Gildan Activewear Inc. reported a profit against a loss in the first quarter as revenues climbed 28.4 percent.
“Our first-quarter results reflected a strong start to 2021 as continued benefits from our Back to Basics strategy supported sell-through across all channels and drove strong operating margin performance, allowing us to deliver net earnings significantly above prior year and first quarter 2019 levels,” said Gildan President and CEO, Glenn J. Chamandy. “While large events have not yet restarted, we continue to be encouraged by the strength of our imprintables business and on the retail side we were pleased with strong double-digit growth in underwear and activewear sales compared to the first quarters of 2020 and 2019.”
Overall, the company generated $590 million in sales, up 28 percent over last year and down approximately 5 percent from the first quarter of 2019. Gross margin in the quarter of 32.0 percent and adjusted gross margin1 of 31.1 percent were up 880 bps and 650 bps, respectively, over the same quarter last year. Compared to the first quarter of 2019, gross margin was up 620 bps and 530 bps on an adjusted basis. Margin performance in the quarter was enhanced by the positive impact of an approximate $18 million (300 bps) accrual of a one-time payment from the USDA related to its Pandemic Assistance for Cotton Users (PACU) program. Further, despite higher sales in the quarter, Gildan said it kept its selling, general and administrative (SG&A) expenses flat compared to last year, which translated to SG&A as a percentage of sales of 12.4 percent in the quarter, a strong improvement over the same quarter in 2020 and 2019. Consequently, Gildan delivered GAAP diluted EPS of $0.50 and adjusted diluted EPS of $0.48, including the $0.09 per share PACU benefit. Before reflecting the PACU accrual, adjusted diluted EPS of $0.39 in the quarter significantly exceeded adjusted diluted EPS of $0.06 and $0.16 in the first quarters of 2020 and 2019, respectively.
During the first quarter, Gildan generated a strong free cash flow of $38 million and its available liquidity position at the end of the quarter remained at $1.6 billion. Net debt totaled $541.6 million and its net debt to adjusted EBITDA ratio decreased to 2.1 from 3.5 at the end of 2020 for external reporting purposes. After reflecting debt covenant adjustments, which exclude the impact of the second quarter of 2020, the company’s net debt leverage ratio was 1.1. Effective April 5, 2021, the company is no longer required to comply with the restrictions and provisions established in June of 2020 when the company amended its loan agreements to obtain temporary COVID-19-related covenant relief. Furthermore, subsequent to the quarter-end, the company repaid its $400 million unsecured two-year term loan which was due on April 6, 2022.
Lastly, today Gildan announced that its Board of Directors had approved the reinstatement of the company’s quarterly dividend of $0.154 per share, in line with Gildan’s previous cash dividend rate prior to suspending these payments after the first quarter of 2020. The Board’s action to reinstate dividend payments reflects increased confidence from the strong recovery so far, the company’s solid foundation for future cash flow generation, and the improvement in the company’s reported net debt leverage ratio which has come down near the high end of the company’s historical target range of one to two times net debt to adjusted EBITDA for the trailing twelve-month period. The Board will assess further capital returns to shareholders through the potential reinstatement of its share repurchase program when we gain further visibility on the COVID-19 recovery outlook and when the company’s debt leverage ratio falls well within its historical target range.
Q1 2021 Operating Results
Net sales for the first quarter ending April 4, 2021, of $589.6 million were up 28.4 percent compared to the first quarter of 2020, consisting of activewear sales of $484.6 million, up 30.1 percent, and sales of $105.0 million in the hosiery and underwear category, up 21.4 percent. The increase in activewear sales was driven by double-digit unit sales volume growth in North American and international imprintables markets and activewear sold in retail channels, as well as favorable product mix, partly offset by lower net selling prices. Imprintables volume growth reflected the impact of net restocking by distributors and positive point-of-sales (POS) compared to the first quarter last year. Compared to the first quarter of 2019, POS in the U.S. and international markets remained relatively stable with the levels it saw entering the quarter, down 10 percent to 15 percent over 2019. The increase in the hosiery and underwear category was driven by the strength of its underwear sales which reflected strong double-digit volume growth over both the first quarters of 2020 and 2019.
Gildan reported gross margin in the first quarter was 32.0 percent compared to a gross margin of 23.2 percent in the first quarter of 2020. Adjusted gross margin totaled 31.1 percent in the quarter, up 650 basis points from the adjusted gross margin of 24.6 percent in the first quarter last year. The significant year-over-year increase was mainly due to the non-recurrence of COVID-19-related charges incurred in the first quarter of 2020, the impact of the PACU benefit, lower raw material costs, favorable product mix, and the benefit of Back to Basics initiatives. The positive impact of these factors more than offset the impact of lower imprintables net selling prices. Excluding the impact of the one-time PACU benefit (300 bps), the adjusted gross margin in the quarter totaled 28.1 percent.
SG&A expenses for the first quarter of $73.4 million, or 12.4 percent of sales, were down slightly by $0.5 million compared to SG&A expenses of $73.9 million, or 16.1 percent of sales for the same quarter last year. The year-over-year reduction reflected cost savings stemming from its Back to Basics initiatives offset by higher variable compensation expenses.
Gildan generated an operating income of $113.8 million, or 19.3 percent of sales, in the first quarter of 2021 compared to an operating loss of $92.3 million last year. Adjusted operating income1 totaled $110.3 million, or 18.7 percent of sales, compared to $19.9 million, or 4.3 percent of sales, last year, driven by the impact of higher sales and adjusted gross margin and the benefit of the non-recurrence of the impairment of trade accounts receivable of $20.8 million recorded in the first quarter of 2020. Net financial expenses of $10.8 million were up $2.9 million over the prior year, mainly due to fees incurred in connection with the amendments made to its long-term debt facilities and the impact of foreign exchange. Consequently, it reported net earnings of $98.5 million, or $0.50 per share on a diluted basis, for the three months ended April 4, 2021, and adjusted net earnings of $95.0 million, or $0.48 per share on a diluted basis, compared to a net loss of $99.3 million, or $0.50 per diluted share, and adjusted net earnings of $11.2 million, or $0.06 per diluted share, respectively, in the first quarter last year.
Gildan generated a strong free cash flow of $38 million in the first quarter 2021, compared to $235 million of free cash flow consumed in the first quarter of 2020. Historically, the first quarter is a period during which the company consumes free cash flow due to higher working capital requirements to build inventories to support seasonal summer sales. The increase in free cash flow in the first quarter compared to last year was primarily due to higher operating earnings, a lower inventory build in the quarter, a net cash impact of $30 million from insurance proceeds, and lower capital expenditures compared to last year. While benefits from the company’s Back to Basics initiatives are translating to more efficient inventory management, higher than anticipated sales also contributed to a lower than planned increase in inventory levels in the quarter.
Current Market Environment
Gildan said in its statement, “Our POS in imprintables channels as Gildan moved from the first quarter into the second quarter has been running slightly better, with overall POS in the U.S. and international markets down approximately 10 percent compared to pre-pandemic 2019 levels. In retail, sales in all product categories are tracking above prior-year levels. Overall, we are encouraged by the economic recovery it is seeing related to continued re-openings, the impact of U.S. stimulus on consumer demand, and the strong progress of the vaccine rollout in the U.S. However, large gatherings have not yet restarted and on the supply chain side, we are monitoring labor shortages in the U.S. affecting certain industries, including yarn spinners, tightness in raw material inputs, as well as the impact of port backlogs and transportation-related factors globally. Consequently, we remain cautious regarding the pace of overall recovery. Nonetheless, we are confident that the combination of the steps we took during the crisis in 2020 and the strength of our Back to Basics strategy is positioning us well to capitalize on market share opportunities and create value for our shareholders over the long-term.”
Photo courtesy Gildan
