Gildan Activewear Inc. reported first quarter net earnings of $27.5 million and diluted EPS of 23 cents, up respectively 76.3% and 76.9% from net earnings of $15.6 million and diluted EPS of 13 cents in the first quarter of fiscal 2007. Results for the first quarter of fiscal 2008 include a charge of $0.8 million to reflect ongoing carrying costs for Canadian and U.S. manufacturing facilities, pursuant to the closure of these facilities in fiscal 2007. Before reflecting restructuring charges in both fiscal years, adjusted net earnings for the first quarter were $28.3 million, or 23 cents per share, up respectively 66.5% and 64.3% from adjusted net earnings of $17.0 million, or 14 cents per share, in the first quarter of fiscal 2007. The growth in EPS was primarily due to higher unit sales volumes, selling prices and manufacturing efficiencies for activewear. As a result of the same factors, diluted EPS was 2 cents higher than the earnings guidance previously provided by the company.
The acquisition of V. I. Prewett & Son, Inc. was accretive by a penny per share in the quarter. Results for Prewett have been included with effect from the date of the acquisition on October 15, 2007.
Sales in the first quarter, which is seasonally the lowest quarter of the fiscal year for sales of activewear, amounted to $250.5 million, up 34.8% from $185.8 million in the first quarter of last year. The increase in sales revenues was due to an increase of 92.7% or $39.4 million in sock sales due to the acquisition of Prewett and new retail sock programs obtained in fiscal 2007, a 13.7% increase in unit sales volumes for activewear, and an increase of approximately 2.5% in activewear unit selling prices. The growth in sales was achieved in spite of the elimination during fiscal 2007 of unprofitable sock product-lines, which did not fit with Gildan's strategy.
The growth in activewear unit sales was primarily due to continuing market share penetration in all product categories in the U.S. wholesale distributor channel. Although the final S.T.A.R.S. report for market shares and overall industry demand for the calendar quarter ended December 31, 2007 is not yet available, preliminary S.T.A.R.S. data indicate that Gildan achieved record market shares in the T-shirt and fleece categories, and that overall industry shipments from U.S. distributors to screenprinters increased in the quarter, compared to the corresponding period in 2006. Inventories in the U.S. distributor channel continue to be in good balance.
During the first quarter, the company obtained its first underwear program with a U.S. national mass-market retailer. Shipments for this program are expected to begin in May of 2008.
In addition to the company's growth in U.S. markets, unit shipments to Canada, Europe, Asia/Pacific and Mexico increased by 19.3%, compared to the first quarter of fiscal 2007. The company has leased warehouse space in Shenzen, China with a third-party logistics provider, to support its growth objectives in the Chinese market.
Gross margins in the first quarter of fiscal 2008 were 31.5%, versus 29.0% in the first quarter of 2007. The increase in gross margins was due to higher activewear selling prices and increased manufacturing efficiencies for activewear. Gross margins include the negative impact of the consumption of higher-cost opening textile and sock inventories, combined with sock inventory write-downs due to the company's decision to accelerate the liquidation of unprofitable product-lines which have been discontinued, as well as the impact of Prewett, which currently provides lower gross margins than Gildan's activewear product-lines.
Selling, general and administrative expenses in the first quarter were $32.6 million compared to $26.1 million in the first quarter of last year. The increase in selling, general and administrative expenses was due to the impact of the acquisition of Prewett, higher distribution costs and increased administrative and information technology costs to support the company's continuing growth strategy. Administrative expenses were also impacted by the stronger Canadian dollar. The impact of these higher costs was partially offset by the non-recurrence of a $1.1 million charge incurred in the first quarter of fiscal 2007 for the replacement of the company's leased aircraft. As a percentage of sales, selling, general and administrative costs decreased to 13.0% from 14.1% in the first quarter of fiscal 2007.
The increase of $4.1 million in depreciation and amortization expenses was due to the company's continuing investments in capacity expansion, combined with the impact of the Prewett acquisition.
Cash Flow
During the first quarter of fiscal 2008, the company acquired V.I. Prewett & Son, Inc., for a purchase price of $125 million, plus a contingent payment of $10 million. Before the investment in the Prewett acquisition, Gildan generated free cash flow of $71.0 million in the quarter. Cash flow from operating activities amounted to $103.4 million, including a $83.3 million reduction in accounts receivable due to the seasonally low level of sales in the first quarter and a reduction in days sales outstanding. The company used $11.2 million in the first quarter for seasonal rebuilding of inventories, in line with its requirements to support its projected sales. $34.2 million was used for capital investments, primarily in the company's major textile and sock manufacturing capacity expansion projects in Honduras. At the end of the first quarter, the company continued to have significant unused financing capacity to be able to pursue further capacity expansion in excess of its current plans, as well as other potential growth opportunities.
Outlook
The company has increased its EPS guidance for the full year to a range of $1.85 to $1.90, up 43% to 47% from adjusted net earnings of $1.29 per share in fiscal 2007.
The impact of projected more favourable pricing in the wholesale channel, and of the company's more favourable performance in the first quarter, is projected to be partially offset by a higher than previously anticipated income tax rate for the year, as well as the assumed impact of a proposed U.S. tariff on sock imports from Honduras in the third and fourth quarters.
The projected increase in EPS compared to fiscal 2007 reflects 14% projected growth in unit sales volumes for activewear and underwear, projected higher selling prices for activewear, projected manufacturing efficiencies as a result of completing the closures of the company's Canadian textile manufacturing operations and consolidating activewear manufacturing offshore, and the impact of integrating the company's sock acquisitions. The positive impact of these factors in fiscal 2008 is assumed to be partially offset by higher selling, general and administrative and depreciation expenses, projected increases in cotton, energy and transportation costs, and a higher effective income tax rate including the non-recurrence of income tax recoveries recorded in fiscal 2007.
The company also indicated that it expects to report EPS of approximately 42 cents in the second quarter of the fiscal year, up 35.5% from adjusted EPS of 31 cents in the second quarter of fiscal 2007.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended
December 30, December 31,
2007 2006
———————————————————————–
(unaudited) (unaudited)
Sales $250,457 $185,829
Cost of sales 171,541 131,951
———————————————————————–
Gross profit 78,916 53,878
Selling, general and
administrative expenses 32,607 26,110
Restructuring and other
charges (note 2) 823 1,391
———————————————————————–
Earnings before the undernoted items 45,486 26,377
Depreciation and amortization 12,847 8,774
Interest, net 2,794 971
Non-controlling interest in income
(loss) of consolidated joint venture 291 (64)
———————————————————————–
Earnings before income taxes 29,554 16,696
Income tax expense 2,080 1,085
———————————————————————–
Net earnings $27,474 $15,611
———————————————————————–
———————————————————————–
Basic EPS $0.23 $0.13
Diluted EPS $0.23 $0.13
Weighted average number of shares
outstanding (in thousands)
Basic 120,428 120,278
Diluted 121,656 121,447
