Gildan Activewear Inc announced record results for the first quarter of a fiscal year, which was slightly in excess of the guidance range which it had previously provided, and reconfirmed its earnings guidance for fiscal 2013 which it had initiated on November 29, 2012. The Company also provided guidance for sales and earnings for the second quarter of fiscal 2013.
First Quarter Results
Gildan reported net earnings of U.S. $35.3 million or U.S. $0.29 per share on a diluted basis for its first fiscal quarter ended December 30, 2012, compared with a net loss of U.S. $46.1 million or U.S. $0.38 per share in the first quarter of fiscal 2012. Results for the first quarter of fiscal 2013 include restructuring and acquisition-related costs amounting to U.S. $3.8 million after tax, primarily related to the acquisition of Anvil Holdings Inc. (Anvil) and the further write-down of assets held for divestiture since the closure of U.S. sock manufacturing operations. Before the restructuring and acquisition-related costs, adjusted net earnings for the first quarter of fiscal 2013 were U.S. $39.1 million or U.S. $0.32 per share, compared to a net loss of U.S. $45.8 million or U.S. $0.38 per share in the first quarter of last year.
The Company had previously projected adjusted net earnings of U.S. $0.28-$0.31 per share for the first quarter, when it reported its fiscal 2012 fourth quarter and full year results on November 29, 2012. Results were slightly more favourable than projected due to lower than forecast promotional discounting in Printwear, partially offset by the impact of the cost of repairs at the Dominican Republic textile facility due to hurricane damage which amounts to approximately U.S. $0.02 per share, primarily in the first quarter, and which had not been reflected in the Company's previous earnings guidance.
The Company incurred a loss in the first quarter of last year due to a combination of factors including historically high costs of cotton, abnormally high levels of inventory destocking by wholesale distributors, a special distributor inventory devaluation discount, an abnormally high promotional discount rate in the U.S. distributor channel and an extended holiday manufacturing shutdown in order to manage inventory levels.
The significant improvement in the Company's results in the first quarter compared to the first quarter of last year was due to the benefit of significantly lower cotton costs, improved market conditions for Printwear and the accretion from the acquisition of Anvil. These positive factors were partially offset by lower selling prices for Printwear, primarily reflecting the selling price reductions implemented in the first quarter of fiscal 2012, and higher selling, general and administrative expenses.
Net sales in the first quarter amounted to U.S. $420.8 million, up 38.5% from U.S. $303.8 million in the first quarter of fiscal 2012. The Company had projected that sales for the first quarter would be in excess of U.S. $400 million. Sales for the Printwear segment amounted to U.S. $243.7 million, up 65.6% from U.S. $147.2 million in the first quarter of fiscal 2012, and sales for the Branded Apparel segment were U.S. $177.0 million, up 13.0% from U.S. $156.6 million for the first quarter of last year.
The increase in sales in the Printwear segment was due to higher unit sales volumes as a result of the strong recovery in demand for Gildan branded products compared to the first quarter of fiscal 2012, the non-recurrence of the abnormally high seasonal inventory destocking by distributors, the non-recurrence of the distributor inventory devaluation discount in the first quarter of fiscal 2012, and the impact of the Anvil acquisition. Gildan inventories in the U.S. distributor channel at the end of the first quarter were in good balance relative to demand.
The 13.0% growth in sales for the Branded Apparel segment was due to the impact of the acquisition of Anvil and increased sales of Gildan branded activewear to retail customers, partially offset by lower sales of socks compared to the first quarter of last year.
Consolidated gross margins in the first quarter were 26.8% compared to 2.1% last year. The significant recovery in gross margins was due to the impact of lower-cost cotton, the improved industry conditions for Printwear compared to the first quarter of last year, and more favourable product-mix for Branded Apparel, partially offset by the impact of the reduction in selling prices for Printwear and the impact on manufacturing costs of inflation in purchased cost inputs and the repairs due to the hurricane damage.
Selling, general and administrative expenses in the first quarter were U.S. $69.4 million, or 16.5% of net sales, compared with U.S. $50.8 million, or 16.7% of net sales, in the first quarter of last year. The increase in SG&A expenses was primarily due to increased variable performance-driven compensation expenses, increased marketing and advertising expenses and the impact of Anvil.
In the first quarter, the Printwear segment reported operating income of U.S. $45.9 million, compared to an operating loss of U.S. $30.8 million in the first quarter of fiscal 2012. The more favourable results for the Printwear segment were primarily due to the impact of lower cotton costs, improved industry conditions and the impact of the Anvil acquisition, partially offset by lower selling prices and higher SG&A expenses.
The Branded Apparel segment reported quarterly operating income of U.S. $19.6 million, compared with U.S. $2.4 million in the first quarter of fiscal 2012. The improved results for Branded Apparel were due to lower cotton costs, the acquisition of Anvil and the growth of Gildan branded activewear sales to retailers, partially offset by lower sales of socks and higher SG&A expenses.
Cash Flow and Financial Position
The Company generated free cash flow of U.S. $21.3 million in the first quarter, after financing a seasonal increase in inventories and capital expenditures of U.S. $25.3 million. The Company ended the first quarter of the fiscal year with bank indebtedness of U.S. $177.0 million and cash and cash equivalents of U.S. $82.0 million.
Outlook
Net sales revenues are projected to slightly exceed the Company's previous guidance of approximately U.S. $2.1 billion. Net sales for Printwear are now projected to exceed the previous projection of approximately U.S. $1.4 billion, and net sales for Branded Apparel are still projected to be approximately U.S. $0.7 billion. The EPS impact of the slightly higher than previously projected Printwear sales is projected to be offset by higher than previously projected cotton and manufacturing costs. Other material assumptions are essentially unchanged compared to the Company's previous guidance. Therefore, the Company is continuing to project adjusted EPS of U.S. $2.60-$2.70 for the full fiscal year.
During the second quarter, the Company announced selling price reductions for certain printwear products, and applied the benefit of these selling price reductions to distributor inventories. However, the full financial impact of the price reductions, including the distributor inventory devaluation, had been reflected in the Company's prior guidance. The Company's guidance continues to reflect the possibility of further increases in promotional discounting in the balance of the fiscal year.
The Company has begun shipment of new branded programs for national customers in the second quarter and will begin shipment of further new programs in the third quarter of the fiscal year. The Company believes that it is positioned to secure further new programs for both the Gildan brand and the Gold Toe portfolio of brands. In order to maximize the opportunity provided by the new branded programs, Gildan is increasing its advertising expenditures in support of its brands during fiscal 2013 by over U.S. $15 million compared with fiscal 2012, including a commercial which aired during Super Bowl XLVII on February 3, 2013.
The cost of cotton futures has increased since the Company initiated its fiscal 2013 guidance in November. The Company has not yet purchased all of its cotton requirements for consumption in cost of sales in the balance of fiscal 2013, and is assuming that the balance of its requirements are purchased at approximately current futures prices for cotton.
The Company is projecting adjusted net earnings per share for the second fiscal quarter of U.S. $0.54-$0.57, compared with adjusted EPS of U.S. $0.23 per share in the second quarter of fiscal 2012. Compared with last year, the impact of significantly lower cotton costs, higher unit sales volumes for Printwear, more favourable product-mix for Branded Apparel and the impact of Anvil are projected to be partially offset by lower net selling prices for Printwear, including the U.S. $0.04 per share impact of the distributor inventory devaluation, the impact of short-term manufacturing inefficiencies, the timing of the Easter holiday shutdown which falls this year in the second fiscal quarter compared to the third quarter in fiscal 2012, inflation in certain purchased cost elements and increased selling, general and administrative expenses. Net sales revenues for the second fiscal quarter are projected to be approximately U.S. $520 million, compared with U.S. $483 million in the second quarter of fiscal 2012.
The Company is continuing to project free cash flow in excess of U.S. $200 million in fiscal 2013. Capital expenditures are projected to be approximately U.S. $200 million, including a total of approximately U.S. $85 million for yarn-spinning investments.
In January 2013, the Company purchased a building in Salisbury, N.C. which will be used for its planned ring-spun yarn manufacturing facility. As indicated in November, the balance of the fiscal 2013 capital expenditure program is primarily for expansion of textile capacity in Honduras, including the carryover of expenditures from fiscal 2012 for Rio Nance V and the refurbishment of Rio Nance I, as well as for expansion of distribution capacity, including the construction of a new distribution centre in Honduras and continued investments in biomass projects. In addition, the Company is considering the option of increasing the utilization of the former Anvil facility in Honduras to support its growth in more specialized performance products. This would allow Rio Nance I to focus on large-scale, high-volume manufacturing of ring-spun underwear and activewear.
About Gildan
Gildan is a leading supplier of quality branded basic family apparel, including T-shirts, fleece, sport shirts, socks and underwear. The Company sells its products under a diversified portfolio of Company-owned brands, including the Gildan, Gold Toe and Anvil brands and brand extensions, as well as under license agreements for the Under Armour and New Balance brands.
The Company distributes its products in printwear markets in the U.S. and Canada, where Gildan is the industry-leading brand, and the Company is increasing its penetration in international printwear markets. The Company is also one of the largest suppliers of branded athletic, casual and dress socks for a broad spectrum of retailers in the U.S., and is developing Gildan as a consumer brand for underwear and activewear.
