Gildan Activewear Inc. reported fiscal third quarter net earnings of U.S. $34.1 million or U.S. 57 cents per share, up respectively 30.2% and 29.5% from the third quarter of last year. Gildan had announced on July 12, 2005 that it expected E.P.S. for the third quarter to be at least 10% above the top end of its previous guidance for the third quarter, which had called for E.P.S. of approximately U.S. 50 cents per share.
Gildan reconfirmed its recently increased earnings guidance for the balance of the fiscal year, and announced its capital expenditure and capacity expansion plans for fiscal 2006.
Compared to last year, the increase in third quarter net earnings was driven by continuing strong growth in unit volume sales, more favourable product-mix and lower costs of cotton. These positive factors were partially offset by lower selling prices, increased costs for transportation, and higher selling, general and administrative expenses.
Sales in the third quarter amounted to U.S. $198.9 million, up 18.1% from the third quarter a year ago, reflecting a 15.3% increase in unit shipments and more favourable product-mix, partially offset by lower selling prices. The Company continued to achieve strong market share increases in all product categories, in spite of capacity constraints which restricted its ability to maximize sales growth in the quarter.
The value of the S.T.A.R.S. market growth and market share data for the U.S. wholesale distribution market continues to be reduced by non-participation by major distributors. With this caveat, the table below summarizes the S.T.A.R.S. data for the quarter ended June 30, 2005. In calculating year-over-year growth rates, S.T.A.R.S. has adjusted prior period comparatives to exclude sales through distributors no longer participating in the S.T.A.R.S. report.
Gildan Gildan Gildan Industry
Market Share Market Share Unit Growth Unit Growth
Q3 2005 Q3 2004 Q3 2005 vs Q3 2005 vs
Q3 2004 Q3 2004
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36.2% 29.6% T-shirts 27.8% 3.8%
32.4% 23.0% Sport shirts 39.2% (3.1)%
25.3% 16.4% Fleece 101.3% 29.4%
Gross margins in the third quarter were 31.6%, compared with 30.3% in the third quarter of last year. The increase in gross margins was due to more favourable product-mix and lower cotton costs, partially offset by the impact of higher transportation costs.
Selling, general and administration expenses were U.S. $19.1 million, or 9.6% of sales, compared with U.S. $15.6 million, or 9.3% of sales, in the third quarter of fiscal 2004. The higher SG&A expenses reflected higher distribution expenses, provision for higher performance-related compensation expenses, and the stronger Canadian dollar, in addition to the continuing development of the organization to support the Company's ongoing growth strategy. The cost of operating the Company's U.S. distribution center was negatively impacted in the third quarter by the start-up of a new warehouse management system to increase distribution capacity. Although the new system was implemented quickly and successfully, it resulted in additional costs during the start-up phase.
Net earnings for the first nine months of fiscal 2005 were U.S. $64.6 million, or U.S. $1.08 per share, before the special charge recorded in the second quarter for the closure and relocation of the Canadian yarn-spinning facilities. These results were up 38.3% and 38.5% respectively from net earnings of U.S. $46.7 million or U.S. $0.78 per share in the first nine months of last year, after adjusting last year's earnings for the negative impact of the functional currency change on cost of sales as a result of revaluing opening inventories which were consumed in the first half of fiscal 2004. Net earnings and E.P.S. for the first nine months of fiscal 2005 were U.S. $56.8 million and U.S. $0.95 per share after the special charge, compared with net earnings and E.P.S. as reported of U.S. $43.4 million and U.S. $0.73 per share in the first nine months of fiscal 2004.
On July 12, 2005, the Company increased its E.P.S. guidance for the full 2005 fiscal year from approximately U.S. $1.40 per share to approximately U.S. $1.50 per share before the special charge for the closure and relocation of the Canadian yarn-spinning operations, and approximately U.S. $1.37 per share after the charge. The Company continues to be comfortable with its revised guidance. The Company is projecting E.P.S. of approximately U.S. $0.42 per share for the fourth quarter, up approximately 23.5% from U.S. $0.34 per share in the fourth quarter of fiscal 2004, before the special charge in the fourth quarter of last year to reflect the Company's contractual obligations to H. Greg Chamandy.
During the third quarter, the Company generated U.S. $15.9 million of free cash flow. (Free cash flow is defined as cash flow from operating activities less cash flow from investing activities.) Capital expenditures amounted to U.S. $23.6 million, including the investment in a new yarn-spinning facility by Gildan's joint venture with Frontier Spinning Mills, Inc., which is now fully consolidated in Gildan's financial statements. The Company utilized U.S. $17.5 million in the third quarter for the second scheduled principal repayment of Gildan's U.S. senior notes, and ended the quarter with cash and cash equivalents of U.S. $30.8 million.
Gildan continues to project capital expenditures of approximately U.S. $85 million for the full 2005 fiscal year. The Company expects to generate free cash flow of approximately U.S. $10 million in fiscal 2005, and to end the fiscal year with cash and cash equivalents of approximately U.S. $65 million.
Gildan also announced that it planned to spend approximately U.S. $105 million for its capital expenditure program in fiscal 2006. In addition to completing the ramp-up and expansion of the Company's new textile facility in the Dominican Republic, the Company intends to construct two new facilities at its Rio Nance site in Honduras, one for the manufacture of its existing products, and one for production of athletic socks. Gildan believes that entry into the athletic sock market represents a significant growth opportunity for the Company, which will complement its overall retail strategy and leverage its existing core competencies and low-cost offshore manufacturing expertise.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Nine months ended
July 3, July 4, July 3, July 4,
2005 2004 2005 2004
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(unaudited)(unaudited)(unaudited)(unaudited)
Sales $198,901 $168,429 $473,179 $387,757
Cost of sales 136,091 117,443 328,309 278,134
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Gross profit 62,810 50,986 144,870 109,623
Selling, general and
administrative expenses 19,134 15,629 53,746 42,177
Special charge (note 2) - - 11,886 -
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Earnings before the
undernoted items 43,676 35,357 79,238 67,446
Depreciation and
amortization 6,043 5,517 18,413 15,698
Interest expense 1,191 1,626 3,691 4,970
Earnings of
non-controlling
interest 72 - 187 -
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Earnings before
income taxes 36,370 28,214 56,947 46,778
Income tax expense (note 3) 2,223 1,986 101 3,345
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Net earnings $34,147 $26,228 $56,846 $43,433
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Basic EPS $0.57 $0.44 $0.95 $0.73
Diluted EPS $0.57 $0.44 $0.95 $0.73
