Gildan Activewear Inc. reported sales for the second quarter ended June 28 declined 71.3 percent to $229.7 million compared to the year-ago quarter, primarily driven by sales volume declines as a result of demand downturn in the quarter, the impact of significant distributor inventory destocking in imprintables, unfavorable product mix, and higher promotional discounting in imprintables.
Activewear sales in the second quarter totaled $131.6 million, down 80.2 percent, compared to the second quarter of 2019. The decline stemmed primarily from lower sales volume of imprintables, which were down 75 percent in North America and approximately 55 percent internationally. In addition to the negative POS, Gildan saw high levels of de-stocking by distributors as they serviced demand and managed working capital needs by drawing down their inventory levels. Consequently, inventories in the distributor channel at the end of the quarter were, and continue to be, “meaningfully lower” than last year. Sales in Activewear also reflected the impact of higher promotional discounting in the quarter, including the sales discount accrual of $24.6 million related to the imprintables promotional incentives based on the ongoing sell-through of products from distributors to screen printers.
In the current environment, Gildan believes there is an opportunity to leverage its cost base and financial position to drive further market share penetration through promoting in the imprintables channel. Activewear sales volumes in retail were also down due to the widespread closure of retail stores, most notably impacting Gildan’s business with department stores, national chains, sports specialty retailers, and global lifestyle brand customers partly offset by better sell-through in the craft, mass and online channels.
Hosiery and Underwear category sales were down 27.9 percent to $98.1 million in the quarter compared to last year’s quarter. The decrease in sales was also tied to retail store closures during the quarter which impacted Gildan’s sock business. Sales performance in underwear was said to be strong in the quarter, up 23.5 percent over the prior year, reflecting double-digit growth in private brand underwear and underwear products sold online, despite a decline in overall industry demand in this category according to data from NPD Retail Tracking Service.
Gross profit was negative in the quarter due primarily to COVID-19 and Back to Basics related impacts. Gildan reported a gross loss of $148.5 million, or $122.5 million, on an adjusted basis after adding back the impact of the $26.0 million charge related to its SKU rationalization initiative under the Back to Basics strategy. The gross profit performance compared to last year was primarily due to the decline in sales, including the sales discount accrual of $24.6 million in the quarter, manufacturing idling costs, inventory provisions, and the impact of unwinding excess derivative hedges and cotton commitments.
SG&A expenses for Q220 totaled $64.9 million, down $27.1 million, compared to SG&A expenses of $92.0 million in the same quarter last year, due mainly to lower compensation, lower volume-driven distribution costs, and cost containment efforts.
Impairment of trade accounts receivable in the second quarter of 2020 was a recovery of $6.3 million as strong collections in the quarter, which were better than anticipated, led to a reduction in accounts receivable trade balances. Restructuring and acquisition-related costs for the second quarter were $29.0 million. These costs related primarily to actions taken to right-size and manage its manufacturing and SG&A cost base more efficiently in the context of the current environment and gradual economic recovery.
The operating loss for the second quarter of 2020 totaled $236.1 million. Before reflecting restructuring and acquisition-related costs and charges related to the company’s imprintables SKU rationalization initiative, on an adjusted basis, the operating loss for the quarter was $181.1 million. Further, net financial expenses in the quarter of $16.1 million were up $5.5 million over the prior year, mainly due to fees related to the covenant amendment and higher average borrowing levels.
Gildan reported a net loss of $249.7 million, or $1.26 per share on a diluted basis, for the three months ended June 28, 2020 and an adjusted net loss of $196.6 million, or 99 cents per share on a diluted basis.
Despite the net loss for the quarter, Gildan said it generated $177.1 million of free cash flow in the second quarter of 2020, compared to $26.0 million of free cash flow in the second quarter last year by tightly managing working capital and suspending non-critical capital expenditures, which more than offset the earnings loss in the quarter. We had strong collections in the quarter, drew down our inventory levels to service sales while manufacturing facilities remained idle and spent $5.2 million in maintenance capital expenditures. As a result, the company ended the second quarter of 2020 with net debt1 of $987.3 million and liquidity of approximately $1.2 billion.
“Despite the impact of the COVID-19 pandemic, we maintained a strong focus on our key priorities, including the health and safety of our employees and the long term positioning of our business,” said Glenn J. Chamandy, president and CEO of Gildan Activewear. “Against the challenging backdrop of the pandemic and the difficult but necessary actions we have taken, we have accelerated efforts under our Back to Basics strategy to further simplify our product portfolios, remove complexity and cost from our business, better support our customers and drive long term market share growth.”
Photo courtesy Gildan