Gildan Activewear reported earnings for the fourth fiscal quarter ended Oct. 3, were
U.S. $56.8 million, or 47 cents per share. Excluding a
restructuring charge of one cent per share related to the
consolidation of U.S. distribution activities, earnings grew 37.5% to $58.3 million, or 48 cents per share,
from $42.4 million, or 35 cents a year ago.
The Montreal-based company said the growth in net earnings compared to last year was primarily due to strong unit sales growth in the U.S. distributor channel, which was achieved in spite of low activewear finished goods inventory levels throughout the quarter, lower promotional activity in the channel, including the non-recurrence of a special devaluation discount applicable to distributor inventories which was recorded in the fourth quarter of last year, and the proceeds from an insurance claim which partially compensated for the impact of lost sales and additional supply chain costs in fiscal 2010 due to the Haiti earthquake in January 2010.
These positive factors more than offset the unfavorable impact of significantly higher cotton costs compared to the fourth quarter of last year and higher selling, general and administrative expenses. Although selling price increases have been implemented in the U.S. wholesale distributor channel since July, to offset inflation in cotton and other input costs, these price increases were not applied to back-orders already placed at the time of implementing the increases, and therefore only partially offset the impact of the significant cotton cost increases in the quarter.
Net sales in the fourth quarter of fiscal 2010 amounted to U.S. $368.9 million, up 22.3% from U.S. $301.7 million last year. Sales of activewear and underwear amounted to U.S. $307.5 million, up 27.7% from fiscal 2009, and sales of socks were U.S. $61.5 million, up 1.0% from last year. Unit sales volumes for socks increased approximately 9% from the fourth quarter of fiscal 2009.
The growth in sales of activewear and underwear compared to the fourth quarter of fiscal 2009 was primarily due to a 21.3% increase in unit volume shipments as a result of increased market share in the U.S. distributor channel, a 2.7% increase in overall industry shipments from U.S. distributors to U.S. screenprinters, strong growth in international markets, in particular in Europe, and significantly increased shipments of underwear and activewear to mass-market retailers, partially offset by a larger reduction of distributor inventory levels during the fourth quarter compared to the fourth quarter of fiscal 2009.
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 September 30, 2010.
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Three months ended Three months ended
September 30, September 30,
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 15.1% 2.7 % 64.0% 57.1%
T-shirts 15.4% 3.1 % 64.5% 57.7%
Fleece 5.1% (2.1)% 61.1% 56.9%
Sport shirts 22.6% 0.4 % 54.1% 44.2%
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Market conditions continued to be strong at the end of the fourth quarter. The Company continued to have a substantial open order position at the quarter-end, and industry shipments from U.S. distributors to U.S. screenprinters for the month of October were up by 5.5% from October 2009, according to the S.T.A.R.S. report.
The increase in sales of socks compared to the fourth quarter of fiscal 2009 was due to the approximate 9% increase in unit shipments of socks, which was largely offset by a lower-valued more basic product-mix and lower selling prices for certain sock programs, including the impact of significantly increased participation in back-to-school promotions. Sell-through of socks provided by Gildan from retailers to consumers was strong during the fourth quarter in the men's and boys' categories.
Gross margins in the fourth quarter were 27.3%, compared to 25.7% in the fourth quarter of fiscal 2009. The increase in gross margins was due to the non-recurrence of the special distributor inventory devaluation discount a year ago, the proceeds from the Haiti insurance claim, which reflected the maximum benefit of U.S. $8 million receivable by Gildan under the coverage in its insurance policy, and the impact of a cotton subsidy in the company's yarn-spinning joint venture. Higher year-over-year cotton costs negatively impacted gross margins by approximately 380 basis points in the fourth quarter, of which only approximately 150 basis points was recovered in increased selling prices. Gross margins in the fourth quarter of fiscal 2010 were also negatively impacted by start-up inefficiencies in underwear manufacturing and additional costs incurred to mitigate the loss of production due to the Haiti earthquake.
Selling, general and administrative expenses in the fourth quarter were U.S. $42.0 million, or 11.4% of sales, compared to U.S. $34.1 million, or 11.3% of sales in the fourth quarter of fiscal 2009. The increase in selling, general and administrative expenses was primarily due to higher volume-driven distribution expenses, higher performance-driven variable compensation expenses, increased administrative and distribution infrastructure to support the development of the Company's retail initiatives, and the impact of the higher-valued Canadian dollar on corporate administrative expenses. Selling, general and administrative expenses in the fourth quarter included a charge of U.S. $1.9 million for provisions for doubtful accounts receivable, compared with U.S. $3.0 million in the fourth quarter of last year.
Full Year Sales, Earnings and Cash Flow
Net sales in fiscal 2010 totaled U.S. $1,311.5 million, up 26.3%, from U.S. $1,038.3 million in fiscal 2009 due to a 31.2% increase in unit sales volumes of activewear and underwear, more favourable activewear product-mix and an increase in net selling prices due to reduced promotional activity, partially offset by a 6.7% decrease in sock sales. The unit volume increase in sales of activewear and underwear was mainly attributable to continued market share penetration in all product categories in the U.S. distributor channel and a 2.7% increase in overall industry unit shipments from U.S. distributors to U.S screenprinters, combined with strong growth in international and other screenprint markets and significantly increased shipments of underwear and activewear to retail customers. The decrease in sales of socks for fiscal 2010 was mainly attributable to lower unit sales volumes primarily due to the discontinuance of unprofitable sock programs and the elimination of baby apparel and layette programs, as well as servicing issues resulting from the ramp-up of our new retail distribution centre and the ramp-up of production at the new sock manufacturing facility in Honduras.
Net earnings for fiscal 2010 amounted to U.S. $198.2 million, or U.S. $1.63 per share on a diluted basis, up 108.0% and 106.3%, respectively compared with net earnings of U.S. $95.3 million, or U.S. $0.79 per share on a diluted basis in fiscal 2009. Net earnings included after-tax restructuring and other charges of U.S. $5.4 million in fiscal 2010 and U.S. $4.4 million in fiscal 2009. Excluding the impact of restructuring charges, adjusted net earnings and adjusted diluted EPS for fiscal 2010 totaled U.S. $203.6 million and U.S. $1.67 per share compared with adjusted net earnings of U.S. $99.7 million, or U.S. $0.82 per share, in fiscal 2009. The increase in adjusted net earnings and EPS was due to strong sales growth and significantly higher gross margins, partially offset by higher selling, general and administrative expenses. Gross margins in fiscal 2010 increased to 27.8% from 22.2% in fiscal 2009 due to lower promotional discounting in the U.S. distributor channel, more favourable product-mix and increased manufacturing efficiencies.
The company generated free cash flow of U.S. $175.9 million in fiscal 2010, after financing capital expenditures of U.S. $127.9 million. Working capital was a source of cash in fiscal 2010 due to a reduction of close to 4 million dozens in activewear finished goods inventories and a significant reduction in days of sales outstanding in accounts receivable. The company used U.S. $15.9 million to acquire the shares of Shahriyar Fabric Industries Limited, a manufacturer of T-shirts in Bangladesh, in March 2010. The company ended fiscal 2010 with cash and cash equivalents of U.S. $258.4 million.
Fiscal 2011 Outlook and Capital Expenditure Plans
The company is currently projecting full year net sales revenues for fiscal 2011 of approximately U.S. $1.6 billion, gross margins of approximately 25%, and selling, general and administrative expenses of approximately 10.5% of sales.
The company plans to invest in excess of U.S. $150 million in capital expenditures in fiscal 2011, to implement its further capacity expansion plans for production of activewear and underwear in Honduras, the Dominican Republic and Bangladesh and complete the ramp-up of its second sock manufacturing facility in Honduras, as well as to finance its ongoing cost reduction initiatives including the completion of its biomass alternative energy projects in Honduras. In addition, the company plans to invest in new technology in its U.S. yarn-spinning joint venture. The company also expects to use cash in fiscal 2011 to finance the planned increase in activewear finished goods inventories and higher carrying costs of inventories due to the higher cost of cotton and other purchased cost inputs.
The company is currently projecting net sales in excess of U.S. $300 million and gross margins of approximately 25% in the first quarter of fiscal 2011. The projected growth in sales revenues of approximately 40% compared to the first quarter of fiscal 2010 is due primarily to continuing strong industry demand for activewear in the U.S. distributor channel, combined with significantly increased penetration in international and other screenprint markets, as well as in underwear and socks in the retail channel. The strong projected sales growth in activewear is largely due to distributor inventory replenishment in anticipation of supply shortages and selling price increases. The projected reduction in gross margins in the first quarter, compared to gross margins of 29.8% in the first quarter of fiscal 2010, is primarily attributable to higher cotton and other purchased input costs, which will only partially be offset by selling price increases as the company has not applied selling price increases in the distributor channel to back-orders, and also reflects the impact of projected more unfavourable product-mix compared with the first quarter of fiscal 2010. The strong sales growth in the first quarter is resulting in faster than anticipated consumption of opening finished goods inventories which were produced with lower cost cotton purchased in fiscal 2010. The company will not derive significant benefits from planned cost reduction initiatives in the first quarter of the fiscal year, when it is largely consuming inventories purchased during fiscal 2010, although these initiatives are still expected to have a positive impact on manufacturing efficiencies in the balance of fiscal 2011.
Board Appointment
Gildan also announced today the appointment of Russell Goodman to its Board of Directors. Goodman is a senior partner of PricewaterhouseCoopers, where he has served successively as Managing Partner of Project Finance and Privatization for the Americas, Managing Partner of the Montreal office, and Canadian Managing Partner of the Transactions Advisory Services group during the past 12 years.
Gildan Activewear Inc.
Consolidated Statements of Earnings and Comprehensive Income
(in thousands of U.S. dollars, except per share data)
Three months ended Twelve months ended
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October 3, October 4, October 3, October 4,
2010 2009 2010 2009
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(unaudited) (unaudited) (unaudited) (audited)
Net sales $ 368,935 $ 301,720 $ 1,311,463 $ 1,038,319
Cost of sales 268,268 224,064 947,206 807,986
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Gross profit 100,667 77,656 364,257 230,333
Selling, general and
administrative expenses 42,045 34,151 154,674 134,785
Restructuring and other
charges (note 1) 2,783 778 8,705 6,199
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Operating income 55,839 42,727 200,878 89,349
Financial (income) expense,
net (note 2) (1,132) 1,000 751 (304)
Non-controlling interest in
consolidated joint venture 2,691 88 3,786 110
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Earnings before income taxes 54,280 41,639 196,341 89,543
Income taxes (2,536) (746) (1,904) (5,786)
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Net earnings 56,816 42,385 198,245 95,329
Other comprehensive loss,
net of related income taxes (3,425) - (1,710) -
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Comprehensive income $ 53,391 $ 42,385 $ 196,535 $ 95,329
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Earnings per share:
Basic EPS $ 0.47 $ 0.35 $ 1.64 $ 0.79
Diluted EPS $ 0.47 $ 0.35 $ 1.63 $ 0.79
