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Gildan Pulls Off Fourth Quarter Profit and Looks to Expand Production Capacity

While experiencing higher raw material costs and a falloff in underwear sales in 2018, Gildan Activewear’s sales grew and net income turned black in the fourth quarter.

In a Nutshell: Gildan Activewear said it ended 2018 with a strong finish, meeting full-year financial targets after successfully navigating through unanticipated weather impacts and supply chain disruptions during the year.

Gildan said sales growth in the quarter and full year was driven by gains in key areas, including fashion basics, international and global lifestyle brands, and “new private label program wins,” which shipped primarily in the fourth quarter. The Montreal-based companies, with operations in the U.S., Central America, Mexico and Bangladesh, also noted that e-commerce sales doubled in 2018 from the previous year.

The company was able to drive operational efficiencies across the organization and reduce sales, general and administrative (SG&A) expenses, while driving top line growth. In the fourth quarter, SG&A expenses as a percentage of sales improved by 300 basis points, and for the full year, despite planned increases in distribution and e-commerce investments in the first half of the year, SG&A expenses as a percentage of sales improved 100 basis points over 2017.

Gildan said during the fourth quarter it closed the AKH textile facility in Honduras acquired as part of the Anvil acquisition in 2012 and was operating in leased premises outside of its large manufacturing complex in Rio Nance. This production, mainly for fashion basics, was transitioned into Gildan’s new state-of-the art Rio Nance 6 textile facility, where it’s investing with new equipment for more efficient production of fashion basics. Also in the period, the company began to consolidate sock operations, integrating the majority of our sock production in Honduras into its Rio Nance 4 facility, with the Rio Nance 3 facility now focusing on garment dyeing operations.

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Sales: Net sales for the fourth quarter ended Dec. 30 were up 13.6 percent to $742.7 million compared to the fourth quarter of 2017, lifted by a 22.3 percent increase in activewear sales, partly offset by a 7.9 percent sales decline in the hosiery and underwear category. The increase in the activewear segment in the quarter, with $569 million in net sales, came thanks to a better product mix, mainly in fleece, and higher net selling prices.

Sales in the hosiery and underwear category fell $15 million in the three months to $173 million, primarily due to lower Gildan sock sales in mass and lower mass retailer replenishment of Gildan underwear in the quarter.

For the full year, net sales grew 5.7 percent to $2.91 billion, with a 13.6 percent increase in activewear sales and a 17 percent decline in the hosiery and underwear category.

Earnings: Net earnings in the quarter rose 8.6 percent to $59.6 million compared to net earnings of $54.9 million for the three months ended Dec. 31, 2017. For the full year, net earnings fell 3.2 percent to $350.8 million from $362.3 million in 2017.

Gross margin in the fourth quarter was down 80 basis points to 26.3 percent compared to the prior-year quarter. Gildan cited higher raw material and other input costs, and activewear growth ramp-up costs as among the reasons for the decline.

Gross margin for the year was 27.7 percent, down 140 basis points over the prior year, also brought down by higher raw material and other input costs, as well as higher manufacturing costs.

CEO’s Take: Glenn J. Chamandy, president and CEO, on a conference call with analysts, said: “Our core business is on plan. We have a good projection for growth in underwear for next year. We’re expanding our space in mass because of new private label programs. We’re geared to support this and we’re expecting to have significant increase in underwear sales in 2019.

The American Apparel brand that rolled out in 2018 “is one of the biggest contributors in driving our fashion basics in the U.S., as well as international,” Chamandy said.

“We’ve rolled out the brand internationally in every market,” he said. “We’re in Europe. Japan, Australia and we’re moving into China, so we’ve got really good distribution. We’re also supporting it with direct-to-consumer,” with the brand now available in 225 countries. He said, “We’re seeing accelerated POS growth and we achieved our goal of $100 million” in sales in 2018.

Discussing overall sales, he added, “China is where we’re seeing our fastest growth,” and it’s now the company’s third largest market after the U.S. and Europe, surpassing Canada.

“The next big wave of manufacturing capacity is going to see how we’re going to leverage growth in those international markets,” Chamandy said.

Turning to private label, he said, “If you walk into any retailer today, there’s a big growth in private label and we’re going to continue to try to leverage that” with Gildan’s manufacturing capabilities and grow that segment.

At the same time, “e-commerce grew significantly in 2018, approaching $100 million in sales,” he said. “We’ve invested heavily in supporting that.”

This includes e-commerce sales in brands such as Gildan underwear and American Apparel. Chamandy added that the Gildan brand, despite some falloff in favor of private label, “is still a significant brand, with $400 million in sales.”