Gildan Offsets Cotton and Weather Woes in Q2

Gildan Activewear reported revenues rose 4.9 percent in its second quarter ended Mar. 30, to $548.8 million. Adjusted net earnings were $79.2 million, or 64 cents a share, up 8.9 percent

The company had projected net sales for the quarter in excess of $550 million. Earnings landed at the top end of a guidance range provided on Feb. 5

On a conference call with analysts, Laurence Sellyn, EVP and chief financial administrative officer, said the growth in sales and EPS in the second quarter compared to last year was achieved in spite of the impact of colder weather which negatively impacted demand for T-shirts and contributed to soft retail market conditions.

Sales were boosted by strong growth in underwear to retailers, increased sales to lifestyle brands and international printwear markets, and the non-recurrence of a 4-cent-a-share distributor inventory devaluation discount in the year-ago second quarter. These positive factors were partially offset by an 8-cent per share impact of higher cotton costs in the latest quarter.

Sales for the Printwear segment amounted to $378.5 million, up 2.9 percent. Unit sales volumes were essentially flat compared to last year, as 20 percent growth in international markets were offset by lower shipments in the U.S. and Canada, due to the impact of colder weather conditions on seasonal demand for T-shirts. Lower T-shirt demand was partially mitigated by higher net selling prices and more favorable product mix, due to higher sales of fleece and long-sleeve T-shirts. Distributor inventory levels at the end of the quarter “continued to be in good balance relative to projected industry demand.”

Printwear’s operating income reached $92.2 million, up 5.6 percent. Operating margins for Printwear were 24.3 percent compared with 23.7 percent. The slight margin erosion was due to the non-recurrence of a distributor inventory devaluation discount in the second quarter of last year and increased textile manufacturing efficiencies, partially offset by higher cotton costs and other inflationary cost increases.

Sales for Branded Apparel were $170.3 million, up 9.9 percent. The growth was due to the continuing success of its Gildan branded mass market underwear program, the growth of premium Gildan premium socks and underwear in national chains and department stores, increased market share for Gold Toe, and new active wear and underwear for the GE by Gold Toe brand, increased sales for licensed brands and increased sales to global lifestyle brands. Sales of Gildan branded products increased approximately 50 percent. Added Sellyn, “We are continuing to secure increased shelf space and new programs in multiple channels of retail distribution, for fiscal 2015.”

The Branded Apparel segment’s operating income eased 0.7 percent to $13.3 million. Operating margins were 7.8 percent versus 8.6 percent a year ago. The margin decline reflected short-term manufacturing inefficiencies, inflationary cost increases and higher cotton costs.

Consolidated gross margins were reduced to 27.9 percent from 28.9 percent as the impact of higher cotton costs was only partially passed through into higher net selling prices in Printwear and selling prices for Branded Apparel were not increased. Margins were also hurt by inflationary cost increases and transitional manufacturing inefficiencies which are being incurred primarily in sock operations and the former Anvil textile operations, to support new programs and the introduction of new products, and which offset the favorable impact of other manufacturing cost reduction projects.

SG&A expenses were cut 5.8 percent to $69.3 million due to lower variable compensation expenses and the impact of the lower-valued Canadian dollar on corporate head office expenses. As a percentage of sales, SG&A expenses declined to 12.6 percent from 14.1 percent a year ago.

Looking ahead, Gildan increased its guidance for sales revenues for the full fiscal year to approximately $2.4 billion, compared to the company's prior guidance of approximately $2.35 billion. Sales revenues for Printwear are now projected to be approximately $1.55 billion, compared with prior guidance of in excess of $1.5 billion, and up approximately 5.5 percent versus fiscal 2013. Sales revenues for Branded Apparel are projected to be approximately $850 million, compared with prior guidance of in excess of $825 million, and up approximately 19 percent versus last year.

Adjusted EPS for the full year is still projected to be in the range of $3.00-$3.10, up 11.5 percent to 15.2 percent compared to fiscal 2013. The slightly-higher sales gains are expected to be offset by higher-than-expected transitional manufacturing inefficiencies. Those transitional costs now include additional costs to train sewing operators and ramp up sewing operations to support a planned further significant increase in underwear sales and sales of higher-valued products in fiscal 2015.