In a Nutshell: Gildan Activewear Inc. said its second quarter results reflected the effects of the widespread government-mandated closures that began in late March and led to a pause in economic activity for a good part of the second quarter.
This led to a substantial decline in sales compared to last year, while the company also incurred substantial COVID-related costs and charges. However, the company said it was encouraged by certain signs of recovery, particularly as point of sales (POS) trends during the quarter performed better than expected across all channels.
By the end of the second quarter, essentially all imprintables distributor customer warehouses and most brick and mortar store locations had reopened in the U.S., although many with reduced operating hours, Gildan noted. Sales related to certain categories in the U.S. imprintables channel, including fleece and fashion basics, started turning positive in June.
In international markets, although sales were down on a year-over year basis, demand declines decelerated, with sales in Europe and Latin America performing better than anticipated for the quarter
While the majority of its manufacturing operations remained closed for the quarter, Gildan said sell-through of products were serviced from its inventories and from customers’ inventories, particularly in the imprintables channel, where it saw a significant drawdown of inventories in the channel.
In line with improving demand, Gildan said it has started to resume production at various operating levels across the majority of its facilities. The company owns and operates vertically integrated manufacturing facilities in Central America, the Caribbean Basin, North America and Bangladesh.
“Despite these improving demand trends and the restart of our production facilities, uncertainty remains with respect to the impact of the virus and the pace at which global economies will recover,” the company said. “Consequently, during the second quarter we took a number of actions to drive market share in this environment, further reduce our cost base, and strengthen our level of financial flexibility. We believe these actions will position us well as we continue to manage through the impact of the pandemic as we head towards 2021 and for longer term growth in 2022.”
In order to lower its cost structure, Gildan reduced its manufacturing workforce by an additional 6,000 employees, adjusting to the current demand environment. It also reduced its sales, general and administrative (SG&A) workforce by approximately 380 employees and announced the closure of a smaller specialty yarn-spinning operation in the U.S.
The company also “unwound excess commodity derivative hedge positions and market to market excess cotton commitments with merchants resulting in a total charge of $24.6 million reflected in cost of sales.”
Sales: Sales for the second quarter ended June 28 declined 71.3 percent to $229.7 million compared to last year, primarily driven by volume declines as a result of the meaningful demand downturn in the quarter, the impact of significant distributor inventory destocking in imprintables, unfavorable product-mix and higher promotional discounting in imprintables.
Activewear sales in the quarter fell 80.2 percent to $131.6 million. The decline stemmed primarily from lower sales of imprintables, which were down 75 percent in North America and 55 percent internationally. Sales in activewear also reflected the impact of higher promotional discounting in the quarter, including the sales discount accrual of $24.6 million related to the imprintables promotional incentives based on the ongoing sell-through of products from distributors to screenprinters.
Activewear sales at retail were also down due to the widespread closure of retail stores, most notably impacting Gildan’s business with department stores, national chains, sports specialty retailers and global lifestyle brand customers, partly offset by better sell-through in the craft, mass and online channels.
Sales in the hosiery and underwear category declined 27.9 percent to $98.1 million, also tied to retail store closures during the quarter, which impacted the sock business. Sales performance in underwear was strong in the quarter, up 23.5 percent over the prior year, reflecting double digit growth in private brand underwear and underwear products sold on-line.
Earnings: Gildan reported a net loss of $249.7 million, or $1.26 per share on a diluted basis, for the three months, reflecting the impact of the decline in revenue combined with the impact of the total $224 million of charges, including $131 million of COVID-19-related charges and $93 million in accelerated Back to Basics initiatives. This compared to net income of $99.7 million in the year-ago period.
Despite this large loss, due to the combination of tight working capital and CAPEX management, the company generated $177 million of free cash flow in the quarter. Net debt at the end of June totaled $987 million and available liquidity increased to approximately $1.2 billion.
CEO’s Take: Glenn J. Chamandy, president and CEO of Gildan Activewear, said: “Despite the impact of the COVID-19 pandemic, we maintained a strong focus on our key priorities, including the health and safety of our employees and the long term positioning of our business. Against the challenging backdrop of the pandemic and the difficult but necessary actions we have taken, we have accelerated efforts under our Back to Basics strategy to further simplify our product portfolios, remove complexity and cost from our business, better support our customers and drive long term market share growth.”