Gildan Activewear Inc. reported that net earnings for the companys fiscal second quarter fell more than 83% to $7.1 million, or 6 cents per diluted share, for the period ended April 5, compared with net earnings of $42.1 million, or 35 cents per diluted share, in the second quarter of fiscal 2008.
Gildan said the reduction in net earnings and EPS was primarily due to significantly lower unit sales volumes, as a result of weak end-use demand and the timing of wholesale distributor replenishment, and significantly lower gross margins, as a result of the consumption of higher-cost inventories produced in previous quarters and unfavorable product-mix. Gross margins are projected to improve in the third and fourth quarters, compared to the second quarter, due to more favorable manufacturing and raw material costs and more favorable product-mix.
Net sales in the second quarter amounted to $244.8 million, down 16.7% from $293.8 million in the second quarter of last year, due primarily to a 21.9% decline in activewear sales including a 13.9% decrease in unit shipments of activewear. Increased market share penetration in the U.S. U.K. , the Asia/Pacific region and Mexico were offset by the temporary suspension of distribution in Eastern Europe , which had been a growing market in fiscal 2008. Sales of socks were essentially unchanged from the second quarter of fiscal 2008 in spite of the elimination of unprofitable sock product-lines during fiscal 2008. Unit sales of Gildan socks from the company's major retail customers to consumers were higher than the previous year, in spite of weak overall retail market conditions. The company believes that it is well positioned at this time to build on its strong market position in the sock category and pursue its strategy to achieve further penetration with U.S.
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.
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Three months ended Three months ended
March 31, March 31,
2009 vs. 2008 2009 2008
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Unit Growth Market Share
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Gildan Industry Gildan
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All products (5.5)% (18.0)% 57.3% 50.1%
T-shirts (5.5)% (17.9)% 58.1% 50.7%
Fleece 0.4% (12.9)% 56.0% 48.8%
Sport shirts (23.8)% (28.6)% 37.7% 35.5%
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Gross margins in the second quarter were 15.8%, compared to 28.8% after recasting prior year comparatives to reflect the reclassification of manufacturing depreciation and certain items from selling, general and administrative expenses to cost of sales. The decline in gross margins was due to significantly higher costs in previously manufactured inventory for cotton, energy, chemicals and dyestuffs, more unfavorable activewear product-mix including the impact of the sale of second-quality product, inefficiencies due to manufacturing downtime, the temporary impact of inefficiencies related to the transition in sock private label brands for Gildan's largest retail customer, higher depreciation expenses absorbed in cost of sales, and the impact of currency fluctuations, partially offset by slightly higher net selling prices for activewear and the non-recurrence of charges related to completing the integration of the acquisition of a sock manufacturer which were incurred in the second quarter of fiscal 2008.
The company continues to plan its business on the basis of assuming that macro-economic conditions will continue to result in very weak activewear sales demand and severe selling price competition in the second half of the fiscal year. However, gross margins are expected to improve in the second half of the fiscal year, compared to the second quarter, due to more favorable manufacturing efficiencies which are reflected in inventory valuations at the end of the second fiscal quarter, including the benefit of lower energy and transportation costs, the non-recurrence of the abnormally high proportion of sales of second-quality merchandise in the second quarter, a higher proportion of sales of fleece and long-sleeve T-shirts, and the completion of the transition to new sock private label brands. In addition, cotton costs in the second half of the year will decline compared to the second quarter of fiscal 2009, although gross margins in the second half of the current fiscal year will not yet reflect the full benefit of the decline in commodity costs, as tthe company had previously committed itself to cotton purchases at higher cotton prices. Lower manufacturing and raw material costs in the second half of fiscal 2009, combined with more favorable product-mix, are expected to positively impact gross margins by over 10%, compared to the second quarter, and more than offset the negative impact of assumed further downtime and possible further selling price discounting in the second half of the year.
Selling, general and administrative expenses, after reflecting the recasting of certain items in both years, were $30.9 million in the second quarter, compared with $34.6 million in the second quarter of fiscal 2008. The reduction in selling, general and administrative expenses compared to last year was primarily due to reduced distribution costs and the impact of the lower-valued Canadian dollar on corporate administrative expenses, partially offset by higher legal and professional fees.
Year-to-date Sales and Earnings
Net sales for the six months ended April 5, 2009 were $428.8 million, down $115.4 million or 21.2% compared to the same period last year. The decrease in net sales was due to a 20.9% decline in activewear unit volumes, unfavorable activewear product-mix, a $14.0 million decrease in sock sales due to the elimination of unprofitable sock product-lines during fiscal 2008 and the negative impact of the stronger U.S. dollar on Canadian and international sales. These negative factors were partially offset by higher net selling prices for activewear. The lower unit sales volumes for activewear were due to the decline in overall industry unit shipments by U.S. wholesale distributors to screenprinters and the significant impact of inventory reductions by U.S. wholesale distributors, which more than offset Gildan's market share gains in the U.S. screenprint channel during the six months ended April 5, 2009.
Net earnings for the first six months were $11.4 million, or $0.09 per share on a diluted basis, compared with net earnings of $70.1 million, or $0.58 per share, for the same period last year. The reduction in net earnings and EPS in the first six months of fiscal 2009 was due to significantly lower activewear unit sales volumes and gross margins, partially offset by lower SG&A and financial expenses.
Cash Flows
Cash flows from operating activities less cash flows from investing activities resulted in a use of cash of $62.0 million in the second quarter. Cash flows from operating activities before depreciation and amortization and other non-cash items, together with the approximately $7.5 million impact of a reduction in inventories in the quarter, were used to finance an approximate $77.8 million increase in accounts receivable and approximately $13.4 million of capital expenditures.
Inventories at the end of the second quarter were slightly reduced compared to the end of the first quarter, as higher unit quantities of activewear finished goods inventories were more than offset by the impact of a reduction in activewear unit inventory costs and lower inventories of socks. Manufacturing downtime will be scheduled as required in order to continue to control activewear inventories, based on the outlook for end-use demand and the level of replenishment of distributor inventories.
The company ended the second quarter of fiscal 2009 with net indebtedness of approximately $97.5 million, and continues to have significant financing capacity and flexibility under its revolving bank credit facility, which matures in 2013. In addition, the company expects to continue to reinforce its strong balance-sheet and capital structure by generating positive free cash flow in the current fiscal year. Capital expenditures for fiscal 2009 are currently projected to be approximately $60-$65 million, down from the company's most recent projection due to the deferral of capital expenditures for capacity expansion. The company's objective is to have no debt outstanding under its bank credit facility at the fiscal year-end.
Distributor Debt Restructuring
The company's largest wholesale distributor, Broder Bros., has been undertaking a restructuring of its debt financing. Its restructuring plan includes the conversion of a minimum of 95% of its existing 11.25% senior notes into new debt and equity instruments. The deadline for achieving the minimum tender condition of 95% of the bond-holders is 11:59 p.m. EDT today. In the event that Broder fails to achieve the required level of bond-holder acceptance, it has announced that it intends to immediately seek creditor protection under Chapter 11 of the U.S. Bankruptcy Code. If Broder elects to pursue such a filing, Gildan may be required to provide for non-collection of all or part of its net accounts receivable from Broder, amounting to approximately $12.4 million.
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(in US$ millions,
except per share
amounts or otherwise Q2 2008 YTD 2008
indicated) Q2 2009 Recast(i) YTD 2009 Recast(i)
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Net sales 244.8 293.8 428.8 544.2
Gross profit 38.7 84.6 77.6 150.1
Selling, general and
administrative
expenses (SG&A) 31.0 34.6 64.4 66.3
Operating income 7.6 49.2 12.1 82.2
EBITDA (1) 23.3 62.3 41.1 107.2
Net earnings and
comprehensive income 7.1 42.1 11.4 70.1
Adjusted net
earnings (2) 7.2 42.9 12.5 71.7
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EPS – diluted 0.06 0.35 0.09 0.58
Adjusted EPS
– diluted (2) 0.06 0.35 0.10 0.59
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Gross margin 15.8% 28.8% 18.1% 27.6%
SG&A as a percentage
of sales 12.6% 11.8% 15.0% 12.2%
Operating margin 3.1% 16.7% 2.8% 15.1%
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Cash flows from
operations (49.4) 24.3 (33.5) 127.7
Free cash flow (3) (62.0) (0.3) (59.1) 70.7
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April 5, October 5, March 30,
As at 2009 2008 2008
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Inventories 379.9 316.2 300.1
Accounts receivable 176.6 222.2 185.8
Net indebtedness (4) 97.5 40.6 117.0
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(1), (2), (3), (4): Please refer to Non-GAAP Financial Measures on page 7
of this press release.
