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.


Excluding the restructuring charge, adjusted net earnings for the first quarter were U.S. $36.6 million or U.S. 30 cents per share, up 25.3% and 25.0% respectively from adjusted net earnings of U.S. $29.2 million or U.S. 24 cents per share in the first quarter of fiscal 2010. Both net earnings and earnings per share in the first quarter of fiscal 2011 were a record for the first quarter of a fiscal year, which is seasonally the lowest quarter in the fiscal year for sales of T-shirts.

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 increase in unit volumes was attributable to inventory replenishment by U.S. wholesale distributors during the quarter, 7.9% growth in overall industry demand in the U.S. distributor channel during the quarter, strong growth in international and other screenprint markets and increased shipments of underwear and activewear to mass-market retailers. These positive factors were partially offset by a decline in Gildan's market share in the U.S. wholesale distributor channel, as the company was unable to fully service demand for its brand due to continuing low finished goods inventory levels and capacity constraints. Gildan's share of inventories in the U.S. distributor channel was 52.4% on Dec. 31, 2010, compared with its market share of 60.2% for the first fiscal quarter.

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.


Compared to the assumptions in the company's previous outlook provided in December 2010, the benefit of recent further selling price increases is currently forecast to be fully offset by the impact of higher than previously projected cotton cost increases in the second half of the fiscal year, as well as by lower than previously projected unit sales volumes and reduced manufacturing and distribution efficiencies. Selling price increases averaging approximately 7% were announced in early January in the screenprint market and selling price increases have also been agreed with retail customers. If cotton prices do not correct significantly from current levels, the company will seek further selling price increases in the second half of the year, which are not reflected in its sales and margin assumptions. The revised outlook assumes that cotton costs for consumption in fiscal 2011 average slightly in excess of U.S. $1.10 per pound compared to the company's prior projection of U.S. $1.00 per pound, based on covering the balance of cotton requirements for the second half of the year at approximately current cotton prices.

 

The company has not yet covered a large proportion of its cotton requirements for consumption in the fourth quarter. The company's outlook assumes approximately 3% growth in overall U.S. screenprint industry demand for the balance of the fiscal year. The Company has slightly reduced sales volumes in the second half of the fiscal year, compared to its prior forecast, in order to provide for the possible negative impact of increases in selling prices on industry demand, although the price elasticity of demand in its markets is difficult to predict.

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.