Gildan Activewear Inc. reported net profits climbed 13.7 percent on a 3.8 percent revenue gain while slightly raising its earnings guidance for the year.

The second quarter was another strong quarter of earnings growth and free cash flow generation. Sales reflected the impact of contributions from acquisitions, which came in as expected, with progress on integration activities well on plan. Branded Apparel benefited from strong growth in men’s underwear and Printwear benefited from continued momentum in fashion basics and international markets. Operating margins in the quarter increased by 200 basis points compared to the same quarter last year, driving adjusted earnings per share growth of approximately 20 percent in the quarter. The company delivered strong free cash flow of $162.1 million in the quarter, generating record free cash flow of over $200 million in the first half of the year.

Consolidated Results

Consolidated net sales of $715.4 million in the second quarter ended July 2, 2017 were up $26.5 million or 3.8 percent compared to the second quarter in 2016, reflecting sales increases of 1.9 percent in the Printwear segment and 8.1 percent in Branded Apparel. The sales increase was driven by acquisitions and higher net selling prices, which was partly offset by lower unit sales volumes of fleece and the impact of unfavorable foreign exchange.

Consolidated gross margin in the second quarter was 29.8 percent, up 240 basis points compared to the same period last year. The increase was mainly due to the favourable net impact of net selling prices and manufacturing and raw material costs compared to the same quarter last year, partly offset by the impact of unfavourable foreign exchange. Consolidated SG&A expenses as a percentage of sales were 12.5 percent, up 40 basis points compared to the same period last year due to the impact of acquisitions. Adjusted operating margins for the quarter totaled 17.3 percent, up 200 basis points compared to 15.3 percent in the same period last year.

Net earnings for the three months ended July 2, 2017, amounted to $107.7 million, or $0.48 per share on a diluted basis, compared with net earnings of $94.7 million, or $0.40 per share on a diluted basis for the same period last year. After excluding the impact of after-tax restructuring and acquisition-related costs of $2.8 million in the quarter and $1.7 million in the prior year quarter, Gildan reported adjusted net earnings of $110.5 million, or $0.49 per share on a diluted basis for the second quarter of 2017, up from $96.4 million, or $0.41 per share on a diluted basis in the same quarter last year. The 19.5 percent increase in adjusted diluted EPS in the quarter was mainly driven by strong operating margin improvement, the impact of acquisitions and the benefit of share repurchases.

Gildan generated free cash flow of $162.1 million in the second quarter of 2017, up $31.9 million from $130.2 million in the same quarter last year. The increase was mainly due to the impact of higher earnings, lower capital expenditures and working capital improvements. Capital expenditures during the second quarter totaled $17.8 million primarily for investments in textile capacity, distribution and garment dyeing expansion. During the second quarter of 2017, the company repurchased approximately 2.5 million common shares under its normal course issuer bid (NCIB) at a total cost of $68.0 million. The company ended the second quarter with net debt of $658.2 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 second quarter of 2017 were $480.1 million, up 1.9 percent over the same period last year. The incremental sales contribution of approximately $29 million from acquisitions combined with strong double-digit organic unit sales increases in fashion basics, higher net selling prices and increased shipments in international markets were partly offset by lower unit sales volumes of fleece in the quarter and the impact of unfavorable foreign exchange.

Printwear segment operating income for the three months ended July 2, 2017 totaled $122.1 million, up 10.0 percent compared to $111.0 million for the same period last year. Operating margins for Printwear were 25.4 percent, up 190 basis points over the prior year quarter due primarily to the favourable net impact of net selling prices and manufacturing and raw material costs, partly offset by unfavourable foreign exchange impacts and SG&A expenses from acquisitions.

Net sales for the Branded Apparel segment in the quarter were $235.3 million, up 8.1 percent from $217.6 million in the second quarter of 2016 driven primarily by the approximate $17 million sales contribution of the Peds acquisition and strong growth in men’s underwear, partly offset by lower global lifestyle and Gold Toe® branded sock sales reflecting weakness in department stores and national chains.

For the three months ended July 2, 2017, Branded Apparel generated strong operating income of $26.0 million, up 52.0 percent compared to $17.1 million in the same quarter last year. Branded Apparel operating margins of 11.0 percent increased 320 basis points over the same quarter last year. The significant improvement in operating margins was primarily attributable to the favourable impact of manufacturing and raw material costs compared to the prior year quarter, and lower SG&A expenses as a percentage of Branded Apparel sales, partly offset by unfavourable product-mix.

Year-to-date sales and earnings

Consolidated net sales of $1,380.7 million in the first six months of 2017 increased by $98.5 million or 7.7 percent compared to the same period last year, reflecting sales increases of 7.2 percent in the Printwear segment and 8.6 percent in Branded Apparel. The increase in consolidated net sales was due to the aggregate incremental sales contribution of $106 million from the 2016 acquisitions of Alstyle and Peds, as well as the American Apparel acquisition which closed during the first quarter of 2017. The benefit of higher net selling prices, increased unit sales of printwear fashion basics and favourable product-mix during the first six months of the year was more than offset by the impact of lower unit sales of printwear basics, the planned exit of private label programs in Branded Apparel and the impact of unfavourable foreign exchange.

Gross margins for the six months ended July 2, 2017, of 29.1 percent were up 220 basis points compared to the same period last year, reflecting gross margin expansion 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 percentage of sales for the first six months of 2017 were 12.9 percent, up from 12.7 percent of sales in the same period last year, mainly due to the impact of acquisitions. Consolidated adjusted operating margins in the first six months of 2017 totaled 16.2 percent, up 200 basis points over the same period last year.

Net earnings for the first six months of 2017 were $191.2 million, or $0.84 per share on a diluted basis, up from net earnings of $157.9 million, or $0.66 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 $200.6 million or $0.88 per share on a diluted basis in the first six months of 2017, up 21.3 percent and 27.5 percent, respectively, compared to adjusted net earnings of $165.4 million or $0.69 per share in the same period last year. The increase in adjusted net earnings reflected the strong improvement in operating margins and the impact of acquisitions, partly offset by higher financial and income tax expenses. Adjusted EPS growth also reflected the benefit of share repurchases.

Outlook

The company updated its full year financial guidance for 2017, which it initiated in February this year. Given the company’s performance in the first half of the year, adjusted diluted EPS is now expected to be at the high end of the $1.60-$1.70 range, on projected consolidated and segmented net sales growth which remains in the high-single-digit range. As projected when the company initiated its 2017 guidance, earnings growth was strong during the first half of 2017, while earnings in the second half of the year will reflect the anniversary of the Alstyle and Peds acquisitions and headwinds from higher raw material costs. The company also updated its expectations for adjusted EBITDA for 2017 and now anticipates adjusted EBITDA at the high-end of its previous guidance range of $555-$585 million. Capital expenditures for the year are currently projected to come in at approximately $100 million compared to the company’s initial expectation of $125 million and total free cash flow is expected to be in excess of $425 million, up from in excess of $400 million.

Declaration of quarterly dividend

The Board of Directors has declared a cash dividend of U.S. $0.0935 per share, payable on September 11, 2017 to shareholders of record on August 17, 2017. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.

Normal course issuer bid

On February 23, 2017, the company announced the renewal of a normal course issuer bid (NCIB) beginning February 27, 2017 and expiring February 26, 2018, to purchase for cancellation up to 11,512,267 common shares, representing approximately 5 percent of the company’s issued and outstanding common shares as of February 17, 2017.

During the first half of the year, the company had repurchased for cancellation a total of approximately 6.0 million common shares at a total cost of $157.2 million.

Photo courtesy Gildan Activewear