Gildan Activewear Inc. reported second quarter net earnings of $14.3 million or 48 cents per share, which includes a special charge of $7.8 million after-tax or 26 cents per share for the closure of its Canadian yarn-spinning facilities. Earnings in the second quarter of last year included a four cents per share negative impact on cost of sales of revaluing opening inventories, due to the adoption of the U.S. dollar as the Company's functional currency at the beginning of the 2004 fiscal year.
Excluding special items in both years, earnings increased to $22.1 million or 74 cents per share, up respectively 43.5% and 42.3% from $15.4 million and 52 cents per share in the second quarter of fiscal 2004. Gildan announced on April 6, 2005 that it expected E.P.S. to be at least 10% above the top end of its previous guidance for the second quarter, which had called for E.P.S. before the special charge of 60 cents – 65 cents per share.
Compared to last year, the increase in second quarter net earnings before special items was driven by increased selling prices and reduced promotional activity, continuing growth in unit volume sales and more favourable product- mix. These positive variances were partially offset by increased costs for cotton, energy and transportation, the impact of lower capacity utilization on the efficiency of the Canadian yarn-spinning facilities which were closed in March 2005, higher selling, general and administrative expenses and higher depreciation.
“We are pleased that we have continued to deliver very strong earnings growth, and that we have significantly exceeded our original expectations for the quarter”, commented Glenn J. Chamandy, President and Chief Executive Officer. “Moreover, industry conditions continue to be favourable, giving us confidence in our positive outlook for the balance of the fiscal year”.
Sales in the second quarter amounted to $165.3 million, up 16.9% from the second quarter a year ago, reflecting a 10.4% increase in unit shipments, higher selling prices and more favourable product-mix. During the second quarter of fiscal 2005, the Company continued to be capacity- constrained, pending the start-up of its new textile manufacturing facility in the Dominican Republic. The overall supply/demand balance in the wholesale activewear industry also continued to be in good balance, with supply shortages for some products.
The value of the S.T.A.R.S. market and market share data for the U.S. wholesale distribution market continues to be undermined by non-participation by major distributors. With this caveat, the table below summarizes the S.T.A.R.S. data for the quarter ended March 31, 2005. In calculating year-over- year growth rates, S.T.A.R.S. has adjusted prior period comparatives to exclude sales through distributors no longer participating in the S.T.A.R.S. report.
Gildan Gildan Gildan Industry
Market Share Market Share Unit growth Unit growth
Q2 2004 Q2 2005 Q2 2005 Q2 2005
vs Q2 2004 vs Q2 2004
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31.2% 36.3% T-shirts 26.0% 3.2 %
24.4 % 33.1% Sport shirts 39.5% (5.2)%
14.3% 23.9% Fleece 113.5% 10.9 %
The Company indicated that it may not continue to provide S.T.A.R.S. data in the future, due to concerns regarding the completeness of the information provided to S.T.A.R.S.
Gross margins in the second quarter were 30.1%, compared with 27.3% in the second quarter of last year, after increasing last year's gross margins to exclude the negative impact of the functional currency adjustment on cost of sales. The significant increase in gross margins reflected higher selling prices and reduced promotional activity, together with more favourable product- mix, against the background of market conditions where the Company was unable to drive further customer demand for its products due to capacity constraints. The higher selling price realizations, combined with continuing manufacturing efficiencies, more than offset the negative margin impact of higher cotton, energy and transportation costs and inefficiencies resulting from the reduced capacity utilization of the Canadian yarn-spinning operations.
Selling, general and administration expenses were U.S. $18.3 million, or 11.1% of sales, compared with U.S. $15.2 million, or 10.7% of sales, in the second quarter of fiscal 2004. The higher SG&A expenses reflected higher distribution expenses, provision for higher performance-related compensation expenses, and the stronger Canadian dollar, in addition to the continuing development of the organization to support the company's ongoing growth strategy.
The results for the second quarter included a special charge of $7.8 million after-tax ($11.9 million pre-tax) or 26 cents per share for the closure of Gildan's Canadian yarn-spinning facilities. On February 1, 2005, the Company announced plans to close its two Canadian yarn-spinning facilities, and relocate the majority of the yarn-spinning equipment to a new joint-venture facility in the U.S. The amount of the special charge is the same as had been estimated in February.
The financial results for the second quarter of fiscal 2005 include an income tax recovery of $2.7 million, due to the impact of the special charge. Excluding the special charge, the tax rate in the quarter was 5.9%, compared to 6.8% in the second quarter of fiscal 2004.
On April 6, 2005, the Company increased its guidance for the full fiscal year from approximately $2.60 per share to approximately $2.80 per share before the special charge, and approximately $2.54 per share after the charge. The Company continues to be comfortable with its revised guidance. The Company projects E.P.S. of approximately $1.00 per share for the third quarter, up approximately 13.6% from 88 cents per share in the third quarter of fiscal 2004.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Six months ended
April 3, April 4, April 3, April 4,
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 165,321 $ 141,369 $ 274,278 $ 219,328
Cost of sales 115,641 103,832 192,218 160,691
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Gross profit 49,680 37,537 82,060 58,637
Selling, general and
administrative expenses 18,285 15,151 34,612 26,548
Special charge (note 2) 11,886 - 11,886 -
----------------------- -----------------------
Earnings before the
undernoted items 19,509 22,386 35,562 32,089
Depreciation and
amortization 6,490 5,249 12,370 10,181
Interest expense 1,299 1,755 2,500 3,344
Earnings of non-
controlling interest 115 - 115 -
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Earnings before income 11,605 15,382 20,577 18,564
taxes
Income tax (recovery)
expense (note 3) (2,707) 1,049 (2,122) 1,359
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Net earnings $ 14,312 $ 14,333 $ 22,699 $ 17,205
----------------------- -----------------------
----------------------- -----------------------
Basic EPS $ 0.48 $ 0.48 $ 0.76 $ 0.58
Diluted EPS $ 0.48 $ 0.48 $ 0.76 $ 0.58
