Gildan Activewear reported earnings tumbled 84.6% in its first quarter ended Jan. 4, to $4.3 million, or 4 cents a share, from $27.9 million, or 23 cents a year ago. The company had provided EPS guidance of 0 cents to five cents for the first quarter of fiscal 2009

Gildan also suspended its EPS guidance for the full fiscal year, which it had initiated on December 11, 2008, “due to increasing uncertainty about macro-economic conditions and the potential impact of the economic and financial crisis on Gildan's served markets and customer base.” The company also updated its capital expenditure plans for fiscal 2009.

The reduction in net earnings and EPS in the first quarter compared to last year was primarily due to significantly lower unit sales volumes, combined with higher cotton and energy costs reflected in inventories consumed in cost of sales during the quarter, more unfavorable activewear product-mix, and increased provisions for accounts receivable. Cotton costs are projected to be at their highest point during the year in the first quarter of fiscal 2009, and were at their lowest point during fiscal 2008 in the first quarter.

These negative factors were partially offset by favorable manufacturing efficiencies and higher net selling prices for activewear, compared to the first quarter of fiscal 2008. Compared to the company's EPS guidance for the quarter, the impact of lower than projected selling price discounts was offset by lower than projected unit sales volumes, due to continuing inventory de-stocking by U.S. wholesale distributors, and increased provisions for accounts receivable.

Sales in the first quarter of fiscal 2009, which is seasonally the lowest quarter of the fiscal year for Gildan's activewear sales, amounted to U.S. $184.0 million, down 26.5% from U.S. $250.5 million in the first quarter of last year. Increased market share penetration in the U.S. screenprint channel was more than offset by an 11.6% decline in overall industry unit shipments in the channel and the significant impact of inventory reductions during the quarter by U.S. wholesale distributors. Sales were also negatively impacted by more unfavourable activewear product-mix. Sales of socks included an extra two weeks of sales from the Prewett acquisition, which was effective from October 15, 2007. However, unit sales of socks decreased due to the elimination of unprofitable sock product-lines during fiscal 2008, and a reduction in inventories carried by retailer. Unit sales of Gildan socks from the Company's major retail customers to consumers were essentially unchanged compared with the previous year, in spite of weak overall retail market conditions.

Gross margins in the first quarter were 21.1%, compared to 26.2% 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. Recast prior year comparative figures have been provided in the Investor Relations section of the company's website. Compared to the recast gross margins for the first quarter of fiscal 2008, the decline in gross margins was due to significantly higher cotton and energy costs, more unfavourable activewear product-mix due to a lower proportion of high-valued fleece and long-sleeve T-shirts, higher depreciation expenses absorbed in cost of sales, a higher proportion of sales of socks compared to activewear, the temporary impact of additional packaging costs related to a transition in sock private label brands for Gildan's largest retail customer, which is being implemented in the second half of fiscal 2009, and higher labour costs, partially offset by increased manufacturing efficiencies, the non-recurrence of sock inventory write-downs in the first quarter of fiscal 2008, and higher net selling prices compared to the first quarter of last year.

Selling, general and administrative expenses, after reflecting the reclassification of certain items in both years as disclosed in the Company's website, were U.S. $33.5 million, compared with U.S. $31.7 million in the first quarter of fiscal 2008. The approximate U.S. $2 million impact of an increase in accounts receivable provisions, together with higher professional and legal fees, were partially offset by lower volume-related distribution expenses and the impact of the reduction in the value of the Canadian dollar on Gildan's corporate administrative expenses.

EPS Outlook and Guidance for Fiscal 2009

Although the company initiated EPS guidance for fiscal 2009 in mid-December, and has so far met its EPS expectations in spite of difficult market conditions, the company believes that it is prudent to suspend its earnings guidance due to increasing uncertainty regarding the severity and duration of the current economic and financial crisis. In addition, continuing weak end-use demand and tighter credit markets may affect the financial condition and liquidity of wholesale customers, resulting in increased credit risk and a need for the company to prudently balance short-term market share considerations with such increased customer credit risk.

Gildan's operations are performing well, and the company believes that its strong competitive positioning, combined with its strong balance-sheet and free cash flow generation, will allow it to take advantage of potential opportunities resulting from any industry rationalization or restructuring that may occur as a result of a prolonged industry downturn and crisis in liquidity.

Cash Flows and Capital Expenditures

The company generated free cash flow of approximately U.S. $3 million in the first quarter of fiscal 2009, after capital expenditures and the payment of prior year income taxes pursuant to the Company's settlement of its transfer pricing audit with the Canada Revenue Agency. Cash flows from operating activities before depreciation expenses and other non-cash items, together with approximately U.S. $120 million of cash inflows from the collection of accounts receivables in the quarter, were used to finance an approximate U.S. $66 million increase in inventories to meet anticipated sales demand and approximately U.S. $14 million of capital expenditures, as well as to pay approximately U.S. $24 million of income taxes, and U.S. $31 million of accounts payable and accrued liabilities.

The company ended the first quarter of fiscal 2009 with net indebtedness of approximately U.S. $37 million, and continues to have significant financing capacity and flexibility under its revolving bank credit facility, which matures in 2013. A major objective for the company in fiscal 2009 will be to maintain its strong financing position and ensure that it continues to be in a position to take advantage of any strategic growth opportunities that may arise.

Consequently, in the current economic environment, Gildan intends to prudently manage its receivable and inventory levels and its capital expenditures. Inventories will be carefully monitored in relation to market conditions as they evolve, and the Company will evaluate the need for production downtime as required to align inventories with sales demand. The Company is continuing to defer construction of its Rio Nance 5 facility until the economic outlook in support of further major capacity expansion becomes clearer. In addition, the company has decided to proceed cautiously on other expansion projects and defer the ramp-up of its second sock manufacturing facility in Honduras. Gildan plans to transfer its U.S. sock finishing operations to an existing leased facility in Honduras in order to achieve planned manufacturing efficiencies without incurring major capital costs or creating significant new industry overcapacity. The Rio Nance 4 building will be utilized as a distribution centre while sock capacity expansion requirements are re-assessed. Capital expenditures for fiscal 2009 are now projected at approximately U.S. $80 million, compared with the Company's most recent forecast of U.S. $115 million.