Gildan Activewear Inc. reported net earnings of $115.8 million, or 94 cents per share, for the third fiscal quarter ended June 30, compared with net earnings of $78.6 million, or 0.64 cents per share, a year ago. Earnings were a record for a fiscal quarter, and were at the top end of company guidance. Gildan also further narrowed its earnings guidance for the full fiscal year, and reconfirmed its full year guidance for net sales revenues.
Net earnings for Q3 of fiscal 2013 included after-tax restructuring and acquisition-related costs amounting to $0.7 million in the third quarter of fiscal 2013 and $1.6 million in the third quarter of the prior year. Before restructuring and acquisition-related costs, adjusted net earnings for the third quarter of fiscal 2013 were $116.5 million, or 95 cents per share, up 45.3 percent and 43.9 percent, respectively, compared to adjusted net earnings of $80.2 million, or 66 cents per share, in the third quarter of last year.
The company had previously projected adjusted net earnings of 92 cents-95 cenys per share for the third quarter, when it reported its second quarter results on May 2. Operating income for both operating segments was in line with forecast. The benefit of lower than projected promotional discounts in Printwear was essentially offset by lower than forecast Printwear sales volumes due to production capacity constraints which limited the company's ability to fully capitalize on seasonal peak demand for activewear during the third quarter.
The growth in Gildan's net earnings compared to the third quarter of last year was due to lower cotton costs, higher unit sales volumes in both operating segments, more favorable branded product-mix in Branded Apparel, increased supply chain and manufacturing efficiencies and lower financial expenses, partially offset by lower net selling prices for Printwear, increased selling, general and administrative expenses and higher income taxes. On July 31, the company announced selling price reductions for certain printwear products, and applied the benefit of these selling price reductions to distributor inventories. The impact of the distributor inventory devaluation discount included in results for the third quarter was approximately 5 cents per share.
Net sales in the third quarter totaled $614.3 million, up 2.3 percent from $600.2 million in the third quarter of fiscal 2012. Net sales for the quarter were slightly below the company's guidance of approximately $630 million due to the production capacity constraints which limited the company's ability to fully capitalize on seasonal peak demand for activewear in both North American and international printwear markets, partially offset by lower than projected promotional discounts.
Net sales for the Printwear segment amounted to $433.0 million, down 3.6 percent from $449.3 million in the third quarter of fiscal 2012. In spite of capacity constraints, unit sales volumes increased by 4.1 percent. However, the positive impact on net sales of higher unit sales volumes was more than offset by the reduction in net selling prices compared to last year.
Net sales for Branded Apparel were $181.4 million, up 20.1% percent from $150.9 million in the third quarter of last year. The growth in sales for the Branded Apparel segment was due to the impact of new Gildan branded underwear and activewear programs for retail customers, increased sales to global athletic and lifestyle brands, and slightly higher sock sales compared to the third quarter of last year.
During the third quarter of fiscal 2013, the company began shipment of its first major Gildan branded underwear program to a national mass-market retailer. Initial retailer sales of the Gildan underwear products are very strong, and consumer demand is well in excess of expectations. In addition, men's Gold Toe branded sock programs also achieved increased market share penetration following the company's recent investments in marketing and advertising to further enhance the equity of the brand. Gildan's new Gold Toe G underwear and activewear programs in the department store and national chain channels targeting a younger consumer demographic are achieving good penetration and success. The company is continuing to obtain new placement of branded programs, including the introduction of the Gildan Platinum brand in national chains and department stores.
Although the company is primarily focused on the development of its Gildan and Gold Toe brands, it has also been successful in securing important new programs for fiscal 2014 as a supply chain partner for global athletic and lifestyle brands, which are seeking to consolidate sourcing with large-scale manufacturers strategically located in the Western Hemisphere. The acquisition, on June 21, of New Buffalo Shirt Factory Inc. (New Buffalo) provides the gompany with screenprinting and decorating capabilities which will position it to further enhance its sourcing solutions for these brands.
The company achieved consolidated gross margins in the third quarter of 31.5 percent, compared to 23.9 percent in the third quarter of last year. The improvement in gross margins for the third quarter of fiscal 2013 compared to the third quarter last year reflected the impact of lower-cost cotton, increased supply chain and manufacturing efficiencies due primarily to the ramp-up of Rio Nance V and cost reduction projects including the biomass project at Rio Nance, the non-recurrence of the write-off of obsolete manufacturing equipment at Rio Nance I in the third quarter of fiscal 2012, and a higher-value product-mix for Branded Apparel. These positive factors were partially offset by the impact of lower net selling prices for Printwear, including the distributor inventory devaluation discount.
SG&A expenses in the third quarter were $69.9 million, or 11.4 percent of net sales, compared with $57.2 million, or 9.5 percent of net sales, in the third quarter of last year. The increase in SG&A expenses continued to reflect increased marketing and advertising expenses and increased variable performance-driven compensation expenses.
In the third quarter, the Printwear segment reported operating income of $119.2 million, up 33.3 percent compared to $89.5 million in the third quarter of fiscal 2012. The more favorable results for the Printwear segment were primarily due to the impact of lower cotton costs together with increased manufacturing efficiencies and higher unit sales volumes, partially offset by lower net selling prices and higher SG&A expenses. The Branded Apparel segment reported quarterly operating income of $27.3 million, up 92.6 percent compared with $14.2 million in the third quarter of fiscal 2012. Branded Apparel operating margins were 15.1 percent, compared to 9.4 percent in the third quarter last year, notwithstanding the SG&A infrastructure and continuing investment in marketing expenses to position the Branded Apparel business for long-term growth. The improved results for Branded Apparel were primarily due to lower cotton costs, sales volume growth and a higher-valued branded product-mix, partially offset by higher SG&A expenses.
During the third quarter of fiscal 2013, the company generated free cash flow of $149.8 million, which was utilized to reduce bank indebtedness, pay the quarterly dividend and finance the acquisition of New Buffalo. The company ended the third quarter of the fiscal year with net indebtedness of $4.9 million, after taking account of $120.1 million of cash and cash equivalents.
Outlook
GIL now expects full year adjusted EPS to be $2.67-$2.70, compared to its previous guidance range of $2.65-$2.70. Adjusted EPS for the fourth quarter of fiscal 2013 is therefore projected to be 81 cents-84 cents. The company continues to project net sales revenues for fiscal 2013 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 material assumptions underlying the company's guidance are essentially unchanged, including the assumption that there is no major change in market and economic conditions.
The company's projected adjusted EPS for the fourth fiscal quarter of 81 cents-84 cents reflects growth of 4 percent-8 percent compared with strong prior year comparative adjusted EPS of 78 cents in the fourth quarter of fiscal 2012. The projected increase in EPS in the fourth quarter compared with the fourth quarter of last year reflects lower cotton costs together with assumed higher unit sales volumes and more favorable product-mix for both Printwear and Branded Apparel, together with increased supply chain and manufacturing efficiencies, which are projected to be largely offset by lower net selling prices for Printwear, higher SG&A expenses and higher income taxes.
Net sales revenues in the fourth quarter are projected to be in excess of $600 million, representing an increase of over 7 percent from net sales of $561.7 million in the fourth quarter of fiscal 2012. Gross margins in the fourth quarter are expected to decline slightly compared to the third quarter, in part due to sequentially higher costs of cotton. The margin impact of the selling price reductions for certain products in Printwear is projected to be essentially offset by assumed lower promotional activity, although margins will be slightly impacted by the balance of the July 31 distributor inventory devaluation discount.
The company is continuing to implement all of the capital expenditure projects for capacity expansion, new product technology and manufacturing cost reductions which it has previously announced, including completion of the ramp-up of Rio Nance V, refurbishment of Rio Nance I and the upgrading of equipment at the former Anvil facility, significant investments in vertical integration in yarn-spinning, further biomass projects and the expansion of distribution capacity. The ramp-up of Rio Nance I is beginning in the fourth quarter of fiscal 2013. The company is currently analyzing options for the further expansion of vertically-integrated textile production capacity, in order to support its planned sales growth. Gildan is projecting full year capital expenditures in fiscal 2013 of approximately $175 million, compared to its prior forecast of approximately $200 million, as a result of the timing of the delivery of new equipment. Free cash flow for fiscal 2013 is projected to be approximately $225 million.
The company expects to have essentially no net indebtedness at the end of the fiscal year, and plans to assess whether to unwind its interest rate swaps based on its projected cash requirements in fiscal 2014 to finance its further investments in capital expenditures and potential complementary acquisitions, as well as other possible uses of its cash flow. The unrealized loss on the interest rate swaps is currently approximately $5 million. The company's earnings guidance does not take account of the possible charge to unwind interest rate swaps if it is no longer economic to maintain such interest rate swaps.
Declaration of Quarterly Dividend
The Board of Directors has declared a cash dividend of 9 cents per share, payable on September 9, 2013 to shareholders of record on August 15, 2013. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.
| Consolidated Financial Data – unaudited | ||||||||
| (in US$ millions, except per share amounts or otherwise indicated) | Q3 2013 | Q3 2012 | YTD 2013 | YTD 2012 | ||||
| Net sales | 614.3 | 600.2 | 1,558.1 | 1,386.6 | ||||
| Gross profit | 193.3 | 143.5 | 457.1 | 235.9 | ||||
| SG&A expenses | 69.9 | 57.2 | 212.8 | 162.0 | ||||
| Operating income | 121.9 | 82.6 | 236.6 | 68.4 | ||||
| EBITDA(1) | 151.3 | 116.2 | 315.0 | 142.6 | ||||
| Net earnings | 115.8 | 78.6 | 223.4 | 59.4 | ||||
| Adjusted net earnings(1) | 116.5 | 80.2 | 228.3 | 62.2 | ||||
| Diluted EPS | 0.94 | 0.64 | 1.82 | 0.49 | ||||
| Adjusted diluted EPS(1) | ||||||||
