Gildan Activewear projected sales growth of 2 percent to 4 percent this year, despite sales and earnings falling for the fourth quarter and full year in 2019.
In a Nutshell: Gildan Activewear said it was pleased with the progress made on its “Back to Basics” strategy intended to simplify the product portfolio and reduce complexity in manufacturing and distribution.
The company said its imprintables business saw continued sales softness and distributor inventory de-stocking in the fourth quarter, while on the retail side, total market demand was weaker than expected, particularly for hosiery. A highlight was strong double-digit underwear sales growth.
At the end of the quarter, Gildan decided to significantly reduce its imprintables product line base by exiting all ship to-the-piece activities and discontinuing overlapping and less productive styles between brands. This resulted in charges of $55 million in the quarter consisting of inventory write-downs of approximately $48 million and a net $7 million reversal of gross profit relating to anticipated product returns of discontinued styles that reduced sales by $19 million and cost of sales by $12 million.
In the supply chain, the company said it continues to work on plans to expand capacity in Central America and Bangladesh to support top-line growth opportunities.
Gildan issued fresh guidance for 2020 that included earnings per share (EPS) on a diluted basis in the range of $1.70 to $1.80 and adjusted diluted EPS in the range of $1.85 to $1.95, on projected sales growth for the year of 2 percent to 4 percent. The company said EPS includes projected restructuring and acquisition-related costs of up to $30 million, primarily relating to manufacturing and distribution optimization initiatives as part of its Back to Basics strategy.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2020 is expected to be in the range of $580 million to $600 million. The company projected capital expenditures of approximately $125 million primarily for investments in manufacturing capacity expansion.
Gildan said it doesn’t project and has not incorporated in its guidance any meaningful impact on its business resulting from the current outbreak of the coronavirus in China.
Sales growth for the year is expected to be driven by increases in activewear and the hosiery and underwear category. Growth in the hosiery and underwear sales category is expected to be driven by projected double-digit growth in underwear sales resulting from the benefit of retail shelf space gains, while hosiery sales are projected to remain relatively stable over prior year levels.
Sales: Net sales for the fourth quarter ended Dec. 29 were down 11.3 percent to $658.7 million. The falloff included a 15.1 percent decline in activewear sales, slightly offset by a 1 percent increase in the hosiery and underwear category.
In activewear, sales decreased 17. 75 percent to $483.5 million in the quarter. Sales in the hosiery and underwear category rose 1 percent to $175.1 million, as strong double-digit volume growth of underwear was largely offset by lower socks sales.
E-commerce sales in the quarter were up more than 50 percent.
For the full year, sales fell 2.9 percent to $2.82 billion, which the company said was in line with guidance of a low-single-digit sales decline. This reflected activewear sales of $2.26 billion, down 2.6 percent over last year, and sales in the hosiery and underwear category of $562 million, off 3 percent compared to 2018.
The decrease in activewear sales for the year was mainly due to lower unit volume in the imprintables channel in North America and internationally, partly offset by higher sales of activewear in the retail channel, including private brands and strong sales in the craft channel, as well as higher net selling prices.
Sales in the hosiery and underwear category were down $25.2 million over the prior year, as strong double-digit underwear sales growth was more than offset by lower unit sales of socks.
Earnings: Net earnings fell 45.47 percent in the quarter to $32.5 million from $59.6 million for the three months ended Dec. 30, 2018. The decline in net earnings was mainly due to lower sales and a lower operating margin, including the impact of the charge related to the Back to Basics strategy, partly offset by lower income taxes.
Operating income for the quarter was $24.3 million, or 3.7 percent of sales, down from $78.2 million, or 10.5 percent, in the fourth quarter of 2018.
Gross margin was 17.9 percent compared to 26.3 percent a year earlier. The decline was largely due to higher royalty expenses related to licensed brand sock sales, which impacted adjusted gross margin by approximately 50 basis points, as well as higher manufacturing input costs.
For the full year, net earnings declined 25.9 percent to $259.8 million from $350.8 million in 2018. The decline was due to lower operating income and higher financial expenses, partly offset by lower income taxes resulting from tax recoveries.
Operating income for 2019 was $289 million, or 10.2 percent of sales, down $114.2 million, or 370 basis points, over the prior year, primarily attributable to lower gross profit, the approximate $24 million impairment of trade accounts receivable related to a distributor receivership and the bankruptcy of a retail customer in the first quarter of 2019.
Gross margin was 24.9 percent, down 280 basis points from 27.7 percent in the prior year.
CEO’s Take: Glenn Chamandy, president and CEO, speaking to analysts on a conference call, said: “The whole strategy of our Back to Basics…was to consolidate…and to be more productive and effective…Ultimately, by having less product space between our lines we feel that we’re going to increase our manufacturing efficiency, reduce complexity and increase margins.”
Commenting on strengths and weaknesses in the business, Chamandy said while “socks and underwear…were relatively down for the full year of 2019…we’re very optimistic with our underwear going forward and we’ve got a stable sock business as we move into 2020.”
“Our online business is also doing very well,” he added. “We have a huge growth in the Q4 on online. All of our brands are doing very well in online and we’re encouraged with that.”