Gildan Activewear Inc. set a new earnings record in the third quarter ended July 4, thanks to strong growth in Activewear unit sales and lower promotional activity in the U.S. distributor channel.

Before restructuring charges, adjusted net earnings were $66.4 million or  54 cents per share, compared to  $44.9 million or  37 cents per share in the third quarter of fiscal 2009. Net earnings were $64.7 million, or 53 cents per share, after reflecting a restructuring charge of  1 penny per share related to the consolidation of U.S. distribution activities announced on Dec. 10, 2009.

Earnings and EPS were a record for a fiscal quarter. The 45.9% increase in adjusted EPS in the third quarter compared to last year was primarily due to strong growth in activewear unit sales volumes and lower promotional activity in the U.S. distributor channel, partially offset by supply chain inefficiencies due to the integration of new retail products and the impact of the Haiti earthquake, higher selling, general and administrative expenses, and the non-recurrence of a  5cent per share prior year income tax recovery recorded in the third quarter of fiscal 2009.

Net sales for the third quarter of fiscal 2010 amounted to  $395.3 million, up 28.4% from  $307.8 million in the third quarter of last year. Sales of activewear and underwear were  $351.3 million, up 36.1% from  $258.1 million last year, and sales of socks were  $44.0 million, down 11.5% from last year.

The growth in sales of activewear and underwear compared to fiscal 2009 was primarily due to higher market share in the U.S. wholesale distributor channel, combined with a strong recovery in overall industry demand, which increased by 10.5% compared to the third quarter of last year, continuing strong growth in international and other screenprint markets, an approximately 2% increase in net selling prices for activewear, more favourable activewear product-mix and increased shipments of underwear and activewear to retail customers. The Company noted that demand in the U.S. distributor channel at the end of the quarter may have been positively impacted by purchases by screenprinters in advance of an industry selling price increase which was effective at the beginning of the fourth quarter.


The table below summarizes the data from the S.T.A.R.S. report produced by ACNielsen Market Decisions, which tracks unit volume shipments of activewear from U.S. wholesale distributors to U.S. screenprinters, for the calendar quarter ended June 30, 2010.


                     Three months ended  Three months ended
                          June 30,            June 30,
                        2010 vs. 2009      2010      2009
                         Unit Growth        Market Share
                      Gildan   Industry        Gildan
All products           26.9%     10.5%     63.9%     55.7%
T-shirts               27.0%     10.8%     64.6%     56.4%
Fleece                 26.8%     8.0%      61.8%     52.7%
Sport shirts           23.9%     3.4%      45.6%     38.1%

 At the end of the June quarter, overall inventories in the U.S. distributor channel as reported by S.T.A.R.S. were down by 1.8% compared with a year ago. Gildan's share of distributor inventories was 52.5% at June 30, 2010, compared with its market share of 63.9% for the quarter as shown above. The Company was constrained from fully capitalizing on strong demand for its products due to low activewear finished goods inventories during the quarter, as a result of lost production due to the Haiti earthquake combined with the strong recovery in industry demand. The Company ended the quarter with a high open order position.


Unit shipments of activewear in international and other screenprint markets increased by approximately 60% compared to the third quarter of fiscal 2009, and shipments of activewear and underwear to retailers more than doubled from a small base in the third quarter of last year.

The decline in sales of socks compared to last year was primarily due to short-term issues in servicing demand due to increased reliance on third party contractors during the ramp-up of Rio Nance IV and the transition to the new U.S. retail distribution centre. In addition, average net selling price realizations were lower than last year due to a shift towards a more basic product-mix. The Company continues to be satisfied with the performance of its major continuing sock programs and believes that it is well positioned to continue to gain market share in socks in the mass-market retail channel.


Gross margins in the third quarter increased to 27.1%, compared to 24.4% in the third quarter of fiscal 2009, due to more favourable activewear net selling prices, more favourable product-mix and lower cotton costs compared to last year. Gross margins in the third quarter of fiscal 2010 were negatively impacted by the initial ramp-up of new retail underwear and activewear programs, additional costs due to the use of third party sock contractors and continuing supply chain inefficiencies related to the Haiti earthquake.


Selling, general and administrative expenses in the third quarter increased to U.S. $39.9 million, compared to U.S. $36.2 million in the third quarter of fiscal 2009. The increase in SG&A expenses from last year was primarily due to higher volume-driven distribution expenses, inefficiencies due to the initial ramp-up of the new retail distribution centre at Charleston, S.C., the impact of the higher-valued Canadian dollar on corporate administrative expenses, and higher performance-driven variable compensation expenses. Selling, general and administrative expenses amounted to 10.1% of sales in the third quarter of fiscal 2010 compared to 11.8% of sales in the third quarter of fiscal 2009.


Third Quarter Cash Flows


The company generated free cash flow of U.S. $82.2 million in the third quarter after financing seasonal increases in accounts receivable and capital expenditures of U.S. $26.0 million, primarily for the ramp-up of the Rio Nance IV sock factory in Honduras, and ended the third quarter with cash and cash equivalents of U.S. $201.2 million. Inventories declined in the third quarter due to a further reduction in activewear finished goods and work-in-process inventory levels, partially offset by the impact of higher raw material and energy costs included in the carrying value of inventory. Activewear finished goods inventories at the end of the third quarter were below optimal levels to service demand, due to strong sales demand and the loss of production due to the Haiti earthquake. The increase in accounts payable relates primarily to the increased volume of purchases of yarn and other raw materials combined with higher raw material costs.




The Company is continuing to project full year sales revenues for fiscal 2010 of approximately U.S. $1.3 billion, up approximately 25% from fiscal 2009. In spite of the strong activewear sales in the third quarter, the updated full year sales outlook continues to assume unit sales volume growth in activewear and underwear of approximately 30%, as activewear shipments in the fourth quarter are assumed to be constrained by the current low level of finished goods inventories. Sales of socks for the full year are now assumed to be flat compared with fiscal 2009 due to the lower than anticipated sock sales in the third quarter. The Company had previously projected unit sales volume growth for socks at 6% for fiscal 2010. Gross margins are now projected at approximately 27.5%, compared to the previous forecast of approximately 27%, due to more favourable net selling prices for activewear and more favourable product-mix than assumed in the Company's prior forecast. However, although promotional activity is lower than previously projected and the previously announced selling price increase in the U.S. wholesale distributor channel has been successfully implemented, the Company will not fully benefit from this increase in the fourth quarter, as it is not applying the price increase to sales orders placed prior to the effective date for the price increase of July 5, 2010.


The total negative impact in fiscal 2010 of lost sales opportunities and supply chain inefficiencies due to the Haiti earthquake is estimated at approximately U.S. $19 million or U.S. $0.16 per share, which is partially recoverable under the Company's insurance policies. Results in the fourth quarter of the fiscal year are assumed to include the maximum insurance recovery of U.S. $8 million or U.S. $0.07 per share.


The Company has continued to secure new activewear programs for the retail channel for fiscal 2011, and has significant growth opportunities in all of its target markets, although it will require to utilize some of its available production capacity in fiscal 2011 to rebuild activewear finished goods inventories. The Company is continuing to implement all of the capital expenditure projects for capacity expansion and cost reduction which it had previously announced, including completion of the ramp-up of the Rio Nance IV sock facility, the construction of the Rio Nance V textile facility, biomass facilities for the Honduran textile operations and the expansion and automation of the Eden, N.C. wholesale distribution centre. However, in-year capital expenditures in fiscal 2010 are now expected to be approximately U.S. $130 million, due to the timing of receiving capital equipment, compared with the Company's most recent full year capital expenditure forecast of U.S. $155 million.


The Company continues to believe that higher selling prices in fiscal 2011, combined with the impact of projected manufacturing efficiency gains from new capital investments and the non-recurrence of supply chain inefficiencies incurred in fiscal 2010, will fully offset increases in the cost of cotton, energy and other purchased cost inputs.


Financial Highlights (unaudited)

(in US$ millions, except per
share amounts or otherwise
indicated)                      Q3 2010    Q3 2009   YTD 2010   YTD 2009

Net sales                          395.3      307.8      942.5      736.6
Gross profit                       107.1       75.1      263.6      152.7
Selling, general and
administrative expenses
(SG&A)                             39.9       36.2      112.6      100.6
Operating income                    64.4       34.5      145.1       46.6
EBITDA (1)                          85.4       58.1      201.0       99.1
Net earnings                        64.7       41.5      141.5       52.9
Adjusted net earnings (2)           66.4       44.9      145.4       57.4

Diluted EPS                         0.53       0.34       1.16       0.44
Adjusted diluted EPS (2)            0.54       0.37       1.19       0.47

Gross margin                        27.1%      24.4%      28.0%      20.7%
SG&A as a percentage of sales       10.1%      11.8%      11.9%      13.7%
Operating margin                    16.3%      11.2%      15.4%       6.3%


Cash flows from operating
activities                        107.3       80.6      211.6       47.1
Free cash flow (3)                  82.2       78.5      118.5       19.4


                                            July 4, October 4,    July 5,
As at                                          2010       2009       2009
Inventories                                   324.0      301.9      339.6
Trade accounts receivable                     167.9      159.6      181.5
Cash in excess of total
indebtedness (Net
indebtedness) (4)                            201.1       95.3      (18.5)

(1), (2), (3), (4): Please refer to Non-GAAP Financial Measures in this
press release.
Certain minor rounding variances exist between the financial statements
and this summary.