Gildan Activewear Inc. reported that third quarter net sales jumped 30.6% to $380.8 million from $291.6 million last year due to an increase of $43.8 million in sock sales as a result the acquisition of V.I. Prewett & Son in the first quarter of fiscal 2008, an approximate 6% increase in activewear unit selling prices, and a 10.4% increase in unit sales volumes for activewear and underwear. Net income for the quarter increased to $54.0 million, or 44 cents per diluted share, from $52.4 million, or 43 cents per diluted share last year.
Results for the third quarter include $2.3 million or 2 cents per share of restructuring charges, related to ongoing carrying costs pursuant to the closure of Canadian and U.S. manufacturing facilities, and a planned consolidation of sewing operations in Haiti. In the third quarter of fiscal 2007, net income included $4.6 million or 4 cents per share of restructuring charges related to manufacturing closures.
Before reflecting the impact of restructuring charges in both fiscal years, adjusted net earnings and adjusted diluted EPS were $56.3 million and 46 cents respectively, compared to adjusted net earnings of $57.0 million and EPS of 47 cents in the third quarter of fiscal 2007.
The change in adjusted EPS, before restructuring charges, was due primarily to higher activewear selling prices and unit sales volumes, which were more than offset by higher cotton and energy costs, more unfavourable activewear product-mix, higher selling, general and administrative and depreciation expenses, the non-recurrence of a prior year income tax recovery which positively impacted EPS by 5 cents in the third quarter of last year, a provision for a doubtful receivable account, and charges to write off or dispose of surplus fixed assets.
As reflected in the company’s guidance for the year, the third quarter of the 2008 fiscal year comprised 14 weeks instead of the normal 13 weeks for a fiscal quarter. The inclusion of an extra week is required in every fifth or sixth fiscal year to maintain the alignment of the company’s financial reporting cycle with the calendar year. Consistent with the company’s prior practice, the extra week is included in the third quarter.
The company’s results for its third fiscal quarter were in line with its most recent EPS guidance. More favourable than projected activewear selling prices, unit volumes and product-mix were offset by a provision for a doubtful receivable account, and charges to write off or dispose of surplus fixed assets.
Growth in activewear unit sales was significantly constrained by lack of inventory, as a result of lower than anticipated production from the company’s Dominican Republic textile manufacturing facility. The company has made good progress in improving the performance of the Dominican Republic facility during the third quarter, although its inventory levels for activewear continue to be very low.
The growth in activewear unit sales in the third fiscal quarter was due to the additional week of shipments and continuing market share penetration in all product categories in the U.S. wholesale distributor channel. The table below summarizes data from the S.T.A.R.S. report produced by ACNielsen Market Decisions, which tracks unit volume shipments from U.S. wholesale distributors to U.S. screenprinters, for the quarter ended June 30, 2008.
Gildan Gildan Gildan Industry
Market Share Market Share Unit Growth Unit Growth
Q3 2008 Q3 2007 Q3 2008 vs. Q3 2008 vs.
Q3 2007 Q3 2007
51.9% 47.6% All activewear products 5.5% (3.5)%
52.6% 48.3% T-shirts 5.5% (3.2)%
51.7% 42.2% Fleece 23.4% 0.3%
34.6% 34.0% Sport shirts (10.6)% (12.6)%
Although overall industry shipments from distributors to screenprinters declined by 3.5% during the June quarter, according to the S.T.A.R.S. report, distributor demand for Gildan products remained very strong. The company had a high open order position throughout the quarter, which has continued into the fourth quarter. Overall inventories in the channel continue to be in good balance in relation to expected industry demand.
During the third quarter, the company began shipment of its first retail underwear program. Also, the company has continued to implement its strategy to rationalize its sock product-mix, in order to focus on basic higher-volume products and programs which capitalize on Gildan’s modern large-scale manufacturing capacity.
Gross margins in the third quarter of fiscal 2008 declined slightly to 31.6%, compared to 32.4% in the third quarter of fiscal 2007. The positive gross margin impact of higher activewear selling prices and favourable manufacturing efficiencies arising from the consolidation of textile facilities in the fourth quarter of fiscal 2007 was more than offset by higher cotton, energy, chemicals and transportation costs, the impact of production inefficiencies in the Dominican Republic textile facility, as inventories produced in the second fiscal quarter were consumed in cost of sales, a lower proportion of high-valued sport shirt sales, and the impact of the acquisition of Prewett. Socks manufactured by Gildan in the U.S. have lower gross margins than activewear and sock products manufactured in the company’s Honduran manufacturing facilities, and therefore dilute overall gross margins.
Selling, general and administrative expenses were $43.9 million, or 11.5% of sales, compared to $28.4 million, or 9.7% of sales in the third quarter of fiscal 2007. The increase in selling, general and administrative expenses was due to the acquisition of Prewett, higher distribution and transportation expenses, a provision of $2.6 million for non-collection of accounts receivable from a U.S. retail customer, which filed for bankruptcy protection during the third quarter, higher corporate infrastructure costs, including the impact of the higher-valued Canadian dollar, a charge for the disposal of surplus fixed assets, and professional fees for special projects. The increase of $5.1 million in depreciation and amortization expenses was primarily due to the ramp-up of major capacity expansion projects and the acquisition of Prewett, including the amortization of acquired intangible assets, as well as a charge to write down surplus fixed assets.
The company continues to be comfortable with its previous guidance of EPS of $1.45 to $1.50 for the full 2008 fiscal year.
Gildan Activewear Inc.
Interim Consolidated Statements of Earnings and Comprehensive Income
(In thousands of U.S. dollars, except per share data)
Three months ended Nine months ended
July 6, 2008 July 1, 2007 July 6, 2008 July 1, 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $380,774 $291,610 $924,994 $709,573
Cost of sales 260,418 197,221 626,051 482,558
Gross profit 120,356 94,389 298,943 227,015
Selling, general and
expenses 43,893 28,430 113,096 83,080
Restructuring and other
charges (note 7) 2,289 4,589 3,929 22,339
Earnings before the
undernoted items 74,174 61,370 181,918 121,596
amortization (note 9a) 15,326 10,272 43,249 28,521
Interest, net (note 10b) 1,204 1,453 6,065 3,501
of consolidated joint
venture 185 503 357 625
Earnings before income
taxes 57,459 49,142 132,247 88,949
Income tax expense
(recovery) (note 12) 3,448 (3,255) 9,076 (205)
Net earnings and
comprehensive income $54,011 $52,397 $123,171 $89,154
Basic EPS (note 8) $0.45 $0.44 $1.02 $0.74
Diluted EPS (note 8) $0.44 $0.43 $1.01 $0.73