Gildan Activewear Inc. reported net earnings of U.S. $28.0 million and diluted EPS of 23 cents for its first fiscal quarter ended Jan. 3, 2010, after reflecting a restructuring charge of  1 penny per share related to the consolidation of its U.S. distribution activities announced on December 10, 2009.

Net earnings were $4.4 million or  4 cents per share in the first quarter of fiscal 2009. Before reflecting restructuring charges in both fiscal years, adjusted net earnings amounted to $29.2 million or 24 cents per share in the first quarter of fiscal 2010, compared to  $5.3 million or 4 cents per share in the first quarter of fiscal 2009.
 
The significant increase in net earnings and EPS in the first quarter compared to last year was due to strong growth in activewear unit sales volumes, more favorable manufacturing, cotton and energy costs, and more favorable activewear product-mix, partially offset by lower activewear selling prices.
 
EPS for the first quarter was slightly higher than the company’s internal forecast as the impact of lower than anticipated promotional activity in the U.S. wholesale distributor channel and more favorable product-mix more than offset the impact of the timing of replenishment of the U.S. wholesale distributor channel, which is benefitting activewear shipments early in the second quarter of the fiscal year.
Net sales in the first quarter of fiscal 2010 amounted to $220.4 million, up 19.8% from $184.0 million in the first quarter of last year. Sales of activewear and underwear were $152.9 million, up 32.0% from  $115.8 million last year, and sales of socks were  $67.5 million, compared to  $68.2 million last year. The first quarter is seasonally the lowest quarter in the fiscal year for Gildan’s activewear sales.
The strong recovery in sales of activewear and underwear compared to fiscal 2009 primarily reflected a 31.5% increase in activewear unit sales volumes, due to higher market share in the U.S. wholesale distributor channel, lower seasonal inventory destocking by distributors than in the first quarter of fiscal 2009, and increased penetration of international and other screenprint markets. These positive factors, together with more favorable activewear product-mix, were partially offset by an 8.9% decline in overall industry unit shipments from U.S. distributors to U.S. screenprinters, and an approximate 3.5% reduction in net selling prices for activewear, compared to the first quarter of fiscal 2009.
 
Overall inventories in the U.S. distributor channel at Dec. 31, 2009 were down by 15.5% compared with a year ago. Gildan’s share of distributor inventories was 49.8%, compared with its market share of 61.3% in the first quarter as shown above. Preliminary S.T.A.R.S. data for the month of January 2010 indicates that overall industry shipments declined by 1.5% compared to January 2009, and that Gildan’s market share for all product categories combined was 64.3%, compared with 61.3% for the December quarter.
 
Sales of socks in the first quarter were essentially flat compared to a year ago in spite of the negative sales impact of the discontinuance of unprofitable sock programs and the elimination of baby apparel and layette programs under licensed brands, which had been included in the Kentucky Derby Hosiery acquisition and did not fit with Gildan’s business model. The impact of eliminating these programs was essentially offset by the performance of continuing sock programs, including new mass retailer private label sock brands introduced during fiscal 2009.
 
Consolidated gross margins in the first quarter were 29.8%, compared to 21.1% in the first quarter of fiscal 2009. The increase in gross margins compared to last year was due to significant gains in manufacturing efficiencies, lower cotton and energy costs and more favorable activewear product-mix, partially offset by lower net selling prices for activewear, as well as the impact of additional inventory provisions.
Selling, general and administrative expenses in the first quarter were $34.0 million, compared to $33.5 million in the first quarter of fiscal 2009. The slight increase in SG&A expenses from last year was due to the impact of the higher-valued Canadian dollar on corporate administrative expenses and higher performance-driven variable compensation expenses, partially offset by the non-recurrence of provisions for doubtful receivable accounts recorded in the first quarter of fiscal 2009 as well as lower legal and professional fees. As a percentage of sales, SG&A expenses declined to 15.4%, compared with 18.2% a year ago.
Cash Flows and Financial Position
The company generated free cash flow of $42.5 million in the first quarter. Accounts receivable were reduced by $81.9 million compared with Oct. 4, 2009 and the company continues to be comfortable with its accounts receivable collections and credit exposures.
 
Inventory levels were increased by $43.1 million during the quarter, in order to build finished goods inventories of activewear to capitalize on demand during the peak summer selling season for T-shirts. The company invested $34.0 million in capital expenditures, primarily for its new retail distribution centre and office building in Charleston, S.C. and for the ramp-up of the Rio Nance IV sock factory in Honduras.
 
The company also paid approximately $13 million for the provincial component of its income tax settlement with the Canada Revenue Agency. This payment had been fully provided for in the fourth quarter of fiscal 2008. At the end of the first quarter, the Company had cash and cash equivalents of $141.1 million, and its $400 million bank credit facility was unutilized.
 
Development of Retail Programs
The company has begun to ship a new underwear program for Wal-Mart, under the Starter brand, as well as further new Starter programs for socks. In addition, the company is beginning shipment of the other new underwear and sock programs for national retailers which it announced in December. The company has significant opportunities to build on these programs, and is in active discussions with mass-retailers for further retail programs, in line with its strategy to be a major full-line supplier of socks, underwear and activewear for mass-retailers.
 
Outlook
The company reconfirmed the outlook and sales and margin assumptions for the full fiscal year, which it had provided on Dec. 10, 2009. The company continues to project full year sales revenues in excess of $1.2 billion, up approximately 17% compared with fiscal 2009, and gross margins for the full year of approximately 26%.
 
Gross margins in the second half of the fiscal year are assumed to be negatively impacted by higher cotton costs, which have not been assumed to be passed through into higher selling prices. The company has continued to base its outlook on the assumption of continuing weak economic conditions, resulting in no growth in overall industry demand being projected for the balance of the fiscal year. Based on preliminary S.T.A.R.S. data for the month of January 2010, overall industry demand in the U.S. wholesale distributor channel appears to be stabilizing.

The company has increased its capital expenditure forecast for fiscal 2010 to approximately $145 million, compared to $130 million projected in December.
 
The increase in projected capital expenditures is due to the acceleration of planned sewing capacity expansion projects required to support the company’s projected sales growth, further capacity expansion and additional knitting machines at the new Rio Nance IV sock facility, and additional investment in the biomass project in Honduras, which is expected to result in further