Gildan Activewear reported record second quarter net earnings of U.S. $14.3 million, or U.S. $0.48 per diluted share, up 6.7% from U.S. $13.4 million or U.S. 45 cents per diluted share in the second quarter of fiscal 2003. Analyst expectations for the quarter were in the range of U.S. 45 – U.S. 49 cents per diluted share.
The Company's results for the quarter include increases in cost of sales
and depreciation expense due to the upward revaluation of opening inventories
and fixed assets required under U.S. and Canadian GAAP to give effect to the
change to U.S. functional currency. The gain on revaluation of opening assets
was reflected directly in opening shareholders' equity.
Net earnings for the
second quarter of fiscal 2004 were U.S. $15.9 million, or U.S. $0.53 per
diluted share, before reflecting the accounting treatment of these adjustments
resulting from the change to U.S. functional currency, up 18.7% and 17.8%
respectively from the second quarter of fiscal 2003.
Compared to last year, the higher second quarter earnings reflected
higher unit sales, further manufacturing efficiencies and more favourable
product-mix. These factors were partially offset by increased cotton costs,
lower selling prices, higher SG&A costs due to the Company's sales growth and
higher depreciation expense as a result of the Company's capital investment
program.
Sales in the quarter were U.S. $141.4 million, up 24.5% from U.S.
$113.6 million in the second quarter of fiscal 2003. The higher sales were due
to a 24.6% increase in unit shipments combined with a higher valued
product-mix, partially offset by lower selling prices. The higher unit sales
reflected continuing market share penetration in all target market segments,
together with strong overall industry demand growth in the U.S. wholesale
distributor channel.
With effect from the beginning of calendar 2004, the Company's largest
customer decided to discontinue its participation in the S.T.A.R.S. report by
ACNielsen Market Decisions. This report is the basis for market and market
share data provided by the Company for the U.S. wholesale distributor channel.
As a result, the S.T.A.R.S. market share data for the second quarter of fiscal
2004 excludes the effect of sales through our largest customer.
On this basis,
Gildan's share in the T-shirt segment of the U.S. wholesale distributor market
increased to 31.2% from 29.1% in the second quarter of fiscal 2003, even
though the Company focussed on higher-valued product-lines within the T-shirt
category, and continued to not fully participate in highly discounted white
T-shirt promotions.
During the second quarter, Gildan's share of the sport
shirt segment increased to 24.4% from 18.4% in the corresponding quarter of
last year. Gildan became the leading brand within the sport shirt category
during the quarter. Gildan's share of the fleece category was 14.3% in the
second quarter, up from 10.7% in the second quarter a year ago.
The table below summarizes the unit sales growth for the calendar quarter
ended March 31, 2004 compared to the quarter ended March 31, 2003 for Gildan
and for the industry overall through the U.S. wholesale distributor channel,
as reported by S.T.A.R.S. after adjusting the prior period comparatives to
exclude sales through our largest customer:
<<
Gildan Industry
Unit growth Unit growth
----------- -----------
T-shirts 30.3% 11.6%
Sport shirts 34.7% 1.1%
Fleece 39.2% 13.8%
Gildan noted that, in addition to the strong overall industry growth for
T-shirts and fleece, the sport shirt category also showed positive growth,
indicating that the steady decline in demand in this segment since 2001 may
have ceased, reflecting a recovery in corporate promotional spending.
In parallel with the growth realized by Gildan with the S.T.A.R.S.
distributors as per the table above, the Company also achieved a comparable
rate of growth in its unit sales to its largest distributor during the second
fiscal quarter, versus the corresponding quarter of fiscal 2003.
Gildan's unit shipments in Europe increased by 38.9% over the second
quarter last year, and shipments in Canada were up by 10.2%. Selling prices in
the Canadian market were negatively impacted as a result of the lower landed
selling prices for U.S. competitors in the Canadian market, due to the decline
in the relative value of the U.S. dollar.
Gross margins in the second quarter were 26.6%, compared with 29.6% in
the second quarter of fiscal 2003. Before the adjustments due to the change to
U.S. functional currency, gross margins in the second quarter of fiscal 2004
were 27.3%. The favourable impact on percentage gross margins of the
higher-valued product-mix, continuing manufacturing efficiencies and the
non-recurrence of a prior year special charge (the closure of the Montreal
sewing plant) was more than offset by the negative effect of higher cotton
costs and lower industry selling prices.
Promotional pricing activity during
the quarter included additional discounts resulting from the higher than
projected unit sales growth.
Net earnings for the first six months of fiscal 2004 were $17.2 million
or U.S. $0.58 per diluted share, essentially the same as the first six months
of fiscal 2003 when the Company generated net earnings of U.S. $17.1 million
or U.S. $0.58 per diluted share. Before the adjustments due to the change to
U.S. functional currency, net earnings for the first six months of fiscal 2004
were U.S. $21.4 million, or U.S. $0.72 per share, up 25.1% and 24.1%
respectively from the first six months of fiscal 2003.
The Company has previously indicated that it expects its EPS for the full
fiscal year to be in the range of U.S. $2.25 - U.S. $2.30, up 25.7% - 28.5%
from fiscal 2003 before the adjustments due to the change to U.S. functional
currency. After reflecting the adjustments resulting from the transition to
U.S functional currency, the Company's EPS guidance range for fiscal 2004 was
U.S. $2.10-$2.15, up 17.3% - 20.1% from fiscal 2003. This guidance was based
on 15% projected growth in unit sales volumes and modest selling price
increases to partially pass through the higher cost of cotton.
In the first and second fiscal quarters, the Company has achieved its
EPS growth projections by offsetting higher than anticipated promotional
pricing activity with higher than projected unit sales volumes. Due to the
higher unit sales in the first two quarters, and its resulting lower than
planned inventory levels at the second quarter-end, the Company expects to
have insufficient capacity in the third quarter to fully satisfy the projected
growth in sales reflected in its prior forecast.
Therefore, achievement of its
original EPS guidance for the full year will depend upon improved selling
prices being realized. Many industry fundamentals - including strong industry
demand, overall inventories within the distributor channel being in reasonable
balance, and higher raw material costs for both cotton and polyester - appear
to support higher pricing in the second half of the fiscal year. However, it
is difficult to predict the outlook for industry pricing with any degree of
certainty.
Therefore, while the Company is projecting some gross margin
improvement in the third and fourth quarter due to reduced promotional
activity and a higher proportion of fleece sales in the balance of the year,
the Company believes that, based on its short-term capacity constraints in the
third quarter and the assumed continuation of aggressive industry pricing
competition, it is more realistic to lower its projected EPS growth in the
second half of the fiscal year.
On this basis, the Company is now projecting
EPS for the full fiscal year to be in the range of U.S. $2.05 - U.S. $2.15 per
diluted share before the U.S. functional currency adjustments, up
approximately 15% - 20% from fiscal 2003. After reflecting the adjustments
resulting from the transition to U.S. functional currency, the Company's
revised EPS forecast for fiscal 2004 is U.S. $1.90 - $2.00, up approximately
6% - 12% from fiscal 2003.
The Company now expects to achieve diluted EPS of U.S. $0.80 - U.S. $0.85
in the third quarter before functional currency adjustments, up approximately
10% - 16% from the third quarter of fiscal 2003, which included an extra week
due to the Company's floating fiscal year-end. In the fourth quarter, Gildan
now expects diluted EPS of U.S. $0.55 - U.S. $0.60 before functional currency
adjustments, up approximately 15% - 25% from fiscal 2003. The functional
currency adjustments in the third and fourth quarter of the fiscal year will
be limited to the impact on depreciation expense, and will therefore not be
material.
Going forward, Gildan expects to achieve its objective of minimum 15% EPS
growth beyond fiscal 2004, in addition to achieving 15% - 20% EPS growth in
the current fiscal year, even if industry pricing continues to decline. Gildan
is slightly ahead of schedule with its timetable for construction of its
Dominican Republic textile facility. As the Company brings this facility on
stream, it expects to continue to lower its manufacturing costs and to have
capacity available to further accelerate its market share penetration in the
wholesale distributor channel in fiscal 2005, as well as to implement its
plans to enter the retail channel.
In the second fiscal quarter, the Company used U.S. $16.7 million of
cash, defined as cash flow from operating activities less cash used in
investing activities, due to the seasonal financing of trade receivables
(which reflected days sales outstanding of 45 days compared with 48 days a
year ago) and the ongoing capital expenditure requirements to implement the
Company's continuing offshore capacity expansion plans. The Company ended the
quarter with surplus cash of U.S. $21.4 million.
The Company intends to utilize U.S. $17.5 million of its surplus cash to
meet the first scheduled instalment of its senior note repayment on June 10,
2004. Also, the Company now expects to invest approximately U.S. $65 million
in capital expenditures for the full fiscal year, up from the previous
estimate of approximately U.S. $60 million, due mainly to the accelerated
timing for the Dominican Republic facility.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Six months ended
April 4, March 30, April 4, March 30,
2004 2003 2004 2003
---------- --------- --------- ------------
(unau- (unau- (unau- (unau-
dited) dited) dited) dited)
Sales $ 141,369 $ 113,615 $ 219,328 $ 178,615
Cost of sales 103,832 80,031 160,691 125,946
---------- --------- --------- ------------
Gross profit 37,537 33,584 58,637 52,669
Selling, general
and
administrative
expenses 15,151 13,528 26,548 23,612
---------- --------- --------- ------------
Earnings before interest,
income taxes,
depreciation and
amortization
(EBITDA) 22,386 20,056 32,089 29,057
Depreciation and
amortization 5,249 3,704 10,181 7,200
Interest 1,755 1,713 3,344 3,158
---------- --------- --------- ------------
Earnings before
income taxes 15,382 14,639 18,564 18,699
Income taxes 1,049 1,228 1,359 1,597
---------- --------- --------- ------------
Net earnings $ 14,333 $ 13,411 $ 17,205 $ 17,102
---------- --------- --------- ------------
---------- --------- --------- ------------
Basic EPS $ 0.48 $ 0.46 $ 0.58 $ 0.59
$ 0.48 $ 0.45 $ 0.58 $ 0.58
Diluted EPS
Weighted average number
of shares outstanding
(in thousands)
Basic 29,576 29,160 29,550 29,053
Diluted 29,866 29,715 29,829 29,658
