Net earnings for the first fiscal quarter ended Jan. 2, 2011 were U.S. $35.9 million, or U.S. 29 cents per share on a diluted basis, including a restructuring charge of U.S. 1 penny per share related to the consolidation of U.S. distribution activities announced on Dec. 10, 2009.
The growth in net earnings compared to last year was due to strong growth in sales revenues for activewear. The positive impact of significantly higher unit sales, which were achieved in spite of low activewear finished goods inventories throughout the first quarter, and higher net selling prices for activewear compared to the first quarter of fiscal 2010 was partially offset by higher cotton costs and start-up inefficiencies in distribution and manufacturing. Start-up inefficiencies in the new retail distribution centre in Charleston, S.C. continued to negatively impact the company's ability to service sales demand for socks in the peak Christmas holiday season and also resulted in significantly increased distribution expenses in the first quarter. Start-up inefficiencies also resulted in higher manufacturing costs for socks during the first quarter.
Net sales in the first quarter amounted to U.S. $331.3 million, up 50.3% from U.S. $220.4 million in the first quarter of fiscal 2010. The company had previously forecast that first quarter sales would exceed U.S. $300 million. Sales of activewear and underwear amounted to U.S. $270.1 million, up 76.7% from fiscal 2010, and sales of socks were U.S. $61.2 million, down 9.3% from last year.
The growth in sales of activewear and underwear compared to the first quarter of fiscal 2010 was due to a 66.5% increase in unit volume shipments and an 11.9% increase in average net selling prices for activewear, partially offset by unfavourable activewear product-mix.
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 December 31, 2010.
ACNielsen has decided to discontinue the S.T.A.R.S. report with effect from the end of the 2010 calendar year, and Gildan will now subscribe to the CREST report produced by Capstone Research Inc. to track industry growth and market share in the U.S. distributor channel.
The decline in sales of socks compared to the first quarter of last year was due to continuing difficulty in servicing industry demand from the new U.S. distribution centre, which significantly impacted sales during the peak Christmas holiday selling season in December, and lower selling prices including the impact of a lower-valued more basic product-mix.
Gross margins in the first quarter were 24.7% compared with 29.8% in the first quarter of last year, and were in line with the Company's forecast of approximately 25% provided on Dec. 2, 2010. The decline in gross margins compared to last year was due to higher cotton, energy and other purchased input costs, start-up manufacturing inefficiencies which significantly impacted gross margins for socks and underwear, increased sewing overtime costs to maximize production of activewear and unfavourable activewear product-mix. These factors more than offset the positive impact of significantly higher net selling prices for activewear.
Selling, general and administrative expenses in the first quarter were U.S. $41.6 million, or 12.6% of sales, compared to U.S. $34.0 million, or 15.4% of sales, in the first quarter of fiscal 2010. The increase in selling, general and administrative expenses was largely due to start-up inefficiencies in the new retail distribution centre and higher volume-driven distribution expenses in the Company's wholesale distribution centre in Eden, N.C.
First Quarter Cash Flow
The company used cash of U.S. $25.1 million in the first quarter to finance a seasonal build-up of activewear inventories and its ongoing major capital expenditure program. The main capital expenditure projects in the first quarter were the ramp-up of the Rio Nance IV sock factory and the expansion and automation of the U.S. wholesale distribution centre. The initial quarterly dividend of U.S. $0.075 per share for the first fiscal quarter will be paid on March 18, 2011 to shareholders of record on Feb. 23, 2011. The company has not yet repurchased any of its shares under its Normal Course Issuer Bid announced on Dec. 2, 2010.
Outlook
The company is projecting net sales revenues slightly in excess of U.S. $1.6 billion, gross margins of approximately 25% and selling, general and administrative expenses of approximately 10.5% of sales for the full 2011 fiscal year.
Total capital expenditures for capacity expansion and major cost reduction projects in fiscal 2011 are still projected to be in excess of U.S. $150 million, and the company has begun the construction of its new textile facility at Rio Nance. The company also continues to plan increases in activewear finished goods inventories including significantly higher unit costs due to the higher cost of cotton and other purchased cost inputs.
For the second quarter of fiscal 2011, the company is currently projecting net sales revenues of approximately U.S. $375 million, up approximately 15% from the second quarter of fiscal 2010, and gross margins of close to 27%, compared to 27.8% in the second quarter of fiscal 2010.