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Gildan Overcomes Hurricanes, Pandemic to Post Solid Q4

Despite getting hit by hurricanes, Covid and poor socks sales, Gildan Activewear was able to post sales and earnings gains in the fourth quarter.

In a Nutshell: Gildan Activewear said its “Back to Basics” strategy drove a strong fourth-quarter performance, even with pandemic and weather-related events.

Selling, general and administrative expenses (SG&A) were down 6 percent, bringing SG&A as a percentage of sales to 10.4 percent, a 120 basis point improvement over the prior year, Gildan reported. Consequently, the company reported adjusted operating margin of 15.3 percent, up from 14.1 percent a year earlier. The year-over-year increase was mainly due to a stronger imprintables product-mix, lower raw material costs and manufacturing efficiencies from the Back to Basics initiatives, partly offset by lower net selling prices and coronavirus-related costs.

Gildan reduced inventories over the prior year and generated record free cash flow in the fourth quarter of $278 million, bringing the full year total to $358 million. At the end of the quarter, the firm’s available liquidity position was $1.56 billion, with net debt of $577 million, down from $862 million a year earlier. Inventories at the end of the quarter were $728 million, down from $939 million at the end of the third quarter.

Despite these strong results, the quarter had its challenges. Starting in early November, back-to-back hurricanes hit Central America, suspendeding production temporarily at the company’s Rio Nance complex and at other locations in Honduras and Nicaragua. The hurricanes caused equipment, inventory and other damages, and facilities in certain locations were closed through November and part of December.

Gildan continued to service customers during the fourth quarter from existing inventories, production from other regions, and production earlier in the quarter in Central America. In the wake of the destruction caused by the hurricanes, the company immediately put teams on the ground to help employees and community members recover and rebuild, donating clothing, protective masks and emergency kits, and assisting in finding shelter for those displaced from their homes.

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The company said given the ongoing impact of the coronavirus pandemic, it was not providing financial guidance for 2021. However, it did offer insights into current conditions.

These included imprintables points of sale currently tracking slightly weaker than during the fourth quarter–down 10 to 15 percent in the U.S. and international markets compared with 2019 levels–due to the impact of renewed winter lockdowns in many jurisdictions.

In retail, it continued to see year-over-year growth in activewear and underwear sales, but revenue in the sock category continues to be down year over year. Consequently, Gildan expects higher overall sales in 2021 compared with 2020, but it remained cautious given the evolution of the pandemic and ongoing restrictions on social gatherings.

Despite this uncertainty, the company said it continues to be pleased with the progress it has made in its Back to Basics strategy, “which we believe will continue to strengthen our financial and operating flexibility and support our margins as we continue to drive toward our long-term targets.”

The company expects to resume investments in 2021, with projected capital expenditures running in the range of 4 percent of sales, including the continuation of its major capacity expansion project in Bangladesh.

Sales: Sale for the fourth quarter ended Jan. 3 rose 4.8 percent over the prior-year period to $690 million, reflecting a strong recovery from the third quarter.

Activewear sales increased 11.3 percent to $537.9 million, while hosiery and underwear sales fell 13 percent to $152.3 million. Increased activewear sales reflected a favorable imprintables product-mix, higher imprintables volume growth in North America and higher unit sales of activewear through retail channels, partly offset by lower international shipments.

The decline in hosiery and underwear sales was driven entirely by lower sales of socks, a category that has been more heavily impacted by the current pandemic environment, particularly within national chains and department stores, as well as sports specialty channels. Underwear sales were up 20 percent in the quarter, significantly outpacing industry demand and reflecting continued market share gains in the company’s private label men’s underwear program and branded underwear products.

For the full year, net sales declined 29.8 percent to $1.98 billion, reflecting declines of 33.8 percent in activewear and 14.1 percent in the hosiery and underwear category. The sales decline was largely volume-driven as a result of the significant adverse impact that the global Covid-19 pandemic had on economic activity worldwide.

Earnings: Gildan reported net earnings of $67.4 million, or 34 cent per diluted share, for the fourth quarter, and adjusted net earnings of $90 million, or 45 cents per diluted share, compared with net earnings of $32.5 million, or 16 cents per diluted share, and adjusted net earnings of $83.4 million, or 41 cents per diluted share, respectively, in the fourth quarter of 2019.

Operating income of $78.8 million in the fourth quarter was up from $24.3 million the prior year. The increase was due to higher sales, higher adjusted gross margin and lower SG&A expenses.

For the year, gross profit totaled $249.1 million and adjusted gross profit was $305.7 million compared with $704.5 million and $759.5 million, respectively, in 2019. The main factors driving the significant year-over-year decline in adjusted gross profit, most of which were triggered by the COVID-19 pandemic, were lower unit sales volumes, unabsorbed fixed manufacturing costs while capacity was idle, inventory provisions and the impact of exiting excess commodity derivative hedges and cotton commitments. The adjusted gross profit decline also reflected unfavorable product-mix and higher promotional discounting in the imprintables channel. These factors were partly offset by lower raw material costs compared with the prior year.

CEO’s Take: Glenn J. Chamandy, president and CEO of Gildan, said: “Our Back to Basics strategy put us on a sound footing going into the pandemic and the additional actions we have taken during 2020 have enhanced our competitive positioning as we work toward a stronger environment, growth and achieving our long-term profitability targets. Further, against the backdrop of the pandemic and the headwind of back-to-back hurricanes in Central America, our team showed exceptional operational execution and delivered strong results for the fourth quarter.”