Gildan Activewear Inc. announced record results for the second quarter of a fiscal year, which exceeded guidance in spite of challenging market conditions and the impact of unseasonal weather conditions in both operating segments.
The company, which sells its products under a diversified portfolio of company-owned brands, including the Gildan, Gold Toe and Anvil brands and brand extensions, as well as under license agreements for the Under Armour and New Balance brands, had previously projected adjusted net earnings of $0.54-$0.57 per share for the second quarter. Results were more favorable than projected due to lower than forecast promotional discounting in Printwear, partially offset by lower than forecast unit sales volumes, which the company believes was largely due to cooler seasonal weather conditions in the second quarter, and a charge of $0.02 per share to provide for the cost of discontinuing certain Anvil product-lines in order to re-focus the brand on contemporary ring-spun products, which had not been reflected in the companys earnings guidance.
The growth in the companys net earnings compared to the second quarter of last year was due to the benefit of significantly lower cotton costs together with higher unit sales volumes in both operating segments, and more favorable product-mix for Branded Apparel, partially offset by lower selling prices for Printwear, including the 4 cents per share impact of a distributor inventory devaluation discount in the quarter, higher manufacturing costs, the charge for the discontinuation of Anvil product-lines, higher selling, general and administrative expenses and higher income taxes.
Net sales in the second quarter amounted to $523.0 million, up 8.4 percent. from $482.6 million in the second quarter of fiscal 2012. The company had projected sales for the second quarter of approximately $520 million. Sales for the Printwear segment amounted to $368.0 million, up 2.0 percent. from $360.9 million in the second quarter of fiscal 2012, and sales for the Branded Apparel segment were $155.0 million, up 27.4 percent. from $121.7 million in the second quarter of last year.
The slight increase in sales in the Printwear segment was due to approximately 4 percent. unit sales volume growth in the U.S., primarily due to the acquisition of Anvil, and close to 20 percent. unit sales volume growth in international markets. The higher unit sales volumes compared to last year were achieved in spite of lower seasonal re-stocking by wholesale distributors than in the second quarter of fiscal 2012, when distributors replenished inventories after abnormally high destocking in the first quarter of last year, and lower seasonal demand for T-shirts by screenprinters due to the weather conditions in the second quarter. The increase in sales volumes was largely offset by the impact of lower selling prices, including the distributor inventory devaluation discount.
The 27.4 percent. growth in sales for the Branded Apparel segment was due to the impact of the acquisition of Anvil and increased sales of Gildan branded activewear to retail customers, partially offset by slightly lower sales of socks compared to the second quarter of last year. Consumer spending in the mass-retail market in the second quarter was negatively impacted by colder weather conditions, the later timing of income tax refunds and an increase in payroll taxes.
Consolidated gross margins in the second quarter were 28.9 percent. compared to 17.8 percent. last year. The significant recovery in gross margins was due to the impact of lower-cost cotton and more favorable product-mix for Branded Apparel, partially offset by the impact of the reduction in net selling prices for Printwear, the distributor inventory devaluation discount, higher manufacturing costs, and the impact of the charge for discontinuation of certain Anvil product-lines. The increase in manufacturing costs was due to short-term issues impacting the cost of goods produced in the first quarter, which were consumed in cost of sales in the second quarter, inflationary cost increases, and the earlier timing of the Easter holiday shutdown, which more than offset the positive impact of manufacturing efficiencies due to the continuing ramp-up of Rio Nance V.
Selling, general and administrative expenses in the second quarter were $73.6 million, or 14.1 percent. of net sales, compared with $53.9 million, or 11.2 percent. of net sales, in the second quarter of last year. The increase in SG&A expenses was primarily due to increased marketing and advertising expenses, increased variable performance-driven compensation expenses and the impact of Anvil.
In the second quarter, the Printwear segment reported operating income of $87.3 million, compared to $50.1 million in the second quarter of fiscal 2012. The more favorable results for the Printwear segment were primarily due to the impact of lower cotton costs, together with higher unit sales volumes and more favorable product-mix, partially offset by lower net selling prices, higher manufacturing costs and higher SG&A expenses. The Branded Apparel segment reported quarterly operating income of $13.4 million, compared with $1.1 million in the second quarter of fiscal 2012. The improved results for Branded Apparel were due to lower cotton costs, the acquisition of Anvil and a higher-valued branded product-mix, partially offset by manufacturing inefficiencies and higher SG&A expenses.
During the second quarter, utilization of the companys revolving bank credit facility increased by $37.0 million due to the cash requirements to finance the seasonal increase in accounts receivable and capital expenditures of $44.7 million. The company ended the second quarter of the fiscal year with bank indebtedness of $214.0 million and cash and cash equivalents of $72.7 million.
Year-To-Date Sales and Earnings
Net sales revenues for the first six months of fiscal 2013 amounted to $943.8 million, up 20.0 percent. from $786.4 million in fiscal 2012. The increase in net sales versus fiscal 2012 was due to the acquisition of Anvil, higher Printwear unit sales volumes, and growth in sales of Gildan branded activewear to retail customers. These factors were partially offset by lower net selling prices for Printwear and lower sales of socks. Sales in the first half of fiscal of 2013 were also impacted by the inventory devaluation discount in the second quarter. Sales in fiscal 2012 were impacted by a $19 million distributor inventory devaluation discount, in the first quarter of the fiscal year.
Net earnings in the first half of fiscal 2013 were $107.6 million or $0.88 per share on a diluted basis, compared to net loss of $19.2 million or $0.16 per share in the first six months of fiscal 2012. Adjusted net earnings before restructuring and acquisition-related costs amounted to $111.8 million or $0.91 per share, compared to adjusted net loss of $18.0 million or $0.15 per share in fiscal 2012. The increase in adjusted EPS in fiscal 2013 compared to last year reflected improved results in both Printwear and Branded Apparel, due to lower cotton costs, higher unit sales volumes, and more favorable product-mix, partially offset by lower Printwear net selling prices, increased selling, general and administrative expenses, and higher income taxes.
Net sales revenues for fiscal 2013 are now projected to be slightly in excess of $2.15 billion. Net sales for Printwear are projected to be approximately $1.45 billion, and net sales for Branded Apparel are projected to be slightly in excess of $0.7 billion. The company now expects full year adjusted EPS of $2.65-$2.70, which is at the upper end of its previous guidance range of EPS of $2.60-$2.70 for the full fiscal year, as the more favorable than projected second quarter results and projected increased supply chain and manufacturing efficiencies in the balance of the year are assumed to offset the negative impact of higher than previously projected cotton costs in the fourth quarter. Other material assumptions are essentially unchanged from the companys previous guidance. The company is assuming in its guidance that there is no major change in market and economic conditions.
The company is projecting adjusted net earnings per share for the third fiscal quarter of $0.92-$0.95, compared with adjusted EPS of $0.66 in the third quarter of fiscal 2012. The projected growth in EPS in the third quarter compared with the third quarter of last year reflects significantly lower cotton costs together with assumed higher unit sales volumes and more favorable product-mix for both Printwear and Branded Apparel, and increased supply chain and manufacturing efficiencies, which are projected to be partially offset by lower net selling prices for Printwear, higher selling, general and administrative expenses and higher income taxes. Net sales revenues in the third quarter are projected to be approximately $630 million.
The company is continuing to project free cash flow in excess of $200 million in fiscal 2013. Capital expenditures are still projected to be approximately $200 million, including a total of approximately $85 million for yarn-spinning investments. The ramp-up of the Rio Nance V textile facility is now essentially complete. The company is currently upgrading equipment at the former Anvil facility in Honduras to support its growth in more specialized performance products. Notwithstanding the companys decision to increase the utilization of the Anvil manufacturing facility, the rampup of Rio Nance I is still scheduled to begin in the fourth quarter of fiscal 2013. The company is making further investments in its biomass facilities at Rio Nance and has begun construction of its Honduran distribution centre.
Based on its projected cash flows, and without any further uses of cash, the company currently anticipates that it will be in a position to have substantially repaid the bank indebtedness incurred to finance both the Gold Toe and Anvil acquisitions by the end of the fiscal year. The companys earnings guidance does not take account of a possible charge if it is no longer economic to maintain interest rate swaps, which were entered into in 2011 when it increased its revolving bank credit facility to finance the acquisition of Gold Toe, in order to mitigate its exposure to a potential future increase in interest rates. The unrealized loss on the interest rate swaps is currently approximately $5 million. The decision whether to unwind the swaps will be based on the projected uses of the companys free cash flow in the second half of fiscal 2013 and in fiscal 2014.
The company believes that it is well positioned for continuing growth in sales and earnings, as it brings capacity on-stream to support its sales growth initiatives in both operating segments. In addition, the company is continuing to invest in manufacturing cost reduction projects and increased vertical integration, and also expects to leverage the investment which it has made in building an overhead infrastructure to drive the further development of its Branded Apparel business.