Gildan Activewear Inc. reported record third quarter net earnings of $42.8 million and diluted EPS of 71 cents, up respectively 25.5% and 24.6% from $34.1 million and 57 cents per share in the third quarter of fiscal 2005. The increase in net earnings and EPS compared to a year ago was due to continuing strong growth in unit sales volumes and higher gross margins, partially offset by increased selling, general and administrative and depreciation expenses.
Sales in the third quarter amounted to a record $233.9 million, up 17.6% from $198.9 million in the third quarter of last year. The increase in sales revenues reflected a 15.6% increase in unit sales volumes and the impact of a higher-valued product-mix, partially offset by an approximate 2.5% reduction in unit selling prices compared to last year. The growth in unit sales was due to continuing market share penetration, combined with 3.7% growth in overall industry unit shipments in the quarter. The company’s ability to fully capitalize on demand for its products in the third quarter continued to be constrained by limitations on production capacity.
The table below summarizes the S.T.A.R.S. data for market growth and market shares in the U.S. distributor channel for the calendar quarter ended June 30, 2006. The S.T.A.R.S. data for the quarter includes information provided by the largest wholesale distributor, which has renewed its participation in the report. In order to calculate year-over-year growth rates, S.T.A.R.S. has adjusted comparative data for the June quarter of 2005. However, market share data for last year has not yet been restated by S.T.A.R.S. on a comparable basis.
Gildan Gildan Industry
Market Share Unit Growth Unit Growth
Q3 2006 Q3 2006 vs. Q3 2005 Q3 2006 vs. Q3 2005
All products 43.6% 18.6% 3.7%
T-shirts 44.5% 19.2% 4.2%
Sport shirts 32.7% 4.2% (0.2)%
Fleece 32.3% 15.5% (4.5)%
Gross margins in the third quarter were 32.4%, versus 31.6% in the third quarter of 2005. The increase in gross margins was due to more favourable product-mix, increased manufacturing efficiencies and lower cotton costs, partially offset by the impact of the reduction in selling prices as well as higher energy and transportation costs.
Selling, general and administrative expenses in the third quarter were $22.0 million, or 9.4% of sales, compared to $19.1 million, or 9.6% of sales, in the third quarter of last year. The increase in selling, general and administrative expenses was due to higher distribution expenses, professional fees for compliance with SOX-404, the impact of the stronger Canadian dollar and a write-down of surplus equipment, combined with the cost of ongoing organizational development to support the company’s growth strategy. The increase of $2.1 million in depreciation expenses was due to the company’s continuing investments in capacity expansion, in particular the new Dominican Republic textile facility.
Year-to-date Sales and Earnings
Sales for the nine months ended July 2, 2006 were $538.0 million, up 13.7% from the corresponding period of last year, due to an increase of 14.8% in unit sales volumes, partially offset by lower selling prices.
Net earnings for the first nine months amounted to $90.0 million, or $1.49 per share, up respectively 39.3% and 38.0% from adjusted net earnings of $64.6 million or $1.08 per share in the first nine months of fiscal 2005, excluding the special charge of $7.8 million after tax, or 13 cents per share, incurred in the second quarter of fiscal 2005 for the closure and relocation of the company’s Canadian yarn-spinning operations. The increase in net earnings and EPS compared to fiscal 2005 was due to continuing unit volume growth and higher gross margins, partially offset by increased selling, general and administrative and depreciation expenses. Net earnings and diluted EPS increased by 58.4% and 56.8% respectively, after taking account of the special charge in the results for fiscal 2005.
Cash Flow
During the third quarter, the company generated free cash flow (defined as cash flow from operating activities less cash flow from investing activities) of $33.6 million, including $5.0 million proceeds from the disposal of the balance of the Canadian yarn-spinning assets held for sale. Inventories decreased by $25.3 million in the third quarter, compared to $9.3 million in the third quarter a year ago. Capital expenditures in the third quarter, primarily for major capacity expansion projects, amounted to $17.8 million. During the quarter, Gildan utilized $17.5 million of its cash and cash equivalents to finance the third scheduled principal repayment of its Senior Notes, and ended the quarter with cash and cash equivalents of $63.9 million.
Fourth Quarter and Full Year EPS Guidance
Gildan has increased its diluted EPS guidance for the full 2006 fiscal year to approximately $2.07. The revised full year guidance is up from the company’s most recent guidance of approximately $2.00 per share, and reflects a projected increase of 33.5% compared with adjusted EPS of $1.55 in fiscal 2005, before taking account of the prior year special charge.
The further increase in EPS guidance for fiscal 2006 is due to the more favourable than previously anticipated results for the third quarter, and the assumed continuation in the fourth quarter of more favourable manufacturing efficiencies and product-mix, partially offset by the projected continuation of more unfavourable industry pricing. The company is now projecting diluted EPS of 58 cents in the fourth quarter, compared with its most recent guidance of 56 cents per share and up 23.4% from adjusted EPS of 47 cents in the fourth quarter of fiscal 2005. The updated guidance assumes that the company’s recent acquisition of Kentucky Derby Hosiery Co., Inc., which was completed on July 6, 2006, will be neither accretive nor dilutive to EPS in the fourth quarter of the current fiscal year.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Nine months ended
July 2, July 3, July 2, July 3,
2006 2005 2006 2005
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(unaudited) (unaudited) (unaudited) (unaudited)
Sales $233,945 $198,901 $538,038 $473,179
Cost of sales 158,221 136,091 358,011 328,309
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Gross profit 75,724 62,810 180,027 144,870
Selling, general and
administrative
expenses 21,978 19,134 60,747 53,746
Special charge (note 1) - - - 11,886
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53,746 43,676 119,280 79,238
Depreciation and
amortization 8,169 6,043 23,311 18,413
Interest expense, net 759 1,191 2,028 3,691
Non-controlling
interest in
income of
consolidated
joint venture 192 72 240 187
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Earnings before
income taxes 44,626 36,370 93,701 56,947
Income tax
expense (note 2) 1,795 2,223 3,660 101
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Net earnings $42,831 $34,147 $90,041 $56,846
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Basic EPS $0.71 $0.57 $1.50 $0.95
Diluted EPS $0.71 $0.57 $1.49 $0.95
Weighted average
number of shares
outstanding
(in thousands)
Basic 60,077 59,816 60,034 59,613
Diluted 60,627 60,270 60,611 60,042
