Gildan Activewear Inc. shared its results for the fourth quarter and year ended January 1, 2017 and initiated guidance for 2017. The company also announced a 20 percent increase in the amount of its quarterly dividend and the renewal of its normal course issuer bid to repurchase up to 5 percent of its issued and outstanding common shares.
For the year ended January 1, 2017, the company achieved diluted EPS of $1.47, and adjusted EPS of $1.51, slightly above its previous guidance of adjusted EPS of $1.48 to $1.50. Sales for the full year of $2.59 billion were essentially in line with the company’s previous sales guidance of approximately $2.6 billion. Adjusted EPS of 32 cents a share in the fourth quarter was up 14 percent on sales of $588 million, which were up 8 percent over the fourth calendar quarter of 2015. Results for the Printwear segment were in line with the company’s expectations, while retailer inventory reductions in the fourth quarter contributed to lower-than-anticipated sales in Branded Apparel.
The company generated strong free cash flow in the quarter of $142 million, resulting in record free cash flow of $398 million for the full year. During 2016 the company executed on all of its capital allocation priorities, including the completion of two acquisitions, while returning approximately $470 million to shareholders through the payment of dividends and share repurchases.
Consolidated Results
The 8.1 percent increase in consolidated sales in the quarter compared to the corresponding quarter in 2015 reflected sales increases of 14.4 percent in the Printwear segment and 1.2 percent in Branded Apparel. Growth was primarily driven by the impact of the Alstyle and Peds acquisitions and organic unit sales volume growth in Printwear, partly offset by the impact of significant retailer inventory de-stocking and the anticipated impact of the exit of private label programs in Branded Apparel, as well as lower net selling prices in Printwear. The acquisitions of Alstyle and Peds contributed approximately $50 million in sales in the fourth quarter of 2016.
Consolidated gross margin in the fourth quarter of 2016 was 26.7 percent, in line with the same period last year, as the benefits from lower raw material and other input costs were largely offset by lower net selling prices. SG&A expenses as a percentage of sales of 14.8 percent in the quarter were up from 13.4 compared to the prior-year quarter, due primarily to higher marketing and advertising expenses as well as SG&A deleveraging in Branded Apparel due to lower organic sales compared to the fourth-calendar quarter last year. Operating margins and adjusted operating margins in the fourth quarter of 2016 were both 11.9 percent compared to 13 percent and 13.2 percent, respectively, in the same period last year.
Net earnings totaled $74.3 million or 32 cents per share on a diluted basis for the three months ended January 1, 2017, compared with net earnings of $67.6 million or 28 cents per share for the three months ended January 3, 2016. Excluding after-tax restructuring and acquisition-related costs of $0.2 million in the quarter and $1.3 million in the same quarter last year, Gildan reported adjusted net earnings of $74.5 million, or 32 cents per share on a diluted basis for the fourth quarter of 2016, up from $68.9 million, or 28 cents per share in the prior-year quarter. The 14.3 percent increase in adjusted diluted EPS was primarily due to higher gross profit, an income tax recovery in the quarter and the benefit of share repurchases during the year, partly offset by higher SG&A and financial charges.
The company generated strong free cash flow of $141.9 million in the fourth quarter, up $42.6 million or 43 percent from the same quarter last year. For the full year, the company achieved a record level of free cash flow totaling $398.4 million, up 151 percent over the prior year. The increase in free cash flow for both periods reflected higher cash from operating activities, including favorable changes to working capital and a reduction in capital expenditures. Capital expenditures of approximately $140 million for 2016 came in slightly lower than the company’s previous guidance of approximately $150 million and reflected investments primarily related to textile capacity, including the development of Rio Nance 6 and capacity expansion in Bangladesh, as well as investments in yarn-spinning, including the ramp-up of ring-spun yarn production in the Mocksville, NC facility.
During the fourth quarter of 2016, the company repurchased approximately 1.6 million common shares under its NCIB at a total cost of $42.8 million. During the course of 2016, the company repurchased a total of 13.8 million common shares at a total cost of $394.5 million. Gildan ended the quarter with net debt of $562 million and a leverage ratio of 1 times net debt to adjusted EBITDA, in line with targeted levels.
Segmented Operating Results
The Printwear business continued to perform well in line with management’s expectations. Segment sales for the fourth quarter of 2016 grew strongly to $325.8 million, up 14.4 percent from $284.9 million in the same calendar quarter last year. The increase was mainly due to the $30 million sales contribution from the Alstyle acquisition and organic unit sales volume growth, driven by strong double-digit volume growth in international printwear markets and higher sales of fashion basics. These positive factors were partly offset by lower net selling prices and the impact of unfavorable foreign currency exchange on international sales.
Operating income in Printwear for the three months ended January 1, 2017 totaled $68.6 million, up 9.2 percent compared to $62.8 million in the fourth calendar quarter of 2015. Operating margins were 21 percent, down 100 basis points over the prior year, due primarily to lower 2016 net selling prices, unfavorable foreign currency exchange and the short-term dilutive impact on operating margins from the acquisition of Alstyle. These factors were partly offset by the benefit of lower raw material and other input costs.
Net sales for the Branded Apparel segment in the quarter were $262.1 million, up 1.2 percent from $258.9 million in the fourth calendar quarter of 2015. Despite a challenging retail environment, the approximate $20 million impact from the Peds acquisition combined with positive point of sales growth during the quarter more than offset the impact of significant retailer inventory de-stocking and the anticipated impact of the exit of certain private label programs as the company had previously planned.
Operating income in Branded Apparel was $24 million in the three months ended January 1, 2017 compared to $31 million in the same quarter last year. Branded Apparel operating margins for the quarter were 9.1 percent, down from 12 percent in the same quarter last year. The operating margin decline was primarily due to re-timed marketing and advertising expenses and SG&A deleveraging resulting from lower organic sales impacted by retailer inventory de-stocking, partly offset by lower raw material and other input costs.
Year-To-Date Consolidated Sales And Earnings
Consolidated net sales of $2,585.1 million in 2016 were slightly up from $2,568.6 million in calendar 2015 due to a 1 percent increase in Printwear segment sales, while Branded Apparel sales were flat compared to the prior year. Net sales during 2016 were impacted by lower net selling prices, lower retailer inventory replenishment, the non-recurrence of distributor inventory re-stocking in 2015 and the exit of approximately $65 million in retailer private label programs combined with unfavorable foreign currency exchange and product mix.
These negative factors were more than offset by the benefit of positive POS growth in Printwear, organic sales growth in Branded Apparel excluding the planned exit of private label programs, and the acquisitions of Alstyle and Peds. Net sales for fiscal 2016 were essentially in line with the company’s previous sales guidance of approximately $2.6 billion, provided on November 3, 2016, with Branded Apparel sales impacted by retailer inventory reductions in the fourth quarter.
Net earnings for 2016 were $346.6 million, or $1.47 per share on a diluted basis compared to $346.1 million or $1.42 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 for 2016 were $356.3 million, slightly up from adjusted net earnings in calendar 2015. Adjusted diluted EPS for the year totaled $1.51 per share, up 3.4 percent compared to adjusted diluted EPS of $1.46 in the prior calendar year. The increase in adjusted EPS reflected higher adjusted operating income, lower income tax expense and the benefit of share repurchases during 2016, partly offset by higher financial charges.
The overall effective tax rate for 2016, excluding the impact of after-tax restructuring and acquisitions costs, was 2 percent compared to 2.3 percent for the same period of the prior year. The company achieved adjusted diluted EPS for 2016 slightly above its previous guidance of $1.48 to $1.50 provided on November 3, 2016, due to slightly higher operating income and the benefit of an income tax recovery in the fourth quarter.
Outlook
For 2017, Gildan expects to achieve adjusted diluted EPS in the range of $1.60 to $1.70, which at the midpoint of the guidance range represents growth of 9 percent over 2016 on projected high-single-digit consolidated net sales growth. Adjusted EBITDA for 2017 is expected to be in the range of $555 million to $585 million. The company is also projecting another record year of strong free cash flow generation in excess of $400 million.
Net sales in 2017 in the Printwear and Branded Apparel segments are each expected to increase in the high-single-digit range. For Printwear sales, the company is assuming overall unit sales volume growth, including continued penetration in the fashion and performance segments of the North American market and double-digit international printwear shipment growth, which is expected to more than offset the assumption of unfavorable foreign exchange impacts. Printwear sales in 2017 compared to the prior year are also expected to benefit from positive product mix.
Projected sales growth in Branded Apparel in 2017 reflect assumptions for sales growth from increased shelf space and new programs in the retail channel and favorable product mix. Total projected consolidated net sales for 2017 assume an incremental impact of approximately $160 million to $185 million in sales from acquisitions completed in 2016 and early 2017. Expected sales from the Peds acquisition are included in the company’s Branded Apparel sales projections, while the projected impact of the acquisitions of Alstyle and American Apparel is included in the company’s projected Printwear segment sales.
The projected growth in adjusted diluted EPS for 2017 reflects primarily the benefit of expected organic sales growth from both operating segments and favorable product mix. In addition, the company expects an approximate 5 cents to 7 cents per share accretive impact on earnings from acquisitions. The contribution on earnings from the acquisition of American Apparel is expected to be neutral in 2017 and accretive thereafter. The positive factors contributing to earnings growth in 2017 are expected to be partly offset by projected increases in SG&A expenses, higher income taxes, and unfavorable foreign exchange.
The net impact of net selling prices, manufacturing cost savings from capital projects, and raw material costs compared to the prior year is expected to be favorable in the first half of 2017 and neutral to earnings for the full year. Projected earnings growth for 2017 is expected to be weighted in the first half of the year with strong earnings growth in the first quarter. The company is assuming an income tax rate of approximately 5 percent in 2017. Consolidated operating margin for 2017 is expected to be slightly higher than 2016.
The company’s strong free cash flow projection for 2017 reflects expected capital expenditures of approximately $125 million for the year to support future growth, primarily for textile capacity related to the continued development of the Rio Nance 6 facility in Honduras, capacity expansion in Bangladesh, investments in distribution and garment dyeing and sewing capacity expansion to align to increases in textile capacity.
Increase In Quarterly Dividend And Renewal Of Normal Course Issuer Bid
The Board of Directors has approved a 20 percent increase in the amount of the current quarterly dividend and has declared a cash dividend of 9.35 cents per share, payable on April 3, 2017 to shareholders of record on March 9, 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. This is the company’s fifth consecutive annual 20 percent increase in the quarterly dividend since inception of the dividend.
The company announced that it had received approval from the Toronto Stock Exchange (“TSX”) for a new normal course issuer bid (“NCIB”) commencing on February 27, 2017 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, the company had 230,245,359 common shares issued and outstanding.
Gildan is authorized to make purchases under the bid during the period from February 27, 2017 to February 26, 2018 in accordance with the requirements of the TSX. Purchases will be made by means of open market transactions on both the TSX and the New York Stock Exchange (“NYSE”), or alternative trading systems, if eligible, or by such other means as the TSX, the NYSE or a securities regulatory authority may permit, including by private agreements under an issuer bid exemption order issued by securities regulatory authorities in Canada. Under the bid, Gildan may purchase up to a maximum of 131,732 shares daily through TSX facilities, which represents 25 percent of the average daily trading volume on the TSX for the most recently completed six calendar months. The price to be paid by Gildan for any Common Shares will be the market price at the time of the acquisition, plus brokerage fees, and purchases made under an issuer bid exemption order will be at a discount to the prevailing market price in accordance with the terms of the order.
Gildan’s current NCIB, which was initially approved by the TSX on February 24, 2016, and subsequently amended on July 26, 2016, authorized Gildan to make purchases under the bid from February 26, 2016 to February 25, 2017. During the three months ended January 1, 2017, the company repurchased for cancellation a total of 1,582,434 common shares under its current NCIB at a total cost of $42.8 million. During the twelve months ended February 22, 2017, the company repurchased for cancellation a total of 13,775,248 common shares under its NCIB for a total cost of $394.5 million and at a weighted average price paid per common share of approximately $28.64 of which a total of 4,025,000 common shares were repurchased by way of private agreements with arm’s length third party sellers.
Gildan’s management and the Board of Directors believe the repurchase of common shares represents an appropriate use of Gildan’s financial resources and that share repurchases under the NCIB will not preclude Gildan from continuing to pursue organic growth and complementary acquisitions.
Disclosure Of Outstanding Share Data
As at February 17, 2017, there were 230,245,359 common shares issued and outstanding along with 2,532,019 stock options and 249,033 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share from treasury at the end of the vesting period, without any monetary consideration being paid to the company. However, the vesting of at least 50 percent of each Treasury RSU grant is contingent on the achievement of performance conditions that are primarily based on the company’s average return on assets performance for the period as compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts, or as determined by the Board of Directors.
Gildan Renews Shareholder Rights Plan
The company also announced today that its Board of Directors has approved a new shareholder rights plan (the “Rights Plan”) which will become effective upon confirmation and approval by the shareholders of the company at the annual meeting of shareholders to be held on May 4, 2017. The Rights Plan will ensure that the company and its shareholders continue to receive the benefits associated with the company’s current shareholder rights plan, which is due to expire at the close of business on the date of the company’s upcoming annual meeting of shareholders. The Rights Plan is designed to ensure that all shareholders of the company are treated fairly in connection with any take-over offer or other acquisition of control of the company. The Rights Plan was not adopted in response to any specific proposal to acquire control of the company, nor is the Board of Directors aware of any pending or threatened take-over bid for the company. The Rights Plan is similar to plans recently adopted by other Canadian companies and approved by their shareholders, which include amendments to take into consideration the changes to the take-over bid rules that came into force in Canada on May 9, 2016. If approved by the shareholders, the Rights Plan will remain in effect until the close of business on the date of the company’s annual meeting of shareholders in 2020, with one renewal option subject to shareholder approval, and subject to earlier termination or expiration of the Rights Plan in accordance with its terms.
Change In Fiscal Year-End
As announced in the company’s fiscal 2015 filings, the company transitioned to a new fiscal year-end in 2015. As a result of this transition, the company’s year-end is now the Sunday closest to December 31, rather than the first Sunday following September 28. For purposes of its regulatory filings, the company’s reported results for fiscal 2015 included the 15-month transition period from October 6, 2014 through January 3, 2016. The company’s first 12-month fiscal year on a calendar basis began on January 4, 2016 and ended on January 1, 2017. The company has provided supplemental financial information on its website containing recast historical financial information for 2011 to 2015 on a calendar year basis. For purposes of this press release, the 2015 comparative figures have been presented on a calendar year basis.
Image courtesy Gildan Activewear