Gildan Activewear Inc. reported first quarter net earnings of $15.6 million and diluted EPS of 26 cents, after recording charges in the quarter related to the previously announced restructuring of the company's Canadian manufacturing facilities totaling $1.4 million after-tax or 2 cents per share. Before reflecting the restructuring charges, adjusted net earnings and adjusted diluted EPS for the first quarter of fiscal 2007 amounted to $17.0 million or 28 cents per share, up respectively 4.9% and 3.7% from net earnings of $16.2 million and diluted EPS of 27 cents in the first quarter of fiscal 2006, and a penny per share higher than the earnings guidance provided by the company. Compared to last year, continuing strong growth in unit sales volumes, a higher-valued product-mix for activewear and favourable manufacturing efficiencies were essentially offset by lower unit selling prices for activewear, higher cotton costs and increased selling, general and administrative and depreciation expenses. The impact of the Kentucky Derby Hosiery acquisition on the company's results in the first quarter was accretive by a penny per share.
Sales in the first quarter amounted to $185.8 million, up 54.4% from $120.3 million in the first quarter of last year. The increase in sales revenues was due to $42.6 million of sock sales resulting from the acquisition of Kentucky Derby Hosiery, a 15.2% increase in unit sales volumes for activewear and the impact of a higher-valued activewear product-mix, partially offset by a reduction in unit selling prices for activewear of approximately 4% compared to last year. The first quarter is seasonally the lowest quarter of the fiscal year for sales of activewear.
The growth in activewear unit sales was primarily due to continuing market share penetration in all product categories in the U.S. distributor channel. The table below summarizes the S.T.A.R.S. data for market shares and industry growth in the U.S. distributor channel for the quarter ended December 31, 2006.
Gildan Gildan Gildan Industry
Market Share Market Share Unit Growth Unit Growth
Q1 2007 Q1 2006 Q1 2007 vs. Q1 Q1 2007 vs.
2006 Q1 2006
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44.2% 39.3% All products 19.6% 2.9%
46.0% 41.7% T-shirts 16.6% 2.7%
34.6% 33.9% Sport shirts 4.2% (9.9)%
36.0% 27.7% Fleece 58.1% 8.7%
Gross margins in the first quarter of fiscal 2007 were 29.0%, versus 35.7% in the first quarter of 2006. The decrease in gross margins was largely attributable to the impact of lower margins from the sale of socks, which do not yet reflect the anticipated cost synergies from the planned rationalization of the company's sock manufacturing operations. Excluding the impact of sock sales, gross margins in the first quarter of fiscal 2007 were 33.1% . The decrease in gross margins for activewear compared to last year was due to lower selling prices and higher cotton costs compared to the low point in cotton prices in the first quarter of last year, partially offset by higher-valued product-mix and favourable manufacturing efficiencies.
Selling, general and administrative expenses in the first quarter were U.S. $26.1 million, or 14.1% of sales, compared to U.S. $18.1 million, or 15.0% of sales, in the first quarter of last year. The increase in selling, general and administrative expenses was due to the impact of the acquisition of Kentucky Derby Hosiery, higher distribution costs, and a $1.1 million charge for the replacement of the aircraft leased by the company, partially offset by the non-recurrence of a $0.6 million severance charge incurred in the first quarter of fiscal 2006. The increase of $1.3 million in depreciation and amortization expenses was due to the company's continuing investments in capacity expansion, combined with the impact of the Kentucky Derby Hosiery acquisition.
Cash Flow
During the first quarter of fiscal 2007, the company generated free cash flow of $8.6 million. Cash flow from operating activities amounted to $39.5 million, including a $67.4 million reduction in accounts receivables due to the low seasonal level of sales in the first quarter and a reduction in days sales outstanding. The company used $32.9 million in the first quarter for seasonal rebuilding of inventories, in line with its requirements to support its projected sales. $30.3 million was used for capital investments in the company's major textile and sock manufacturing capacity expansion projects in Honduras and the Dominican Republic, as well as for its new U.S. retail distribution centre and the expansion of its sewing capacity. The company ended the first quarter with cash and cash equivalents of $36.3 million, and continues to have significant unused financing capacity to be able to pursue further capacity expansion in excess of its current plans, as well as other potential growth opportunities.
Outlook
The company has reiterated its full year diluted EPS guidance of approximately $2.55 on approximately $975 million of sales revenues. Before restructuring charges, adjusted diluted EPS for fiscal 2007 is projected to be approximately $2.61. The company expects adjusted diluted EPS before restructuring charges for the second quarter to be approximately 20% higher than the second quarter of fiscal 2006.
The company is continuing to obtain programs in the retail channel. In order to be able to support its opportunities for continuing sales growth, Gildan is accelerating the installation of equipment and the ramp-up of its two major capacity expansion projects in Honduras, and is increasing its planned capital expenditures in fiscal 2007 to approximately $145 million, compared to its previous projection of $110 million.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended
December 31, 2006 January 1, 2006
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(unaudited) (unaudited)
Sales $185,829 $120,310
Cost of sales 131,951 77,415
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Gross profit 53,878 42,895
Selling, general and administrative
expenses 26,110 18,063
Restructuring and other charges (note 2) 1,391 -
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Earnings before the undernoted items 26,377 24,832
Depreciation and amortization 8,774 7,430
Interest, net 971 566
Non-controlling interest in loss
of consolidated joint venture (64) (108)
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Earnings before income taxes 16,696 16,944
Income taxes 1,085 749
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Net earnings $15,611 $16,195
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Basic EPS $0.26 $0.27
Diluted EPS $0.26 $0.27
Weighted average number of shares
outstanding (in thousands)
Basic 60,139 59,970
Diluted 60,724 60,559
