Gildan Activewear reported adjusted earnings rose 31.5 percent in the fourth quarter. Revenues jumped 13.6 percent, led by a 22.3 percent increase in activewear sales.
Gildan said in its statement, “We ended 2018 on a strong finish, meeting our full year financial targets after successfully navigating through unanticipated weather impacts and supply chain disruptions during the year, and executing well on our organizational consolidation initiatives. Strong performance in the fourth quarter reflected an increase of 16 percent in GAAP diluted EPS, and an increase of 39 percent in adjusted diluted EPS, driven by sales growth of approximately 14 percent and a 230 basis point improvement in adjusted operating margin over the same quarter last year. On a full year basis, we reported GAAP diluted EPS of $1.66, up 3 percent over the prior year, and adjusted diluted EPS of $1.86, up 8 percent on sales growth of close to 6 percent, in-line with our latest guidance for adjusted diluted EPS of $1.85 to $1.87 and mid-single-digit sales growth.
“We were pleased with the underlying factors supporting our financial performance for the year. Sales growth for 2018 was driven by gains in key focus areas, including continued growth in fashion basics, strong double digit growth in international and global lifestyle brands sales, new private label program wins, which shipped primarily in the fourth quarter, and the doubling of our e-commerce sales. Operationally, we made good progress on initiatives related to the organizational consolidation we announced at the beginning of the year. We were able to drive operational efficiencies across the organization and reduce our SG&A expenses, while driving top line growth. In the fourth quarter alone, SG&A expenses as a percentage of sales improved by 300 basis points, and for the full year, despite planned increases in distribution and e-commerce investments in the first half of the year, SG&A expenses as a percentage of sales improved 100 basis points over 2017. We generated strong free cash flow of $429 million for the year, exceeding our initial guidance for 2018. We also completed the buyback of 12.6 million shares under our normal course issuer bid program. Combined with dividends, the company returned more than $460 million to shareholders in 2018, and today, we announced the seventh consecutive 20 percent increase in the amount of our quarterly dividend and the renewal of our normal course issuer bid to repurchase up to 5 percent of our issued and outstanding common shares.
“Overall, 2018 was a solid year of execution on our key growth drivers while driving increased efficiency across the organization. As a result, we generated a higher return on net assets (RONA)1, an important measure of performance for the company. RONA for 2018 improved to 15.6 percent, up 70 basis points from 14.9 percent in 2017.”
Fourth Quarter Results
Net sales for the fourth quarter ended December 30, 2018 of $742.7 million were up 13.6 percent compared to the fourth quarter of 2017 driven by a 22.3 percent increase in activewear sales, partly offset by a 7.9 percent sales decline in the hosiery and underwear category, which was anticipated. The increase in the activewear category in the fourth quarter, where we generated $569 million in net sales, was mainly due to higher unit sales volumes, a better product-mix driven primarily by higher fleece shipments, and higher net selling prices. Activewear volume growth reflected higher shipments of imprintable products in North America and a 29 percent increase in international shipments, as well as higher sales to global lifestyle brands and retailers. Sales in the hosiery and underwear category totaled $173 million, as anticipated, down $15 million from the fourth quarter last year primarily due to lower Gildan sock sales in mass and lower mass retailer replenishment of Gildan underwear in the quarter, partly offset by shipments under one of its new private label underwear programs in the fourth quarter.
Gross margin in the fourth quarter was down 80 basis points to 26.3 percent compared to the prior year quarter. The decrease was mainly due to higher raw material and other input costs, activewear growth ramp up costs, and the flow through of the balance of the costs related to supply chain disruptions which Gildan incurred earlier in the year. These factors more than offset the benefit from higher net selling prices and more favorable product-mix compared to the prior year quarter.
SG&A expenses for the fourth quarter of 2018 of $95.5 million were down 8 percent compared to $103.9 million in the fourth quarter of 2017. As a percentage of sales, SG&A expenses were 12.9 percent, down 300 basis points from 15.9 percent in the fourth quarter last year primarily reflecting the benefit of cost reductions driven by its organizational consolidation and a higher sales base. Operating margin and adjusted operating margin in the fourth quarter of 2018 were 10.5 percent and 13.5 percent, respectively, better by 100 and 230 basis points, respectively, compared to the fourth quarter of 2017. The improvement was mainly due to lower SG&A expenses as a percentage of sales, partly offset by a lower gross margin.
Gildan incurred $21.7 million and $34.2 million of restructuring and acquisition-related costs in the fourth quarter of 2018 and for the full year, respectively. These costs primarily related to the company’s organizational realignment and the consolidation of textile and sock manufacturing, warehouse distribution, and garment dyeing operations. Gildan had initially projected restructuring and acquisition-related costs for 2018 to be in the range of $15 to $20 million. The higher than previously anticipated restructuring and acquisition-related costs were largely associated with the consolidation of textile manufacturing and sock production capacity, as well as the closure of an additional distribution facility in North Carolina, which were not assumed in its initial guidance. With respect to textile manufacturing, during the fourth quarter of 2018, we made the decision to close its AKH textile facility in Honduras, which was acquired as part of the Anvil acquisition in 2012, and was operating in leased premises outside of its large manufacturing complex in Rio Nance. We transitioned this production that was largely for fashion basics products into its new state-of-the art Rio Nance 6 textile facility, which we are ramping up with new equipment geared for more efficient production of fashion basics. In addition, during the fourth quarter, we began the consolidation of its sock operations, integrating the majority of its sock production in Honduras into its Rio Nance 4 facility, with its Rio Nance 3 facility now largely focusing on its garment dyeing operations.
Income tax expense for the quarter was $10.0 million compared to $1.2 million in the fourth quarter of 2017. Income tax expense in both periods included deferred income tax expense adjustments of $7.6 million and $1.7 million respectively, associated with restructuring and acquisition-related actions and the impact of tax rate changes2. On a full year basis for 2018, the effective income tax rate, excluding the impact of restructuring and acquisition-related costs and the aforementioned deferred tax adjustments, was 3.3 percent, slightly lower than the anticipated full year tax rate of 4 percent.
Net earnings totaled $59.6 million or $0.29 per share on a diluted basis for the three months ended December 30, 2018, compared with net earnings of $54.9 million or $0.25 per share for the three months ended December 31, 2017. Adjusted net earnings1 of $88.9 million were up 31.5 percent from $67.6 million in the fourth quarter last year. Gildan generated adjusted diluted EPS for the fourth quarter of $0.43, up 38.7 percent compared to last year mainly due to higher adjusted operating income and the benefit of a lower share count compared to the prior year, partly offset by higher financial and income tax expenses.
Gildan generated strong free cash flow of $252.4 million in the fourth quarter, up $86.7 million over the prior year quarter due mainly to higher earnings, more favorable working capital changes, and slightly lower capital expenditures. Full year free cash flow totaled $428.9 million and was in line with the increased guidance we provided in August calling for free cash flow in excess of $425 million. Capital expenditures for the fourth quarter amounted to $26.2 million bringing its full year capital expenditures at $125.2 million for the year, in line with its guidance. Capital expenditures for the quarter and for the full year reflected investments primarily in textile capacity and related sewing expansion, distribution, and information technology. During the fourth quarter we repurchased 664,289 common shares for cancellation at a total cost of $19.6 million completing a total of 12.6 million common share repurchases for the full year of 2018 at a total cost of $367.5 million. Net debt1 at the end of the year amounted to $622.3 million and its net debt leverage ratio1 of 1.0 times net debt to trailing twelve months adjusted EBITDA1 for 2018 was in-line with its target leverage framework.
Full Year Results
Net sales of $2,908.6 million in 2018 were up 5.7 percent over last year and in line with guidance. Sales growth for the year reflected a 13.6 percent increase in activewear sales, partly offset by a 17.0 percent decline in the hosiery and underwear category as projected in its latest guidance. The increase in activewear sales was driven by higher unit sales volume and net selling prices, more favorable product mix, and positive foreign exchange impacts compared to the prior year. Activewear unit volume growth was mainly due to higher shipments of imprintable products in the U.S., including fashion basics and fleece products, combined with strong double digit unit sales volume growth in international markets and higher unit sales of global lifestyle brand products. The decline in the hosiery and underwear category was mainly due to lower sock volumes in the mass market channel, particularly as a result of the shift to private label brands by mass retailers, as well as declines in licensed and Gold Toe® brand sales. Favorable product-mix was driven by higher sales of fleece and fashion basics and higher value sock sales.
Gross margin for 2018 totaled 27.7 percent, down 140 basis points over the prior year, mainly due to higher raw material and other input costs, as well as higher manufacturing costs primarily related to disruptions in its supply chain which occurred earlier in the year, and costs related to the ramp up of activewear capacity, partly offset by higher net selling prices and the benefit of a richer product-mix compared to last year.
SG&A expenses of $368.5 million were down $8.8 million, or 2.3 percent over the prior year, and as a percentage of sales, SG&A expenses in 2018 decreased by 100 basis points compared to 2017. The improvement in SG&A expenses was mainly due to the benefit of cost reductions resulting from its organizational realignment which Gildan began to implement at the start of the year. Gildan generated cost reductions from the consolidation of marketing, sales, distribution and administrative functions which more than offset investments related to e-commerce and distribution capabilities primarily in the first half of the year. SG&A expenses as a percentage of sales for the second half of 2018 were 12.3 percent, down 220 basis points compared to 14.5 percent in the second half of 2017, and exceeded its guidance calling for SG&A expenses as a percentage of sales in the second half of the year to be lower by 100 to 200 basis points compared to the prior year due to better than anticipated cost management. In line with the latest guidance, operating margin of 13.9 percent for 2018 was down 70 basis points over the prior year, and adjusted operating margin of 15.0 percent was slightly down by 40 basis points compared to 2017, primarily reflecting the gross margin decline which more than offset the benefit of lower SG&A expenses as a percentage of sales.
Net earnings for 2018 were $350.8 million, down from $362.3 million in 2017. On a diluted basis, GAAP EPS totaled $1.66, up 3.1 percent from $1.61 in the prior year. Adjusted net earnings for 2018 were $393.1 million or $1.86 per diluted share, up 1.6 percent and 8.1 percent, respectively, compared to adjusted net earnings of $386.9 million or $1.72 per diluted share in 2017, and in line with the company’s guidance of adjusted diluted EPS of $1.85 to $1.87. The increase in adjusted net earnings for 2018 over the prior year was mainly due to the contribution of higher sales, which more than offset the decline in adjusted operating margin and higher financial expenses. GAAP EPS and adjusted EPS on a diluted basis also benefited from a lower share count. Adjusted EBITDA1 for the year totaled $595.5 million, coming in just slightly under the low end of its guidance range.
Outlook
For 2019, Gildan is projecting GAAP diluted EPS growth of 17 percent and adjusted diluted EPS growth of 10 percent over 2018, at the midpoint of its guidance range, on projected sales growth in the mid-single-digit range. We are initiating guidance for 2019 calling for GAAP diluted EPS of $1.90 to $2.00, and adjusted diluted EPS in the range of $2.00 to $2.10 after excluding the impact of projected restructuring and acquisition-related costs of approximately $20 million, which we expect to incur as we drive operational efficiencies across the organization. Adjusted diluted EPS in the first half of the year is projected to be down compared to the first half of 2018, and higher in the second half of 2019 over the same period in the prior year. Adjusted EBITDA for 2019 is expected to be in excess of $630 million and we expect to generate approximately $350 to $400 million in free cash flow for 2019.
Sales growth in 2019 is expected to be driven by higher sales volume in key growth areas, including fashion basics, international markets, global lifestyle brands, and strong underwear growth. Projected sales growth also assumes the benefit of favorable product-mix and selling price increases to cover higher raw material and other input costs. The positive impact of these factors on sales are expected to be partly offset by anticipated lower sales of activewear basics and socks, as well as an unfavorable impact of foreign exchange.
Projected growth in adjusted diluted EPS for 2019 reflects its sales growth assumptions, continued cost benefits from supply chain initiatives which are expected to start to flow through in the latter part of 2019, SG&A leverage and the benefit of share repurchases. These positive factors are projected to be partly offset by higher raw material and other input costs, including inflationary pressures. While raw material costs are expected to be up for the full year, the unfavorable impact is expected to be more meaningful in the first half of the year. For the full year Gildan is targeting gross margin in line with the prior year level and we are targeting SG&A expenses as a percentage of sales to continue to improve over 2018 levels. Accordingly, operating margin for 2019 is expected to be slightly higher than 2018 and its income tax rate is projected to be approximately 4 percent.
Gildan is projecting adjusted diluted EPS of $0.24-$0.26 for the first quarter of 2019, down from adjusted EPS of $0.34 in the first quarter of 2018, as a result of high raw material and other input cost pressures and a mid to high-single-digit sales decline projected in the first quarter of 2019. We are projecting lower sales of imprintables in the first quarter this year, as we do not anticipate the same level of distributor restocking that occurred in the same quarter last year in advance of the price increase implemented in the latter part of the first quarter of 2018. Gildan’s sales projection for the first quarter of 2019 also assumes lower sales in the hosiery and underwear category, ahead of the roll-out of its new private label men’s underwear program which is planned to ship during the second and third quarters of 2019. These sales impacts are expected to normalize as we move into the second quarter, with sales growth expected during the remaining quarters of the year, aligning to deliver its overall sales guidance for 2019. Finally, the full year unfavorable impact of foreign exchange on sales is expected to be more meaningful in the first half of 2019.
