Higher raw material and other input costs hit Gildan’s bottom line in the second quarter, as activewear pumped up sales.
In a Nutshell: Gildan Activewear Inc. said sales for the second quarter returned to a growth trajectory, generating an 8 percent increase in adjusted diluted earnings per share (EPS) of 56 cents over the prior-year quarter. This was thanks to a richer product mix, higher net selling prices, and a 50 basis point improvement in selling, general and advertising (SG&A) expenses as a percentage of sales.
Gildan said these positive factors more than offset gross margin pressure from increases in raw materials and other input costs. During the quarter, the company said it continued to execute on its manufacturing optimization initiatives and remains on track to generate gross margin expansion through the fourth quarter.
Gildan’s “growth drivers” continued to perform well, including fashion basics, fleece and global lifestyle brand sales. Underwear sales grew more than 50 percent over the prior year quarter, reflecting the successful launch of a new private-label men’s underwear program with its largest mass retail customer.
While international sales were up slightly, Gildan said it saw softness in Europe and slower growth in China. Growth in international sales was stronger in June and the company continues to project double-digit growth in the second half of the year. A slight sales decline in the hosiery and underwear category resulted from lower sock sales were largely offset by a large increase in underwear sales during the quarter.
With results for the first half of 2019 tracking well within its expectations, the company reconfirmed its 2019 full year sales guidance, projecting sales growth in the mid-single-digit range. The company is now projecting 2019 diluted EPS of $1.80 to $1.85 and adjusted diluted EPS of $1.95 to $2.00, compared to its previous guidance range projecting EPS of $1.75 to $1.85 and adjusted diluted EPS of $1.90 to $2.
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Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is now projected to be in excess of $615 million.
Sales: Net sales for the second quarter ended June 30 rose 4.9 percent to $801.6 million, setting a second-quarter record. Higher sales reflected activewear sales of $665.6 million, up 6.5 percent compared to the second quarter of 2018, partly offset by a 2.2 percent decline in the hosiery and underwear category to $136 million.
Earnings: Net earnings for the quarter fell 8.5 percent to $99.7 million compared with net earnings of $109 million for the same period last year.
Gross margin of 27.8 percent in the quarter was down from 28.3 percent from a year earlier. The 50-basis point decline reflected anticipated increases in raw material costs, inflationary pressure on other input costs, and unfavorable foreign exchange. These factors more than offset the benefit of higher net selling prices and favorable product-mix, Gildan noted.
Operating income for the quarter fell 5.7 percent to $114.1 million from $121 million in the second quarter of 2018. After excluding restructuring and acquisition-related costs in both years, adjusted operating income for the three months was up 5.2 percent to $130.4 million from the same period last year.
CEO’s Take: Glenn J. Chamandy, president and CEO, commenting on costs and prices on a conference call with analysts, said: “The price of cotton has gone down, but there are a lot of other inflationary pressures that we have in the industry—labor, chemicals, transportation. Typically, we’ve raised prices in the last couple of years to counteract the higher price of raw materials. You’ll probably see more stable pricing as we move into 2020. At the same time, our low-cost manufacturing helps out margins.”
Asked about the American Apparel brands, Chamandy said, “Our objective is to use the brand in the e-commerce realm and not push a brick-and-mortar strategy.” He said on the printwear side, American Apparel’s multi-year partnership with Live Nation, where the brand is the official printwear partner across 16 Live Nation music venues and six music festivals, “is going well.”
Overall, Chamandy added, “We’re pushing very well in the underwear area and to continue to grow and develop new programs, but we’re also focusing aggressively on our activewear products, where we have a lot of opportunities.”