Gildan Activewear Inc. reported a 26.3% jump in second quarter net sales to $232.1 million from $183.8 million in the second quarter of last year. In addition, the company announced plans for a 2-for-1 stock split while reiterating guidance for the full fiscal year.
Second Quarter Sales and Earnings
Gildan reported second quarter net earnings of $21.1 million and diluted EPS of 35 cents, after recording a restructuring charge in the quarter of $16.4 million after-tax or 27 cents per share, which was primarily related to the previously announced restructuring of the company's Canadian and Mexican manufacturing facilities. Before reflecting the restructuring charge, adjusted net earnings and adjusted diluted EPS for the second quarter of fiscal 2007 amounted to $37.5 million or 62 cents, up respectively 21.0% and 21.6% from net earnings of $31.0 million and diluted EPS of 51 cents in the second quarter of fiscal 2006, and a penny per share higher than the earnings guidance previously provided by the company. The growth in EPS compared to last year was due to higher gross margins for activewear and continuing growth in activewear unit sales volumes, partially offset by increased selling, general and administrative and depreciation expenses. The impact of the Kentucky Derby Hosiery acquisition on the company's results in the second quarter was dilutive by 3 cents per share, due primarily to short-term inefficiencies in manufacturing and distribution costs which are expected to be eliminated by the fourth quarter, as the company progresses with the implementation of its integration plan.
Sales in the second quarter amounted to $232.1 million, up 26.3% from $183.8 million in the second quarter of last year. The increase in sales revenues was due to $32.8 million of sock sales pursuant to the acquisition of Kentucky Derby Hosiery and an 11.2% increase in unit sales volumes for activewear, partially offset by a reduction in unit selling prices for activewear of approximately 2% compared to last year.
The growth in activewear unit sales was primarily due to continuing market share penetration in all product categories in the U.S. distributor channel. The table below summarizes the S.T.A.R.S. data for market shares and industry growth in the U.S. distributor channel for the quarter ended March 31, 2007.
Gildan Gildan Gildan Industry
Market Share Market Share Unit Growth Unit Growth
Q2 2007 Q2 2006 Q2 2007 vs. Q2 2007 vs.
Q2 2006 Q2 2006
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47.4% 38.7% All products 14.4% (0.4)%
48.2% 39.6% T-shirts 12.8% (0.8)%
42.5% 30.5% Fleece 59.8% 11.5%
35.7% 32.5% Sport shirts 10.9% (4.7)%
The slight decline in overall U.S. industry unit shipments for T-shirts in the March quarter is attributed primarily to unseasonably cold weather conditions, which, however, had a positive impact on shipments for fleece. In addition, shipments into the U.S. wholesale distributor channel were negatively impacted by the consolidation of warehouses being undertaken by the largest distributor, in order to reduce its inventory levels.
Growth in Gildan's activewear sales in international markets in the second quarter was strong. In particular, unit shipments in Europe increased by 34% compared with the second quarter of fiscal 2006.
In March, the company began shipment of its first branded sock program to a national retailer. Initial sell-through of Gildan branded product to consumers has exceeded expectations.
Gross margins in the second quarter of fiscal 2007 were 33.9%, versus 33.4% in the second quarter of fiscal 2006. The increase in gross margins was due to higher margins for activewear, largely offset by the impact of margins from the sale of socks, which do not yet reflect the anticipated cost synergies from the planned rationalization of the Company's sock manufacturing operations. Excluding the impact of sock sales, gross margins in the second quarter of fiscal 2007 were 37.2%. The increase in gross margins for activewear compared to last year was due to further manufacturing efficiencies, together with more favourable product-mix, partially offset by lower selling prices and higher cotton costs compared to the low point in cotton prices in the first half of last year, and the non-recurrence of a $1.1 million reversal of a litigation reserve which positively impacted gross margins by 0.6% in the second quarter of fiscal 2006.
Selling, general and administrative expenses in the second quarter were $28.5 million, or 12.3% of sales, compared to $20.7 million, or 11.3% of sales, in the second quarter of last year. The increase in selling, general and administrative expenses was due to the impact of the acquisition of Kentucky Derby Hosiery, higher volume-related distribution costs, increased administration and information technology costs to support the Company's continuing growth, and the non-recurrence of a favourable adjustment to bad debt reserves recorded in the second quarter of fiscal 2006. The increase of $1.8 million in depreciation and amortization expenses was due to the Company's continuing investments in capacity expansion, combined with the impact of the Kentucky Derby Hosiery acquisition.
Restructuring and other charges in the second quarter amounted to $16.4 million, or 27 cents per share, primarily related to the previously announced restructuring of the company's Canadian and Mexican operations, and the resulting relocation of Gildan's corporate office. The restructuring charges for the quarter include severance and other cash costs of $13.6 million, and $2.8 million of asset impairment losses and accelerated depreciation, net of gains on asset disposals. The company continues to expect that restructuring and other charges in fiscal 2007 will total 41 cents per share, including 6 cents per share of accelerated depreciation, as previously announced.
Year-to-date Sales and Earnings
Sales for the six months ended April 1, 2007 were $418.0 million, up 37.4% compared to the same period last year. The growth in sales reflected $75.4 million of sock sales, an increase of 12.7% in unit sales volumes for activewear and a higher-valued activewear product-mix, partially offset by a decrease in unit selling prices for activewear.
For the first six months of fiscal 2007, net earnings amounted to $36.8 million, or 61 cents per share on a diluted basis compared to net earnings of $47.2 million, or 78 cents per share, for the same period in fiscal 2006. Before the impact of restructuring and other charges, adjusted net earnings increased to $54.5 million, or 90 cents per share on a diluted basis. The increase in adjusted net earnings and adjusted diluted EPS was due to favourable manufacturing efficiencies, growth in activewear unit sales volumes and a higher-valued product-mix for activewear, partially offset by lower unit selling prices for activewear, higher cotton costs, increased SG&A and depreciation expenses and the impact of the Kentucky Derby Hosiery acquisition.
Cash Flow
During the second quarter of fiscal 2007, cash flow from operating activities less cash flow from investing activities amounted to a net cash use of $43.3 million. The company used $34.4 million for seasonal working capital requirements, in line with its requirements to support its projected sales in the peak summer selling season for T-shirts in the third quarter of the fiscal year. In addition, $45.1 million of cash was utilized for capital investments, primarily for the company's major textile and sock manufacturing expansion projects in Honduras and the Dominican Republic, as well as for its new U.S. retail distribution centre and the expansion of its sewing capacity. The company continues to have significant unused debt financing capacity and financing flexibility to invest in capital expenditures for further capacity expansion and cost reduction initiatives in excess of its current plans, as well as to pursue potential acquisition opportunities.
Outlook
The company has reiterated its most recent full year diluted EPS guidance of approximately $2.20. Before restructuring charges, adjusted diluted EPS for fiscal 2007 is projected to be approximately $2.61. The company expects adjusted diluted EPS before restructuring charges for the third and fourth quarters to be respectively 25%-30% and 30%-35% higher than the corresponding quarters of fiscal 2006.
The company has also announced that it is increasing its planned fiscal 2007 capital expenditures to $170 million, compared with its most recent projection of approximately $145 million. The further increase is primarily due to two new major cost reduction projects, which will primarily be undertaken during fiscal 2008. The total combined capital investment required for the two projects amounts to approximately $60 million, to be spent over the next 18-24 months. The projects are expected to result in annual savings in energy and chemical costs totalling approximately $15 million once completed. In addition, the company continues to expect to achieve significant further manufacturing efficiencies in fiscal 2008 compared to fiscal 2007, primarily as a result of the continuing ramp-up of its new offshore textile and sock manufacturing facilities, combined with the previously announced restructuring of its North American manufacturing operations.
Stock Split
The company announced that its Board of Directors has approved a 2-for-1 stock split, to be effected in the form of a stock dividend. The split is applicable to all shareholders of record on May 18, 2007. On or about May 25, 2007, the company's registrar and transfer agent will mail new certificates for the additional shares to all registered Gildan shareholders as at May 18, 2007. The company's shares are expected to commence trading on a post-split basis on May 16, 2007 on the TSX and on May 28, 2007 on the NYSE.
Disclosure of Outstanding Share Data
As of April 30, 2007, there were 60,174,423 common shares issued and outstanding along with 460,558 stock options and 503,500 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share at the end of the vesting period, without any monetary consideration being paid to the company. However, the vesting of 50% of the restricted share grant is dependent upon the financial performance of the company, relative to a benchmark group of Canadian publicly-listed companies.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
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(unaudited) (unaudited) (unaudited) (unaudited)
Sales $232,134 $183,783 $417,963 $304,093
Cost of sales 153,386 122,375 285,337 199,790
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Gross profit 78,748 61,408 132,626 104,303
Selling, general
and administrative
expenses 28,540 20,706 54,650 38,769
Restructuring and
other charges
(note 1) 16,359 - 17,750 -
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Earnings before the
undernoted items 33,849 40,702 60,226 65,534
Depreciation and
amortization 9,475 7,712 18,249 15,142
Interest, net 1,077 703 2,048 1,269
Non-controlling
interest in
income of
consolidated
joint venture 186 156 122 48
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Earnings before
income taxes 23,111 32,131 39,807 49,075
Income taxes 1,965 1,116 3,050 1,865
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Net earnings $21,146 $31,015 $36,757 $47,210
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Basic EPS $0.35 $0.52 $0.61 $0.79
Diluted EPS $0.35 $0.51 $0.61 $0.78
Weighted average
number of shares
outstanding
(in thousands)
Basic 60,160 60,054 60,149 60,012
Diluted 60,764 60,647 60,744 60,603
