In a Nutshell: Despite on-track performance during the first two months of the quarter, as global efforts to slow the transmission of COVID-19 heightened in March, Gildan Activewear said it started to see a significant downturn in demand for core products.
This was particularly apparent in the imprintables channel, where its products are typically used for promotional, sporting, entertainment and other large-gathering and cultural events. In retail, the company also saw impacts, although less severe in the mass and online channels.
The company has taken a series of actions to address the outbreak’s impact. Gildan began to close its manufacturing facilities starting on March 17 to ensure the safety of employees and align operations and inventory levels with the demand environment. Since mid-April, it has extended the shutdown for almost all manufacturing facilities. Some distribution centers, where enhanced measures to safeguard the health, safety and well-being of employees were implemented, continue to be operational at reduced capacity levels and most office employees are working remotely from home.
Starting in mid-April, in collaboration with various partners, Gildan began to produce protective personal equipment (PPE) to help address the shortage caused by the COVID-19 pandemic. The company is currently sewing face masks for a cooperative consortium of apparel and textile companies supplying non-medical face masks to the health care sector. It is also producing non-medical face masks and isolation gowns for various retailers to be distributed to health care organizations. Gildan said it plans to produce more than 150 million masks and gowns to service the consortium and retailers under this effort.
In order to preserve cash and preemptively ensure it maintains ample liquidity to manage through the current and future environment, Gildan is deferring non-critical capital spend and discretionary expenses and has drawn down funds under its long-term bank credit facility. On April 6, Gildan secured an additional $400 million of long-term debt with members of its existing bank syndicate. With the proceeds from the new debt financing, as of April 27, the company’s overall available liquidity position was over $950 million, comprised of cash on hand in excess of $650 million and available lines of credit of approximately $300 million.
The company ended the first quarter with net debt of $1.13 billion. Given the significant impact of the pandemic and the resulting negative near-term economic outlook, Gildan said it believes it has acted quickly to enhance its financial flexibility and strengthen its positioning to navigate through this unprecedented environment.
Since March 30, the company’s board of directors, CEO and executive vice presidents have been foregoing 50 percent of their salaries, and pay reductions ranging from 20 percent to 35 percent are also impacting senior staff. Starting on March and until further notice, the majority of salaried employees have moved to a four-day work week.
Due to the unprecedented nature and uncertainty related to the impacts of COVID-19, the company withdrew its guidance for 2020 on March 23. The demand deterioration that began in March has increased through the month of April with point-of-sale (POS) levels in the North American imprintables channel down approximately 75 percent. Sell-through trends in retail, including with global lifestyle brand customers, have also deteriorated, with overall retailer POS for Gildan’s products in April down approximately 45 percent.
“Based on this situation and the expectation that COVID-19 social distancing measures and related economic impacts will have a significant impact on demand during the quarter, we are planning for a significant decline in POS and shipments for the second quarter of 2020,” Gildan said. “Accordingly, this sales outlook, combined with the impact of fixed cost absorption, while our manufacturing facilities remain idle, will likely result in a significant earnings loss in the second quarter of 2020.”
Despite this challenging near-term situation and uncertain outlook related to the duration of the ongoing pandemic impacts, the company said it is “well-positioned to deal with this environment for an extended period.”
“In addition to our strong liquidity position, we have good inventory levels to service our customers in both retail and imprintables,” Gildan said. “We have extended the shutdown of our manufacturing operations until further notice and we will continue to assess the need and timing to resume manufacturing operations, while following government mandated restrictions, in relation to evolving demand trends and inventory levels. We have taken steps to reduce our monthly fixed costs and expect to further lower our expenses as we move forward and adjust to a weak demand outlook which could extend through the remainder of the year.”
Sales: Sales for the first quarter ended March 29 were down 26.4 percent compared to the prior-year period to $459.1 million, comprised of activewear sales of $372.6 million and sales in the hosiery and underwear category of $86.5 million, down 24.5 percent and 33.7 percent, respectively, year over year.
The company said while it was anticipating an overall decrease in net sales for the first quarter, volume declines were meaningfully higher than previously anticipated due to the significant downturn in demand that unfolded in March as a result of the coronavirus pandemic. Lower sales were partly offset by favorable product mix in the hosiery and underwear category and slightly higher net selling prices.
The decrease in activewear sales reflected double-digit volume declines of imprintables in North America and in international markets, the impact of a sales return allowance of $6 million for anticipated product returns for discontinued SKUs, and lower activewear product sales in retail, as retailers increasingly closed stores during the quarter due to the coronavirus pandemic. Similarly, sales in the hosiery and underwear category were also negatively impacted by store closures and declining store traffic trends, as consumers adopted social distancing measures.
Underwear sales were down in the quarter due to the current challenging demand environment and the year-over-year impact of fully exiting a branded underwear program in the mass channel at the end of the first quarter of 2019, partly offset by an increase in sales of private-brand men’s underwear in mass.
Earnings: Gildan reported a net loss of $99.3 million in the quarter compared to net earnings of $22.7 million for the same period last year due to an operating loss incurred in the quarter that included after-tax restructuring and acquisition-related costs, as well as the SKU rationalization, and goodwill and intangible assets impairment charges.
The company reported a loss per share of 50 cents in the quarter compared to earnings per share of 11 cents in the year-ago period, after reflecting after-tax charges of approximately $110 million, or 56 cents per share.
Gross margin for the first quarter was 23.2 percent, down from 25.8 percent in the 2019 period. The decrease in gross margin was mainly due to labor and overhead costs, as well as costs incurred as a result of the pandemic, which together negatively impacted gross margin by 340 basis points and more than offset the benefit of cost savings from the company’s manufacturing optimization initiatives, favorable product-mix, lower promotional discounting, and lower raw material costs compared to the first quarter of 2019.
CEO’s Take: Glenn J. Chamandy, president and CEO, said: “During the first quarter, we faced unprecedented impacts globally as the COVID-19 pandemic unfolded. This required us to amplify our focus on what we do best and on what we can do to support all our stakeholders as a values-driven, strong, resilient and well-positioned company. I am both proud of and extend my gratitude to our employees for their dedication and efforts during this crisis which we will continue to move through over the coming months. I am also equally proud that in these difficult times, Gildan has been able to join with our partners to adapt rapidly to be able to produce products for the health care sector and people working in essential roles, as we all fight this global challenge.”