Gildan Activewear Inc. announced its financial results for the first quarter of its 2012 fiscal year, and also reconfirmed its prior sales and earnings guidance for the full fiscal year. In the first quarter, the company began to manage and report its business as two operating segments, which serve different markets and customers. The branded apparel business supplies socks, underwear and activewear to retail customers. The printwear business supplies activewear, fleece and sport shirts to the screenprint market.
First Quarter Results
Gildan today reported a net loss of U.S. $46.1 million or U.S. $0.38 per share on a diluted basis for its first fiscal quarter ended January 1, 2012, compared with net earnings of U.S. $35.9 million or U.S. $0.29 per share in the first quarter of fiscal 2011. The company had projected a loss of approximately U.S. $0.40 per share for the first quarter, when it initiated its fiscal 2012 sales and earnings guidance on December 1, 2011. Net selling prices for printwear were more favorable than projected, due to lower than projected promotional discounting in the U.S. wholesale distributor channel in the month of December.
The decline in the company's results compared to last year was due to the impact of higher cotton costs, inventory destocking by U.S. wholesale distributors, the impact of a special distributor inventory devaluation discount in the quarter and the cost of the manufacturing shutdown in December in order to manage inventory levels. These unfavourable variances compared to last year were partially offset by the benefit of selling price increases to U.S. retail customers which were primarily implemented in the fourth quarter of fiscal 2011, improved sock manufacturing efficiencies and the accretive impact of the acquisition of Gold Toe Moretz.
Net sales in the first quarter amounted to U.S. $303.8 million, down 8.3 percent from U.S. $331.2 million in the first quarter of fiscal 2011. The company had forecast first quarter sales of approximately U.S. $300 million. Sales for printwear amounted to U.S. $147.2 million, down 41.1 percent from fiscal 2011, and sales to retailers were U.S. $156.6 million, up 92.7 percent from the first quarter of last year.
The decline in sales in the printwear segment compared to the first quarter of fiscal 2011 was primarily due to inventory destocking by U.S. wholesale distributors in anticipation of selling price reductions, which were announced by Gildan with effect from December 5, 2011. In addition, industry demand from U.S. screenprinters, as reported in the CREST report, declined by 3.9 percent compared to the first quarter of last year. However, the impact of the lower industry demand in the U.S. screenprint channel was not material and was more than offset by an increase in Gildan's market share to 61.4 percent, compared to 57.2 percent in the first quarter of fiscal 2011. The first quarter of the fiscal year is traditionally the lowest sales quarter in the printwear industry due to low seasonal demand for T-shirts. Net selling prices for printwear were slightly higher than the first quarter of fiscal 2011, before taking account of the special distributor inventory devaluation discount.
International sales revenues included in the Printwear business segment increased by over 30 percent compared to the first quarter of fiscal 2011.
The growth in sales for Branded Apparel to U.S. retailers was due to the impact of the acquisition of Gold Toe Moretz, together with higher net selling prices, partially offset by weaker retail market conditions and inventory destocking by retailers.
Consolidated gross margins in the first quarter were 2.1 percent compared to 24.6 percent last year. The decline in gross margins was due to higher cotton costs, the impact of the non-replenishment of inventories by distributors, which negatively impacted gross margins as a percentage of sales because promotional discounts in the quarter were largely based on distributor shipments to screenprinters, the impact of the special distributor inventory devaluation discount, and the impact of the extended manufacturing shutdown. The negative impact of these factors was partially offset by the impact of the Gold Toe Moretz acquisition, higher selling prices for products sold to retailers and improved sock manufacturing efficiencies.
SG&A expenses in the first quarter were U.S. $50.8 million, compared with U.S. $41.5 million in the first quarter of last year. The increase in SG&A expenses was due to the acquisition of Gold Toe Moretz, partially offset by lower volume-driven distribution expenses, the non-recurrence of start-up inefficiencies in the first quarter of fiscal 2011 in the Charleston, S.C., distribution centre, and lower variable compensation expenses. SG&A expenses increased from 12.5 percent of net sales to 16.7 percent of net sales primarily as a result of the decline in Printwear sales revenues. In addition, SG&A expenses for the Branded Apparel segment reflect the sales, distribution and administrative infrastructure which has been put in place to support the long-term growth and development of the Branded Apparel business, as well as the duplication of certain overhead expenses subsequent to the acquisition of Gold Toe Moretz.
In the first quarter, the Printwear division reported an operating loss of U.S. $30.8 million, compared with operating income of U.S. $62.8 million in the first quarter of fiscal 2011. The decline in the results for the Printwear segment was due to the impact of higher cotton costs, reduced unit sales volumes due to distributor inventory destocking, the special distributor inventory devaluation discount and the impact of the extended manufacturing shutdown. The Branded Apparel division reported an operating profit of U.S. $2.4 million, versus an operating loss of U.S. $6.7 million in the first quarter of fiscal 2011 as the negative impact of significantly higher cotton costs was more than offset by the accretion from the acquisition of Gold Toe Moretz, higher net selling prices, the non-recurrence of start-up inefficiencies in the Company's new U.S. distribution centre incurred in the first quarter of fiscal 2011 and improved manufacturing efficiencies due to the transition of sock manufacturing to Honduras. The benefits of ramping up the Company's sock manufacturing facilities in Honduras have not yet been fully realized.
Sales and Earnings Outlook
The Company has reconfirmed its prior guidance provided on December 1, 2011 of projected sales revenues of approximately U.S. $1.9 billion and projected EPS of approximately U.S. $1.30 for fiscal 2012. The Company continues to project sales revenues for the Printwear business of approximately U.S. $1.3 billion, and sales revenues for the Branded Apparel segment of approximately U.S. $0.6 billion. There are no material changes in the underlying assumptions provided in December 2011.
The main assumptions are:
– An approximate 5 percent decline in industry shipments from U.S. wholesale distributors to U.S. screenprinters is assumed in the second fiscal quarter, with no change in industry shipments projected in the second half of the fiscal year compared with the second half of fiscal 2011. The Company is assuming a market share of approximately 65 percent in the U.S. distributor channel for the balance of the fiscal year. The Company estimates that every one million dozen change in demand for activewear impacts annual EPS by over U.S. $0.05.
– Selling prices for the Printwear business for the balance of the fiscal year are assumed to be slightly lower than in the first quarter. The Company estimates that every 1 percent change in net selling prices for Printwear impacts projected EPS for the balance of fiscal 2012 by approximately U.S. $0.09.
– Selling price increases implemented in the retail channel in the fourth quarter of fiscal 2011 are projected to be maintained during fiscal 2012, as Gildan's selling price increases to retailers did not reflect the full-pass through of high-cost cotton.
– Cotton costs in the second quarter are assumed to be comparable to the first quarter of 2012 and to be significantly higher than the second quarter of fiscal 2011. Cotton costs in the second half of the fiscal year are expected to be significantly lower than the first half of the fiscal year, based on current cotton futures. Gildan continues to expect that inventories produced with high-cost cotton will be consumed by early in the third quarter of the fiscal year.
Based on the above assumptions, the Company is projecting EPS of approximately U.S. $0.20 in its second fiscal quarter, on projected sales revenues for the quarter of close to U.S. $500 million, compared with adjusted EPS of U.S. $0.53 in the second quarter of fiscal 2011, on sales revenues of U.S. $383.2 million. The projected decline in EPS is due to the significant increase in cotton costs, partially offset by projected higher Printwear unit sales volumes, higher selling prices to retailers, increased manufacturing efficiencies and the impact of the acquisition of Gold Toe Moretz.
Cash Flow
The Company increased utilization of its revolving bank credit facilities in the first quarter due to the loss in the quarter and in order to finance its requirements for seasonally higher inventory levels to support projected sales and for planned capital expenditures. The Company expects to continue to utilize cash in the second fiscal quarter but to generate significant positive free cash flow in the second half of the fiscal year. The Company is currently ramping up its Rio Nance V capacity expansion project in Honduras and continuing to invest in major capital projects which are expected to reinforce its position as a global low-cost manufacturer. Based on its full year sales and earnings guidance for fiscal 2012, and its projected full year capital expenditures of approximately U.S. $100 million, the Company continues to project that its full year free cash flow will amount to approximately U.S. $75- $100 million.
Declaration of Quarterly Dividend
The Board of Directors has declared a cash dividend of U.S. 7.5 cents per share, payable on March 19, 2012 to shareholders of record on February 23, 2012. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.
International Financial Reporting Standards (IFRS)
As disclosed in our fiscal 2011 earnings press release dated December 1, 2011, the Company has adopted IFRS for its fiscal 2012 interim and annual financial statements beginning October 3, 2011, with comparative information presented for fiscal 2011. We have made available today on our website unaudited recast financial information for fiscal 2011 in accordance with IFRS as well as unaudited reconciliations of financial information for fiscal 2011 from Canadian GAAP to IFRS with explanatory notes of the differences identified.
Disclosure of Outstanding Share Data
As of January 31, 2012, there were 121,516,356 common shares issued and outstanding along with 1,131,366 stock options and 835,929 dilutive restricted share units (“Treasury RSUs”) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share from treasury at the end of the vesting period, without any monetary consideration being paid to the Company. However, the vesting of at least 50 percent of each Treasury RSU grant is contingent on the achievement of performance conditions that are primarily based on the Company's average return on assets performance for the period as compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts, or as determined by the Board of Directors.
Segmented Financial Data – unaudited
(in US$ millions) Q1 2012 Q1 2011
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Segmented net sales:
Printwear 147.2 249.9
Branded Apparel 156.6 81.3
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Total net sales 303.8 331.2
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Segment operating income (loss):
Printwear (30.8) 62.8
Branded Apparel 2.4 (6.7)
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Total segment operating income (loss) (28.4) 56.1
Corporate and other(1) (16.3) (16.8)
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Total operating income (loss) (44.7) 39.3
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(1) Includes corporate head office expenses, restructuring and acquisition-
related costs, and amortization of intangible assets
Certain minor rounding variances exist between the financial statements and
this summary.
Historical Segmented Financial Data – unaudited
(in US$ millions) 2011
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Q1 Q2 Q3(1) Q4(1) YTD
Segmented net sales:
Printwear 249.9 323.6 403.6 350.5 1,327.6
Branded Apparel 81.3 59.6 126.1 131.1 398.1
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Total net sales 331.2 383.2 529.7 481.6 1,725.7
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Segment operating income
(loss):
Printwear 62.8 89.2 109.9 68.4 330.3
Branded Apparel (6.7) (5.9) 2.1 (5.7) (16.2)
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Total segment operating
income 56.1 83.3 112.0 62.7 314.1
Corporate and other(2) (16.8) (25.5) (28.9) (22.3) (93.5)
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Total operating income 39.3 57.8 83.1 40.4 220.6
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(1) Results reflect the acquisition of Gold Toe Moretz from April 16, 2011.
(2) Includes corporate head office expenses, restructuring and acquisition-
related costs, and amortization of intangible assets.
Certain minor rounding variances exist between the financial statements and
this summary.
