Gildan Activewear Inc.’s net income and revenue tumbled in the first quarter ended April 1, but both were within management expectations and the company reaffirmed full-year guidance issued on Feb. 22.
Gildan reported net income of $67.9 million, or 31 cents per share, in the first quarter, down 18.7 percent from the first quarter in 2017. Excluding the impact of after-tax restructuring and acquisition-related costs of $6.7 million in the quarter and $6.6 million in the prior year quarter, Gildan reported adjusted net earnings of $74.6 million, or 34 cents per share, down from $90.1 million, or 39 cents per share, in the same quarter last year. The 12.8 percent decrease in adjusted diluted EPS in the quarter was mainly driven by lower gross profit and higher SG&A expenses, partly offset by lower income tax expense and the benefit of a lower share count compared to the prior year.
As expected and consistent with the company’s guidance initiated on Feb. 22, adjusted EPS was down in the quarter compared to the record level achieved in the first quarter last year.
Gildan reported first-quarter sales of $647.3 million, down 2.7 percent compared to the same period a year ago, reflecting a 3.2 percent increase in activewear sales and a 20.4 percent decline in the hosiery and underwear category.
The increase in activewear sales was mainly due to higher net selling prices, including foreign exchange and favorable product-mix driven by double-digit sales growth in the fashion basics category.
International sales in the first quarter were up 24 percent, reflecting strong growth momentum in all markets. The decline in the hosiery and underwear sales category was mainly due to the anticipated decline in unit sales volumes of socks at mass retailers, which are shifting emphasis toward their own private label brands.
In addition, lower sock sales reflected the impact of the non-recurrence of the initial roll-out of a licensed program to a large national chain retailer, which occurred in the first quarter of the prior year.
Gross margin in the first quarter of 2018 totaled 27.2 percent, reflecting a 120 basis point decrease over the same period last year. The decline was mainly due to the anticipated impact of higher raw material and other input costs, partly offset by higher net selling prices, including foreign exchange and the positive impact of a richer product-mix.
SG&A expenses for the first quarter of 2018 amounted to $93.1 million, or 14.4 percent of sales, compared to $89.2 million, or 13.4 percent of sales, in the first quarter of 2017. The $3.9 million increase was primarily due to planned higher selling and distribution expenses related to the enhancement of the company’s e-commerce and distribution capabilities, partly offset by cost reductions resulting from the company’s recent organizational consolidation.
For the first quarter of 2018, Gildan generated operating income of $76.3 million and adjusted operating income of $82.7 million, down 18 percent and 17 percent, respectively, compared to the same period last year. Adjusted operating margin for the first quarter was 12.8 percent compared to 15 in the first quarter of 2017.
The company consumed $40 million of free cash flow in the first quarter 2018 compared to free cash flow generation of $41.3 million in the same quarter last year. The decline was primarily due to higher working capital requirements, driven primarily by higher raw material costs and lower earnings in the quarter, partly offset by lower capital expenditures. Capital expenditures of $22.4 million in the quarter were primarily for investments in textile capacity expansion, distribution, information technology and sewing capacity.
Outlook
Gildan reaffirmed the company’s full-year 2018 financial guidance of adjusted diluted EPS in the range of $1.80 to $1.90 on projected net sales growth in the low-to-mid-single-digit range, adjusted EBITDA in the range of $595 to $620 million and projected free cash flow of approximately $400 million for the year. The company continues to project capital expenditures of approximately $125 million for 2018.
Projected growth in adjusted diluted EPS for 2018 continues to reflect the projected impact of higher sales, anticipated cost reductions related to efficiency gains expected from the streamlining of the company’s sales and marketing infrastructure in connection with its organizational consolidation and the benefit of a lower share count compared to the prior year.
These positive factors are projected to be partly offset by higher raw material and other input costs, expenses related to e-commerce and distribution initiatives to support direct-to-consumer fulfillment capabilities and slightly higher income tax expense.
