Gildan Q4 Sales Decline in Weak Pricing Environment

 

Net earnings in the fourth quarter of fiscal 2008 amounted to U.S. $21.8 million, or U.S. $0.18 per share on a diluted basis. Before a special income tax charge of U.S. $26.9 million or U.S. $0.22 per share recorded in the fourth quarter of last year, adjusted net earnings and diluted EPS in the fourth quarter of fiscal 2008 amounted to U.S. $49.7 million or U.S. $0.41, respectively.

 

Adjusted EPS in the fourth quarter of fiscal 2009, before reflecting the impact of the special devaluation discount, increased by U.S.
1 cent compared to adjusted EPS in the fourth quarter of fiscal 2008, before reflecting the special income tax charge. The positive
EPS impact of increased manufacturing efficiencies, favourable product-mix and lower selling, general and administrative expenses
was essentially offset by lower activewear selling prices, lower unit sales, and the impact of planned production downtime taken in
the fourth quarter of fiscal 2009.

Early in the first quarter of fiscal 2010, the company reduced gross selling prices for the majority of its activewear products in the
U.S. wholesale distributor channel, and applied the benefit of the selling price reduction to inventories held by distributors through a
special inventory devaluation discount.

 

Net sales and gross margins in the fourth quarter of fiscal 2009 reflected both the significant negative impact of the short-term promotions in the fourth quarter as well as the impact of the special discount, which is accounted for as an adjustment to sales in the fourth quarter.

 

Gross margins in the first quarter of fiscal 2010 will reflect the impact of the  reduction in gross selling prices, but the negative impact in the first quarter is expected to be partially offset by a reduction in short-term promotions. The company believes that the approach it has taken to pricing is enhancing the ability of its wholesale distributors
to plan their business and helping to stimulate screenprinter demand for Gildan products.

Net sales in the fourth quarter of fiscal 2009 amounted to U.S. $301.7 million, down 7.1% from U.S. $324.7 million in the fourth quarter of last year. Sales of activewear and underwear were U.S. $240.8 million, down 4.8% from U.S. $253.0 million last year, and sales of socks were U.S. $60.9 million, down 15.1% from U.S. $71.7 million last year.
The decrease in sales of activewear and underwear was due to lower unit selling prices and a 1.3% reduction in unit sales volumes, as
a result of weaker economic conditions, as well as the impact of the special discount and currency changes, partially offset by more
favourable activewear product-mix.

 

The reduction in unit sales volumes of activewear and underwear in the fourth quarter was due to a 12.3% decline in overall industry unit shipments from U.S. distributors to U.S. screenprinters, largely offset by increased market share in all product categories, as well as increased shipments to international and other screenprint markets.

Overall inventories in the U.S. wholesale distributor channel at September 30, 2009 were down by 22.2% compared with a year ago,and Gildan’s share of distributor inventories was 50.1%, compared with its market share of 57.1% in the fourth quarter as shownabove.The reduction in sales of socks in the fourth quarter compared to a year ago was due to the discontinuance of unprofitable sockprograms and inventory fluctuations at the retailer level. The impact of these factors was largely offset by double-digit increases in the sell-through to consumers of continuing programs with major mass-retailer customers. New mass retailer private label sockbrands which have been introduced during fiscal 2009 performed strongly in the fourth quarter and gained market share.

 

Gross margins in the fourth quarter were 25.7%, including the negative impact of the special distributor inventory devaluation discount. Before reflecting the impact of this charge, gross margins for the quarter were 28.7%, compared to 26.8% in the fourthquarter of fiscal 2008.

 

The improvement in gross margins before the special discount was primarily due to increased manufacturing efficiencies, including lower cotton and energy costs, and more favourable activewear product-mix, partially offset by significantly increased promotional discounts for activewear in the U.S. distributor channel, compared with a year ago.

 

Gross margins in the fourth quarter of fiscal 2009 were also impacted by production downtime, which reduced margins by approximately 1.6%.

 

Selling, general and administrative expenses in the fourth quarter were U.S. $34.1 million, or 11.3% of sales, compared to U.S. $36.7 million, or 11.3% of sales in the fourth quarter of fiscal 2008. The reduction in SG&A expenses was primarily due to efficiencies and savings achieved in the management of distribution expenses, as well as the impact of the lower-valued Canadian dollar on corporate administrative expenses, partially offset by higher depreciation expenses and an increase in provisions for doubtful accounts receivable exposures.

 

Net sales for fiscal 2009 were U.S. $1,038.3 million, down 16.9% from fiscal 2008 due to a 10.2% decline in activewear unit volumes, unfavourable activewear product-mix, lower activewear net selling prices, a 17.0% decrease in sock sales primarily due to the elimination of unprofitable sock product-lines during fiscal 2008, and the negative impact of the stronger U.S. dollar on Canadian and international activewear sales. 

 

The lower unit sales volumes for activewear were primarily due to the decline in overall industry unit shipments by U.S. wholesale distributors to screenprinters and inventory reductions by U.S. wholesale distributors, which more than offset Gildan’s market share gains in the U.S. screenprint channel, and increased penetration of other target screenprint markets.

 

Net earnings for fiscal 2009 were U.S. $95.3 million, or U.S. $0.79 per share on a diluted basis, compared with net earnings of U.S.$146.4 million or U.S. $1.20 per share for the same period last year. Before restructuring charges in both years, adjusted net earnings were U.S. $99.7 million, or U.S. $0.82 per share, compared to U.S. $151.3 million, or U.S. $1.24 per share, for the same period last year. The reduction in net earnings and EPS compared to fiscal 2008 was due to significantly lower activewear unit sales volumes and gross margins, partially offset by lower SG&A and financial expenses and the non-recurrence of an income tax charge in the fourth quarter of 2008.

 

The company generated free cash flow of U.S. $112.9 million in the fourth quarter. Inventories in the fourth quarter were reduced by U.S. $37.7 million, and the company ended the fiscal year with inventories of U.S. $301.9 million, compared with U.S. $316.2 million at the end of fiscal 2008. The company believes that its current level of finished goods inventories is appropriate in the context of current market conditions, and is not currently planning production downtime in the firstquarter of fiscal 2010, other than the normal holiday shutdown over the Christmas period.

 

Accounts receivable collections were further improved during the fourth quarter. Days of sales outstanding in accounts receivable at the end of the fiscal year amounted to 45 days, compared to 52 days at the end of fiscal 2008.

 

The company ended the fiscal year with cash and cashequivalents of U.S. $99.7 million, and its U.S. $400 million bank credit facility was unutilized.

 

The Company has continued to build on the successful performance of its private label sock programs and has been awarded a major strategic underwear program as well as a smaller underwear program and three further sock programs, which are all expected to begin shipment in the second quarter of fiscal 2010. The company is currently in active discussions to secure further opportunities with mass retailers for new programs during fiscal 2010.

 

The annualized full year incremental sales revenue from the additional new mass-market retail programs already obtained by the company in fiscal 2010 is currentlyestimated to be approximately U.S. $70 million. In addition, the company is continuing to achieve further penetration with its Gildan branded products in regional retail chains.

 

The Company is currently planning for fiscal 2010 on the basis of the continuation of weak macro economic conditions, although it believes that it is in a position to take advantage of any unanticipated improvement in overall industry demand during fiscal 2010.

 

Based on assuming no growth in industry demand, and without including any further new retail programs which the company may obtain during fiscal 2010, Gildan expects to achieve unit volume growth of approximately 25% in activewear and underwear and approximately 5% in socks compared to fiscal 2009, after taking account of the negative impact of the discontinued sock programs.

 

The projected growth in unit sales is due to assumed higher market share in the U.S. wholesale distributor channel, the assumed nonrecurrence of wholesale distributor destocking which occurred during the first half of fiscal 2009, continued penetration of international and other screenprint markets, the impact of the new retail programs which have been obtained and continued growth in existing retail programs.

 

In order to maintain its market leadership and drive top-line growth, the company is prepared to continue to price aggressively, in the assumed environment of weak global economic conditions and weak industry demand. Assuming an approximate 5% decline in selling prices in fiscal 2010 compared to fiscal 2009, and the impact of a higher proportion of underwear in the company’s product mix, consolidated net sales in fiscal 2010 are projected to be slightly in excess of U.S. $1.2 billion, up approximately 17% from fiscal 2009.

 

Although gross margins in the fourth quarter of fiscal 2009, before reflecting the impact of the devaluation charge, were 28.7%, and gross margins in the first quarter of fiscal 2010 are expected to be close to the same level, gross margins in the balance of fiscal 2010 are expected to be negatively impacted by further promotional discounting and by volatility in cotton, energy and other commodity costs. Also, gross margins in the first and fourth quarters of the fiscal year traditionally benefit from a more favourable seasonal activewear product-mix.

 

Assuming that net selling prices in the balance of the year are impacted by additional promotional discounting and that the company covers the balance of its cotton requirements for fiscal 2010 at current forward rates, the companyis currently projecting that gross margins for the full fiscal year will be approximately 26%.

 

Gildan is projecting capital expenditures of approximately U.S. $130 million in fiscal 2010, compared to U.S. $45 million in fiscal 2009. In November 2009, the company completed the acquisition of a state-of-the-art distribution centre in Charleston, S.C., for approximately U.S. $20 million. This facility will be utilized to support the company’s retail strategy, and is also expected to generate cost reductions and improved efficiencies as a result of consolidating existing distribution capacity.

 

Other significant capitalprojects that are planned for fiscal 2010 include the completion of the Rio Nance 4 sock facility, further textile expansion and energy cost reduction projects, and the purchase of a new office building in Barbados which was not finalized during the fourth quarter of fiscal 2009. The company expects to continue to generate positive free cash flow after capital expenditures in fiscal 2010, and therefore expects to continue to accumulate cash on its balance sheet.

 

During the 2010 fiscal year, the company intends to conduct an evaluation of options for the deployment of cash balances not required to finance its organic growth, in order to maximize returns to shareholders.

 

Gildan also announced today the appointments of George Heller and James R. Scarborough to its Board of Directors. Mr. Heller and Mr. Scarborough have both had successful careers as business leaders in the retail sector spanning over thirty-five years. Until his retirement in 2006, George Heller served as President and Chief Executive Officer of the Hudson’s Bay Company, Canada’s largest diversified general merchandise retailer. Mr. Heller previously held a number of other senior positions in the retail industry, including President and Chief Executive Officer of Kmart Canada, President, North America and Europe for Bata Industries Ltd. and Executive Vice-President of Woodwards Department Stores. Mr. Heller also served as President and Chief Executive Officer of the Victoria Commonwealth Games.

 

James R. Scarborough currently serves as Chairman of the Board of Stage Stores, Inc., a U.S.-based specialty department store retailer that operates over 730 department stores in thirty-eight states. Mr. Scarborough joined Stage Stores in 2000 as President and Chief Executive Officer, and held this position until his retirement in 2008. Mr. Scarborough previously held other senior positions in the retail sector, including President and Chief Executive Officer of Busy Body, Inc. and Seattle Lighting Fixtures Co. With the addition of Mr. Heller and Mr. Scarborough, Gildan’s Board of Directors now comprises nine members, ofwhich eight are independent of management.

 

                                     Gildan Activewear Inc.
          Consolidated Statements of Earnings and Comprehensive Income
                     (in thousands of US dollars, except per share data)

                          Three months ended          Twelve months ended
————————————————————————-
                    October 4,     October 5,     October 4,    October 5,
                         2009           2008           2009          2008
————————————————————————-
                   (unaudited)    (unaudited)      (audited)     (audited)
                                   (Recast –                    (Recast –
                                      note 1                       note 1
                                    & note 2)                    & note 2)

Net sales            $301,720       $324,717     $1,038,319    $1,249,711
Cost of sales         224,064        237,631        807,986       911,242
————————————————————————-

Gross profit           77,656         87,086        230,333       338,469

Selling, general
and administrative
expenses              34,151         36,709        134,785       142,760
Restructuring and
other charges
(note 3)                 778          1,560          6,199         5,489
————————————————————————-

Operating income       42,727         48,817         89,349       190,220

Financial expense
(income), net
(note 5)               1,000          1,795           (304)        9,240
Non-controlling
interest in
consolidated
joint venture             88           (127)           110           230
————————————————————————-

Earnings before
income taxes          41,639         47,149         89,543       180,750

Income taxes             (746)        25,324         (5,786)       34,400
————————————————————————-

Net earnings and
comprehensive income $42,385        $21,825        $95,329      $146,350
————————————————————————-
————————————————————————-

Earnings per share:
  Basic EPS             $0.35          $0.18          $0.79         $1.21
  Diluted EPS            0.35           0.18           0.79          1.20