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Gildan’s 20% Sales Bump Says Activewear Isn’t Over

Gildan’s net earnings increased 8 percent to $158 million in the second quarter, while diluted EPS rose 15 percent to 85 cents.

In a Nutshell: Gildan Activewear Inc. on Thursday reported its operating margin of 19.4 percent and adjusted operating margin of 19.6 percent in the second quarter were each “only down 30 basis points from last year in a continued environment of inflationary cost pressure.”

The company said as it moves into the second half of the year, “while we have seen some slowing, we believe the recovery of large events and travel and tourism remains a tailwind to demand, which is supported by the feedback we are getting from our major imprintables distributors.”

Gildan said while it’s seeing a softening retail environment, it is primarily impacting national account customer sales of activewear, hosiery and underwear products, which represents a smaller part of its overall business. Gildan markets its basic apparel in North America, Europe, Asia Pacific, and Latin America, under company-owned brands that included Gildan, American Apparel, Comfort Colors, Goldtoe and Peds, and an Under Armour license for socks for distribution in the United States and Canada.

The company said given its record first-half performance and the ongoing benefits of its Back to Basics strategy, it remains positive and confident about its ability to deliver on long-term objectives.

Cash generated from operating activities in the quarter totaled $210 million and after capital expenditures approximately $50 million, free cash flow was $159 million. The increase relates to planned capacity expansion in Central America, the Caribbean and Bangladesh.

Sales, general and administrative (SG&A) expenses of $88 million were up approximately $8 million compared to $80 million last year, primarily due to the impact of cost inflation and higher volume-driven distribution expenses.

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Sales: Sales in the second quarter ended July 3 increased 20 percent over the prior year to $896 million.

This consisted of activewear sales of $758 million, up 27 percent, and sales in the hosiery and underwear category of $138 million, down 8 percent over the prior year.

Gildan attributed the activewear sales increase to higher net selling prices, which reflected base price increases and lower promotional discounting this year, as well as favorable product-mix and higher activewear shipments in North America. These positive factors were partly offset by lower international shipments due to demand weakness in Asia.

In the hosiery and underwear category, the sales decline was driven by lower unit sales due to softening demand in retail, as well as the impact of the non-recurrence of stimulus payments that positively impacted demand for these categories in the prior year.

Earnings: Net earnings increased 8 percent to $158 million, reflecting net financial expenses and income taxes that were up $3 million combined over the prior year.

Diluted earnings per share (EPS) was 85 cents and adjusted diluted EPS was 86 cents, up 15 percent and 27 percent, respectively, compared to the second quarter of 2021.

Operating income was $174 million, or 19.4 percent of sales, compared to operating income of $160 million, or 21.4 percent of sales last year. The increase was attributed higher sales, partly offset by lower operating margins.

Gross and adjusted gross profit were $265 million, compared to gross profit of $241 million and adjusted gross profit of $228 million in the prior-year quarter. The improvement in gross and adjusted gross profit was mainly driven by growth in net sales.

Gross and adjusted gross margin of 29.6 percent in the quarter were down 260 basis points and 90 basis points, respectively, compared to last year. The decline in gross margin included the impact of the nonrecurrence of net insurance gains of approximately $13 million, or 175 basis points, which benefited gross margin last year.

Excluding this impact, the gross margin and adjusted gross margin decline reflected the impact of higher fiber costs, as well as inflationary pressures on other manufacturing costs which more than offset the benefit of higher net selling prices and favorable product mix.

CEO’s Take: Glenn J. Chamandy, president and CEO, said: “We are pleased with our record sales and earnings for the quarter, underpinned by the Gildan sustainable growth strategy, including our focus on innovation and ESG. Furthermore, our first half performance points to the tight control we currently have over our supply chain and cost structure, which puts us in a good position to support our customers’ demand as we move through the remainder of the year.”