Gildan Activewear reported sales rose 4.8 percent in the fourth quarter year-over-year while earnings on an adjusted basis improved 9.8 percent.

“Our Back to Basics strategy put us on a sound footing going into the pandemic and the additional actions we have taken during 2020 have enhanced our competitive positioning as we work towards a stronger environment, growth, and achieving our long-term profitability targets,” said Glenn J. Chamandy, president and CEO of Gildan. “Further, against the backdrop of the pandemic and the headwind of back-to-back hurricanes in Central America, our team showed exceptional operational execution and delivered strong results for the fourth quarter.”

In the fourth quarter, Gildan reported GAAP diluted EPS of $0.34 and adjusted diluted EPS of $0.45 before reflecting net charges of approximately $23 million primarily related to its SKU rationalization initiative. Gildan generated $690 million in sales, a strong recovery from the third quarter and up 5 percent compared to the prior year. Adjusted gross margin of 25.8 percent in the quarter exceeded prior-year levels and reflected a 330 basis point improvement from the third quarter this year. Selling, general and administrative expenses (SG&A) were down 6 percent bringing SG&A as a percentage of sales to 10.4 percent, a 120 basis point improvement over the prior year. Consequently, Gildan reported an adjusted operating margin of 15.3 percent, up from 14.1 percent a year ago. Gildan reduced inventories over the prior year and generated a fourth-quarter record-free cash flow of $278 million bringing Gildan’s full-year total to $358 million. At the end of the fourth quarter, its available liquidity position was $1.56 billion with net debt1 totaling $577 million, down from $862 million a year ago.

Despite these strong results, the quarter had its challenges. Starting early November, two back-to-back hurricanes hit Central America, and Gildan suspended production temporarily at its Rio Nance complex and at other locations in Honduras and Nicaragua. The hurricanes caused equipment, inventory and other damages, and facilities in certain locations were closed through November and part of December before Gildan reopened and resumed production. As it managed through this disruption, Gildan continued to service Gildan’s customers during the fourth quarter from existing inventories, production from other regions and production earlier in the quarter in Central America.

In the wake of the destruction caused by the hurricanes, the company put Gildan’s teams on the ground to help employees and the community rebuild..

“I am extremely proud of the efforts of Gildan’s manufacturing team who rose to meet additional challenges in the midst of the ongoing pandemic, tending to humanitarian needs to support these communities and restoring production at our facilities,” said Glenn Chamandy. “While responsibility and sustainability have always been at the core of how we do business, 2020 has amplified the importance of strong environmental, social, governance (ESG) practices as an integral part of our strategy. To this end, we were pleased that for the eighth year running we were included in the Dow Jones Sustainability Index in 2020, we were recognized as a top performer on CDP’s 2020 Climate Change Report and more recently, we received the Silver Class distinction in The Sustainability Yearbook 2021.”

Fourth Quarter Results
Net sales for the fourth quarter ending January 3, 2021, of $690.2 million were up 4.8 percent compared to the fourth quarter of 2019, consisting of activewear sales of $537.9 million, up 11.3 percent, and sales of $152.3 million in the hosiery and underwear category, down 13.0 percent compared to the prior-year quarter. Increased activewear sales reflected favorable imprintables product-mix, higher imprintables volume growth in North America and higher unit sales of activewear through retail channels, partly offset by lower international shipments. Imprintables volume growth in North America was primarily due to the benefit of the non-recurrence of distributor de-stocking that occurred in the fourth quarter last year, partly offset by a decline in POS due to the current COVID-19-related demand environment which also affected international markets. While imprintable POS in North America was down compared to last year, Gildan said it was pleased to see sequential improvement in sell-through trends, with POS in the quarter down on average less than 10 percent year-over-year, better than the 15 percent to 20 percent POS decline it saw in the third quarter this year. The decline in hosiery and underwear sales was driven entirely by lower sales of socks, a category that has been more heavily impacted by the current pandemic environment, particularly within national chains and department stores, and sports specialty channels. Underwear sales were up 20 percent in the quarter, significantly outpacing industry demand and reflecting continued market share gains with its private label men’s underwear program, as well as with ts own branded underwear products.

Gildan’s reported gross margin in the fourth quarter was 22.5 percent compared to a gross margin of 17.9 percent in the fourth quarter of 2019. Before reflecting inventory charges largely in connection with our SKU rationalization initiative in both years and a net insurance gain recognized in the fourth quarter of 2020, adjusted gross margin totaled 25.8 percent, up 20 basis points compared to an adjusted gross margin of 25.6 percent last year. The year-over-year increase was mainly due to stronger imprintables product-mix, lower raw material costs, and manufacturing efficiencies from its Back to Basics initiatives, partly offset by lower net selling prices and COVID-19-related and other period costs. On a sequential basis, adjusted gross margin improved significantly, up 330 basis points compared to the third quarter of 2020 largely due to stronger product-mix and lower COVID-19-related period costs.

During the fourth quarter, as part of Gildan’s Back to Basics efforts, Gildan conducted a comprehensive retail SKU rationalization review and incurred an inventory charge of $26.0 million. Gildan also recorded a charge of approximately $6.2 million related to the discontinuance of personal protective equipment (PPE) SKUs. Further, a net gain of $9.6 million in the quarter was recorded for insurance recoveries accrued to date net of costs incurred due to the impact of the hurricanes on its business operations. Overall, these net pre-tax charges totaling $22.6 million were excluded from Gildan’s adjusted financial measures.

SG&A expenses for the fourth quarter of $71.9 million, or 10.4 percent of sales, were down $4.6 million, or 6 percent compared to $76.5 million, or 11.6 percent of sales, for the same quarter in 2019. The year-over-year reduction primarily reflected the benefits of Gildan’s cost containment efforts.

Operating income of $78.8 million in the fourth quarter was up from $24.3 million last year. On an adjusted basis, Gildan generated adjusted operating income1 of $105.7 million, up from $95.3 million last year. The increase was due to higher sales, higher adjusted gross margin and lower SG&A expenses. Net financial expenses of $13.1 million were up $3.6 million over the prior-year quarter, mainly due to fees incurred in connection with the amendments made to its long-term debt facilities earlier this year and the impact of foreign exchange. Consequently, Gildan reported net earnings of $67.4 million, or $0.34 per diluted share, for the fourth quarter of 2020 and adjusted net earnings1 of $90.0 million, or $0.45 per diluted share, compared to net earnings of $32.5 million, or $0.16 per diluted share, and adjusted net earnings of $83.4 million, or $0.41 per diluted share, respectively, in the fourth quarter last year.

Gildan said it generated record free cash flow in the quarter totaling $278 million, up from $241 million last year. The improvement in free cash flow was driven primarily by a significant reduction in Gildan’s inventories and lower capital expenditures. Inventories at the end of the quarter totaled $728 million versus $939 million at the end of the third quarter of 2020 and $1,052 million at the end of 2019. The company spent $13.4 million in capital expenditures in the quarter, down from $21.3 million last year, primarily for maintenance purposes. At the end of the fourth quarter, the company had net debt of $577 million, down from $862 million at the end of 2019, and available liquidity of $1.56 billion. The company’s reported net debt leverage ratio was 3.5 times adjusted EBITDA1. After reflecting debt covenant adjustments which exclude the impact of the second quarter of 2020 the company’s net debt leverage ratio was 1.3 times adjusted EBITDA.

Full Year Results
Net sales for 2020 totaled $1,981.3 million, down 29.8 percent from the prior year, reflecting declines of 33.8 percent in activewear and 14.1 percent in the hosiery and underwear category. The overall sales decline in 2020 was largely volume-driven as a result of the significant adverse impact that the global COVID-19 pandemic has had on economic activity worldwide. The decrease in activewear sales where the company generated sales of $1,498.4 million was mainly attributable to lower unit sales due to the demand downturn combined with the impact of distributor inventory de-stocking in imprintables, unfavorable product mix, and the impact of more aggressive pricing action taken in imprintables during the year primarily through promotional discounting. The overall sales decline in the hosiery and underwear category where Gildan generated $482.9 million in sales in 2020 also reflected the COVID-19-related impact on demand in retail channels of distribution, specifically lower demand in socks, partly offset by a 27.7 percent increase in underwear sales primarily driven by strong growth of private brands men’s underwear products.

Gross profit totaled $249.1 million and adjusted gross profit1 was $305.7 million compared to $704.5 million and $759.5 million, respectively, in 2019. The main factors driving the significant year-over-year decline in adjusted gross profit, most of which were triggered by the COVID-19 pandemic, were lower unit sales volumes, unabsorbed fixed manufacturing costs while capacity was idle, inventory provisions, as well as the impact of exiting excess commodity derivative hedges and cotton commitments. The adjusted gross profit decline also reflected an unfavorable product-mix and higher promotional discounting in the imprintables channel. These factors were partly offset by lower raw material costs compared to the prior year.

SG&A expenses of $272.3 million in 2020 were down $68.2 million compared to 2019 primarily as a result of lower compensation and volume-driven distribution costs, as well as the benefit of other cost containment efforts. Impairment of trade accounts receivable of $15.5 million was down $12.2 million from 2019 due primarily to the non-recurrence of a loss related to a distributor receivership in 2019, partly offset by an increase in the estimate of expected credit losses due to the heightened credit risk caused by the pandemic. Restructuring and acquisition-related costs of $48.2 million in 2020 were incurred primarily in connection with Back to Basics strategic initiatives, including the consolidation of manufacturing operations and other manufacturing optimization initiatives. This compared to restructuring and acquisition-related costs of $47.3 million in 2019. An impairment of goodwill and intangible assets acquired during previous sock and hosiery business acquisitions of $94.0 million was recorded in the first quarter of 2020 due to the adverse impacts of the COVID-19 pandemic on global economic activity and enterprise values of companies worldwide, including its impact on the company’s business and share price.

After reflecting on the above expenses and charges, Gildan said it incurred an operating loss of $180.8 million in 2020 compared to an operating income of $289.0 million in 2019. Excluding restructuring and acquisition-related costs, charges related to rationalized product SKUs, the net insurance gain in 2020, and the impairment for goodwill and intangible assets, adjusted operating income in 2020 amounted to $18.0 million compared to adjusted operating income of $391.3 million last year. The decrease reflected the lower sales base and the significant operating margin decline which led to a reported net loss in 2020 of $225.3 million, or $1.14 per share on a diluted basis, and an adjusted loss1 of $36.3 million, or $0.18 per diluted share.

Current Market Environment
Gildan wrote, “Given the ongoing impact of COVID-19, we are not providing financial guidance for 2021. Nonetheless, the following reflects what we are currently seeing in the market and some of our expectations. Imprintables POS is currently tracking slightly weaker than during the fourth quarter, down 10 percent to 15 percent in the U.S. and international markets compared to 2019 levels, due to the impact of renewed winter lockdowns in many jurisdictions. In retail, we continue to see year-over-year growth in our activewear and underwear sales; however, sales in the sock category continue to be down year-over-year. Consequently, while we expect higher overall sales in 2021 compared to 2020, we remain cautious with our expectations for 2021 given the evolution of the COVID-19 pandemic and ongoing restrictions on social gatherings. Despite this uncertainty, we continue to be pleased with the progress we have made driving our Back to Basics strategy which we believe will continue to strengthen our financial and operating flexibility and support our margins as we continue to drive towards our long-term targets.

“The company expects to resume investments in 2021 with projected capital expenditures running in the range of 4 percent of sales, including the continuation of our major capacity expansion project in Bangladesh. Further, we are targeting to generate positive free cash flow in 2021. While we are currently well-positioned from liquidity and free cash flow generating perspective, before resuming capital return to shareholders through the payment of dividends and share repurchase programs, the company’s priority remains to position its external net debt leverage ratio within its historical target range of one to two times net debt to adjusted trailing twelve months EBITDA. As such, once we achieve this level we expect that our Board will review capital return policies. Finally, the company continues to assess the full impact of the hurricanes on its business operations and expects to recognize additional insurance recoveries in fiscal 2021. All future insurance recoveries, net of related costs and charges, will be excluded from the company’s adjusted financial measures.”

Organizational Announcements
Earlier this quarter, Mike Hoffman, president, sales, marketing and distribution, announced that effective February 28, 2021, he would retire from Gildan. Hoffman has played a significant role in Gildan’s growth over the last 20 years developing and growing its sales, marketing and distribution out of Barbados as Gildan built a global business in imprintables. He also assumed responsibility for all similar retail-related activities with the initiation of Gildan’s Back to Basics strategy.

“Mike has been a key member of the Gildan executive team, and I thank Mike for the many important contributions he has made over the years. On behalf of everyone at Gildan, we wish Mike all the best for the future” said Glenn Chamandy.

With Hoffman’s retirement and in line with the succession plan the company had in place, effective March 1, 2021, Chuck Ward will assume the role of president, sales, marketing, and distribution, based in Barbados.

“With significant experience across diverse apparel industry roles, most recently leading its overall North American Sales, Marketing and Distribution activities as SVP, North America, Chuck is well-positioned to assume this key leadership role” said Glenn Chamandy. In parallel with these changes, Arun Bajaj has also been elevated to executive vice president, chief human resources officer. Arun has extensive global human resources experience and joined Gildan 16 months ago to support Gildan’s Back to Basics focus and long-term growth strategy.

Photo courtesy Gildan