In a Nutshell: In announcing its third-quarter earnings before the market opened Thursday, Gildan Activewear said it saw good momentum in key growth areas in Q3 as sales grew 5.3 percent compared to last year—despite the impact of Hurricane Florence, which disrupted the company’s distribution operations in the Carolinas and limited shipments during the month of September.
Among the faster-growing areas, Gildan cited fashion basics, international markets, global lifestyle brands and e-commerce, and said it was starting to capitalize on the shifting emphasis among mass retailers toward their own private label brands. During the third quarter, the company secured a new private label underwear program for 2019 with its biggest mass retail customer. Shelf space allocated to the company’s current men’s underwear program with this retailer will be increasing and will be dedicated to the retailer’s private label underwear brand offering in 2019, which Gildan will manufacture.
During the third quarter ending Sept. 30, capital expenditures totaled $33.6 million, allocated for investments primarily in textile capacity and related sewing expansion, distribution and information technology, Gildan said.
Sales: The disruption of shipments from Hurricane Florence impacted overall sales by approximately $30 million, but Gildan still posted a 5.3 percent gain in the third quarter, to $754.4 million, driven by a 12.1 percent increase in activewear sales reaching $612.4 million. Boosting activewear was volume growth in imprintable products, including fashion basics, combined with higher unit sales of global lifestyle brand products and a 27.6 percent increase in international sales.
On the downside, hosiery and underwear sales fell 16.6 percent, to $142 million, mainly due to lower sock volumes, primarily in mass and lower-licensed brand sales. Distribution disruptions due to the impact of Hurricane Florence resulted in roughly $15 million in lost sales in the category as the company was unable to fulfill certain replenishment orders in September.
Incorporating the impact of lost orders as a result of shipping limitations caused by the hurricane and lower-than-anticipated licensed brand sock sales, the company is now projecting sales in the hosiery and underwear category to be down about $125 million for the full year compared to its previous estimate projecting a decline of approximately $85 million.
Earnings: Net earnings for the three months dropped 1.6 percent, to $114.3 million, compared with net earnings of $116.1 million for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs, Gildan reported adjusted net earnings of $118.1 million, essentially flat compared to last year as higher sales and the reduction in expenses offset a decline in gross margin and higher financial expenses.
Gross margin in the third quarter was 29 percent, down 200 basis points over the same period last year, primarily due to higher raw material and other input costs, and partly offset by the benefit of higher net selling prices. Gross margin was also impacted by activewear growth ramp-up costs and costs related to disruptions in the supply chain in Central America, notably in Nicaragua, where civil unrest has caused shifts.
Gildan reported operating income of $127.6 million and adjusted operating income of $130.7 million, up $2.7 million and $3.3 million, respectively, compared to the same period last year. The company projects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to come in toward the lower end of its previous guidance of $605 million to $620 million.
CEO’s Take: During Thursday’s earnings call with analysts, president and CEO Glenn J. Chamandy said: “Our business is performing great…Our printwear business sales are really strong. It’s driven from our fashion basics business, which is driven by Anvil, American Apparel, Comfort Colors. Our international business is very strong. It’s up 28 percent and it’s really just supported again by fashion or fashion basic business, and we launched our American Apparel brand [abroad] which is doing very well. …We’ve opened up over 225 countries with that brand.”
Chamandy added: “As far as the omnichannel customers and marketplace customers in the United States, that’s really where we’ve put in a lot of capacity because that’s where we see the big opportunity. Our Gildan brand underwear is doing very well. We have doubled our sales in the quarter…so everything we’ve done, the investments that we’ve made, the brands we’ve developed, our manufacturing capacity both in yarn spinning and now what we’re bringing on the Rio Nance VI [textile facility]…will help to continue to drive our success with these products in printwear through 2019 and beyond.”