Gildan Activewear Inc. released its results for the first quarter ended April 2, 2017 and reconfirmed its full year guidance for 2017. The company saw a strong net sales growth of 12.2 percent in the quarter due to organic growth and the acquisition of companies including Alstyle, American Apparel, and Peds. Gildan expects sales to continue to increase throughout the remaining of 2017 due to organic growth and acquisitions.
Sales growth and operating margin expansion in the quarter translated to strong adjusted diluted EPS growth of 39 percent compared to last year. Free cash flow in the first quarter was up significantly over last year due to strong working capital management and lower capital expenditures. Increased market share in men’s underwear in the retail channel and continued growth in the faster growing product categories of printwear reflected continued progress with the company’s strategic initiatives, despite mixed market conditions.
Consolidated Results
The company’s consolidated net sales of $665.4 million in the first quarter ended April 2, 2017 grew 12.2 percent compared to the first quarter in 2016, reflecting sales increases of 13.6 percent in the printwear segment and 9.2 percent in branded apparel. The increase in consolidated net sales was mainly due to the impact of the 2016 acquisitions of Alstyle and Peds, as well as the American Apparel acquisition which closed during the first quarter of 2017, and organic growth driven by higher net selling prices and favorable product-mix. These positive factors were partially offset by unfavorable foreign exchange and the planned exit of private label programs in branded apparel.
Consolidated gross margin in the first quarter of 2017 was 28.4 percent, up 200 basis points compared to the same period last year primarily due to the positive net impact of net selling prices, manufacturing and raw material costs, partially offset by unfavorable foreign exchange. SG&A expenses as a percentage of sales of 13.4 percent were flat year over year. Adjusted operating margins of 15.0 percent were up 200 basis points compared to 13.0 percent in the same period last year reflecting consolidated gross margin expansion and SG&A leverage in Branded Apparel, partly offset by the SG&A margin impact of acquisitions in Printwear.
Net earnings totaled $83.5 million, or 36 cents per share on a diluted basis for the three months ended April 2, 2017, compared with net earnings of $63.2 million, or 26 cents per share on a diluted basis for the three months ended April 3, 2016. Excluding after-tax restructuring and acquisition-related costs of $6.6 million in the quarter and $5.8 million in the same quarter last year, Gildan reported adjusted net earnings of $90.1 million, or 39 cents per share on a diluted basis for the first quarter of 2017, up from $69 million, or 28 cents per share on a diluted basis in the prior year quarter. The increase in adjusted net earnings in the quarter was mainly driven by sales growth and higher operating margins, partially offset by higher income taxes compared to the same quarter last year. Adjusted EPS growth also reflected the benefit of share repurchases.
Gildan generated free cash flow of $41.3 million in the first quarter of 2017 compared to a use of $58.4 million of free cash in the same quarter last year. The approximate $100 million improvement in free cash flow in the quarter was due to higher earnings, strong working capital management, and lower capital expenditures. Capital expenditures of $24.8 million in the first quarter of 2017 were primarily for investments in textile capacity, including the development of Rio Nance 6 and textile capacity expansion in Bangladesh, as well as investments in garment dyeing and distribution. During the first quarter of 2017, the company repurchased approximately 3.5 million common shares under its normal course issuer bid (NCIB), which it renewed effective as of February 27, 2017, at a total cost of $89.3 million. Gildan ended the quarter with net debt of $713.0 million and a leverage ratio of 1.3 times net debt to adjusted EBITDA.
Segmented Operating Results
Net sales for the printwear segment for the first quarter of 2017 amounted to $445.6 million, up 13.6 percent from $392.1 million in the first quarter last year. The increase in printwear net sales was mainly due to sales of $39.5 million from the Alstyle and American Apparel acquisitions, higher net selling prices, and favorable product-mix, partly offset by unfavorable foreign exchange impacts.
Net sales for the branded apparel segment in the quarter were $219.7 million, up 9.2 percent from $201.2 million in the first quarter of 2016. The increase in branded apparel sales was primarily due to sales of $20.9 million from the Peds acquisition and organic sales growth which was partially offset by the impact from the planned exit of certain private label programs.
Operating income for the branded apparel segment of $18.6 million in the three months ended April 2, 2017 increased approximately 24.8 percent compared to $14.9 million in the same quarter last year. Branded apparel operating margins of 8.4 percent improved 100 basis points over the same quarter last year primarily attributable to the favorable net impact of net selling prices, manufacturing and raw material costs, as well as the benefit of volume leverage on SG&A expenses.
Outlook
The company reaffirmed its full year 2017 financial guidance, which it initiated on February 23, 2017, of adjusted diluted EPS in the range of $1.60-$1.70 on expected consolidated net sales growth in the high single-digit range. Printwear and branded apparel net sales in 2017 are each expected to increase in the high single-digit range driven by organic growth and the projected aggregate impact of approximately $160 to $185 million from the acquisitions of Alstyle, Peds, and American Apparel. The company continues to expect earnings growth in 2017 to be weighted in the first half of the year as higher raw material costs are projected in the second half of the year. The company is also reconfirming its expectations for adjusted EBITDA for 2017 of $555-$585 million and free cash flow in excess of $400 million, after projected capital expenditures of approximately $125 million for the year.
Photo courtesy Gildan Activewear
