Gildan Activewear Inc. upped its sales outlook for 2010 to 25% from 17% growth over last year after reporting record net earnings of $48.8 million, or 40 cents per diluted share for its second fiscal quarter ended April 4, 2010.


The results reflect a restructuring charge of a penny per share related to the consolidation of its U.S. distribution activities that was announced Dec. 10, 2009.
 
Earnings and EPS were a record for the second quarter of any fiscal year. Before restructuring charges, adjusted net earnings amounted to $49.8 million or 41 cents per share in the second quarter of fiscal 2010, compared to $7.2 million or 6 cents per share in the second quarter of fiscal 2009.
 
Consolidated gross margins in the second quarter were 27.8%, compared to 15.8% in the second quarter of fiscal 2009. The increase in gross margins compared to last year was primarily due to gains in manufacturing efficiencies, lower cotton and energy costs and more favourable activewear product-mix, partially offset by the impact of the inefficiencies due to the Haiti earthquake.


Selling, general and administrative expenses in the second quarter were U.S. $38.7 million, compared to U.S. $30.9 million in the second quarter of fiscal 2009. The increase in SG&A expenses from last year was primarily due to the impact of the higher-valued Canadian dollar on corporate administrative expenses, and higher performance-driven variable compensation expenses. Selling, general and administrative expenses amounted to 11.8% of sales in the second quarter of fiscal 2010 compared to 12.6% of sales in the second quarter of fiscal 2009.
 
The significant increase in net earnings and EPS was due to strong growth in activewear and underwear unit sales volumes, more favorable manufacturing, cotton and energy costs, and more favorable activewear product-mix, partially offset by the 3 cents per share impact of transitional manufacturing inefficiencies due to the Haiti earthquake, and higher selling, general and administrative expenses.
 
Results for the second quarter were significantly ahead of the assumptions in the company's full year outlook provided on Feb. 9, 2010, as more favorable than projected net selling prices, unit sales volumes and product-mix in the U.S. wholesale distributor channel more than offset higher than projected selling, general and administrative expenses and the later timing of shipments of socks, which is expected to benefit the second half of the fiscal year.


Net sales for the second quarter of fiscal 2010 amounted to $326.8 million, up 33.5% from $244.8 million in the second quarter of last year. Sales of activewear and underwear were $273.2 million, up 51.0% from $180.9 million last year, and sales of socks were U.S. $53.6 million, down 16.3% from last year, primarily due to the timing of replenishment and the transition to new programs for mass-market retailers, which are expected to benefit sock shipments in the second half of the fiscal year.


The strong recovery in sales of activewear and underwear compared to fiscal 2009 was due to higher market share in the U.S. wholesale distributor channel, the non-recurrence of distributor destocking which occurred in the second quarter of fiscal 2009, a 3.4% increase in overall industry demand in the U.S. distributor channel, increased penetration of international and other screenprint markets and the impact of more favorable activewear product-mix, together with significantly increased shipments of underwear and activewear to retail customers.
 
The second quarter of fiscal 2010 was the first quarter since the first quarter of fiscal 2008 to benefit from positive growth in overall industry demand in the U.S. distributor channel. The positive trend in market recovery continued to improve each month during the quarter, with the month of March showing overall industry growth of 8.9%. Net selling prices for activewear were essentially flat compared to the second quarter of fiscal 2009.


 
Development of Business in Retail Channel
Gildan said it has received two major vendor awards at Walmart's Annual Supplier Summit held in New York on Wednesday, April 28, 2010. Gildan was named Supplier of the Year for 2009 for its boys' sock business and also received a special award for product innovation. The Supplier of the Year Award recognized Gildan's product quality and supply chain excellence in servicing Walmart's replenishment programs.


The company has continued to obtain new retail programs, including the family fleece program at a major national discount retailer and activewear programs for three other retailers. In addition, the company has secured additional shelf-space for existing programs at major national mass-market retailers as well as significant participation in Back-to-School programs for the fall of 2010.


At the end of the March quarter, overall inventories in the U.S. distributor channel were down by 5.5% compared with a year ago. Gildan's share of distributor inventories was 50.9% at March 31, 2010, compared with its market share of 64.4% for the quarter as shown above. Preliminary S.T.A.R.S. data for the month of April has continued to be strong.


The table below summarizes the data from the S.T.A.R.S. report produced by ACNielsen Market Decisions, which tracks unit volume shipments of activewear from U.S. wholesale distributors to U.S. screenprinters, for the calendar quarter ended March 31, 2010.


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Three months ended      Three months ended
March 31,               March 31,
2010 vs. 2009        2010        2009
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Unit Growth            Market Share
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Gildan    Industry                  Gildan
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All products 16.2% 3.4% 64.4% 57.3%
T-shirts                           16.2%        3.4%       65.2%       58.1%
Fleece                             15.9%        4.5%       62.1%       56.0%
Sport shirts                       18.0%        1.2%       43.9%       37.7%
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Cash Flows and Capital Expenditure Plans


The company used cash of $21.6 million in the second quarter after financing seasonal increases in accounts receivable, capital expenditures of $34.5 million, primarily for the ramp-up of the Rio Nance IV sock factory in Honduras and the new Barbados head office building, and $15.3 million for the acquisition of a manufacturing facility in Bangladesh which was announced on March 31, 2010.
 
Inventories declined slightly in the second quarter due to lower activewear finished goods inventory levels, partially offset by the impact of higher raw material and energy costs included in the carrying value of inventory and higher work-in-process inventories. The decrease in activewear finished goods was due to strong demand in the second quarter, combined with the impact of lost production due to the Haiti earthquake.

For the first six months of fiscal 2010, the company generated free cash flow of $36.3 million, and at the end of the second quarter the Company had cash and cash equivalents of $119.1 million.


The company is increasing its capital expenditure forecast for fiscal 2010 to approximately $155 million from its previous projection of approximately $145 million. The company plans to invest approximately $20 million to expand its Eden, N.C. distribution centre, to service demand in the U.S. wholesale distributor channel and further reduce distribution costs. This project will begin in 2010 and be completed in fiscal 2011.
 
In addition, the company is now planning additional investments to increase the planned production capacity of the new Rio Nance IV sock facility in order to support projected growth in demand. The ramp-up of Rio Nance IV is expected to be completed by the end of the third quarter of fiscal 2011. The company is currently proceeding with the previously announced incremental expansion of existing textile facilities in the Dominican Republic and Honduras, as well as beginning construction of the new Rio Nance V facility. It is also significantly further expanding sewing capacity, in line with the expansion of textile capacity and to support projected growth in sales demand for activewear and underwear.


 
Outlook
Assuming the continuation of more favorable market conditions, Gildan is now projecting full year sales revenues for fiscal 2010 to be approximately $1.3 billion, reflecting an increase of approximately 25% compared with fiscal 2009. The company had previously projected that sales revenues for fiscal 2010 would be in excess of $1.2 billion, or 17% higher than fiscal 2009.
 
The projected increase in sales revenues compared to the prior forecast is due to higher than previously forecasted unit sales volumes in both the screenprint and retail market channels and more favorable activewear selling prices, including the impact of a selling price increase averaging approximately 3% in the U.S. wholesale distributor channel which has been announced to take effect on July 5, 2010.
 
The company's revised full year sales outlook now assumes close to 30% unit sales volume growth in activewear and underwear, compared with its prior projection of 25% growth, and unit sales volume growth of 6% in socks, compared with the Company's original assumption of 5% growth. Net selling prices for activewear in the second half of the fiscal year are now assumed to be approximately 1% higher than in the second half of fiscal 2009.


Gross margins for the full year are now expected to be close to 27%, compared to the company's previous projection of 26%, due primarily to the assumption of more favourable activewear selling prices. The benefit of higher selling prices compared to the previous forecast is expected to be partially offset by the impact of short-term manufacturing inefficiencies to ramp up new sewing capacity and to meet higher than anticipated seasonal sock demand in the second half of the year, in particular the outsourcing of some Back-to-School programs, as well as the impact of currency fluctuations on international sales and slightly higher energy costs in the second half of fiscal 2010 than had been assumed in the company's prior forecast.


As reflected in the previous forecast, cotton costs will significantly increase in the second half of fiscal 2010, compared with both the first half of fiscal 2010 and the corresponding period of fiscal 2009. Although gross margins are expected to be lower in the second half of fiscal 2010 than in the first half, due primarily to higher cotton costs, the company currently expects to fully offset the impact of anticipated higher year-over-year cotton costs in fiscal 2011 compared to fiscal 2010 as a result of selling price increases and projected gains in manufacturing efficiencies.



Financial Highlights (unaudited)
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(in US$ millions, except per share
amounts or otherwise indicated)      Q2 2010  Q2 2009 YTD 2010 YTD 2009
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Net sales                               326.8    244.8    547.2    428.8
Gross profit                             90.7     38.7    156.5     77.6
Selling, general and administrative
expenses (SG&A)                         38.7     31.0     72.7     64.4
Operating income                         50.5      7.6     80.7     12.1
EBITDA (1)                               71.2     23.3    115.6     41.1
Net earnings                             48.8      7.1     76.7     11.4
Adjusted net earnings (2)                49.8      7.2     78.9     12.5

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Diluted EPS                              0.40     0.06     0.63     0.09
Adjusted diluted EPS (2)                 0.41     0.06     0.65     0.10
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Gross margin 27.8% 15.8% 28.6% 18.1%
SG&A as a percentage of sales            11.8%    12.6%    13.3%    15.0%
Operating margin                         15.5%     3.1%    14.7%     2.8%

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Cash flows from operating activities     30.4    (49.4)   104.3    (33.5)
Free cash flow (3)                       (6.3)   (62.0)    36.3    (59.1)