 million and 19.7 percent, respectively in 2022, mainly reflecting gross margin pressure in the year.

After reflecting net financial expenses of $80 million, up from $37 million last year, net earnings and adjusted net earnings1 reached $534 million and $453 million, respectively, in 2023, down 1 percent and 21 percent versus the prior year. After reflecting the impact of share repurchases made under the company’s NCIB programs, diluted EPS and adjusted diluted EPS of $3.03 and $2.57, were up 3 percent and down 17 percent, respectively, versus diluted EPS and adjusted diluted EPS of $2.93 and $3.11, respectively, last year.

Outlook
Over the last year, Gildan said it has continued to execute the key components of the Gildan Sustainable Growth strategy. While an industry-wide soft demand environment has meant that revenue growth during this period was challenging to achieve, the company said it has nonetheless continued to drive market share gains in key product categories.

“This positions us well as we move forward, leveraging our strategy and strong capabilities, and further opportunities in the targeted markets that we serve,” the company said in its release.

For 2024, Gildan expects the following:

  • Revenue growth for the full year to be flat to up low-single digits;
  • Adjusted operating margin slightly above the high end of the company’s 18 percent to 20 percent annual target range;
    Capex to come in at approximately 5 percent of sales;
  • Adjusted diluted EPS in the range of $2.92 to $3.07, up significantly between 13.5 percent and 19.5 percent year over year;
  • Free cash flow above 2023 levels driven by increased profitability, lower working capital investments and lower capital expenditures than in 2023.

The assumptions underpinning the 2024 guidance are as follows:

  • POS trends continue to improve compared to 2023, reflecting the potential for recovery in various markets, as well as overall growth opportunities. The top-line guidance also takes into account the expiration of the Under Armour sock license agreement on March 31, 2024, which is expected to have minimal impact on profitability. Excluding the impact of this agreement, full-year revenue growth in 2024 would be in the low- to mid-single-digit range.
  • First-quarter net sales are expected to be down in the low-single-digits year-over-year, as the impact of higher-than-expected levels of customer replenishment realized in Q4 2023 will result in lower levels of replenishment in Q1 2024. As such, Gildan expects Q1 adjusted operating margin to come in around the low end of its 18 percent to 20 percent target range.
  • Given its strong free cash flow outlook, Gildan assumes share repurchases will continue in 2024, with a debt leverage ratio maintained within its target range of 1 to 2 times.
  • Though the timing of the potential enactment of legislation remains uncertain, Gildan said it has incorporated the estimated impact of the implementation of draft Global Minimum Tax legislation in Canada and Barbados on its effective tax rate, retroactive to January 1, 2024, as well as certain refundable tax credits expected to be introduced in one of the jurisdictions in which it operates, which will reduce its SG&A.
  • No meaningful deterioration from current market conditions including the pricing and inflationary environment. The board may modify, extend or terminate current or future share repurchase programs at any time.

Increase in Quarterly Dividend
On February 20, 2024, the Board of Directors approved a 10 percent increase in the amount of the current quarterly dividend and declared a cash dividend of $0.205 per share, payable on April 8, 2024, to shareholders of record on March 13, 2024. This dividend is an “eligible dividend” for the Income Tax Act (Canada) and any other applicable provincial legislation about eligible dividends.

Image courtesy Gildan Activewear, Inc.