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Gildan Sales and Profits Fall in Quarter as Raw Material Costs Rise

Gildan’s realignment kicked into full gear in the first quarter, as did its global launch of American Apparel, but challenges bit into sales and earnings.

In a Nutshell: Gildan Activewear Inc. saw sales fall in the quarter on soft activewear and legwear volume, while raw material costs hit the bottom line. On the positive side, the company cited strong sales momentum in higher growth product areas like fashion basics, as well as double-digit sales growth in international markets.

During the quarter, the company also successfully launched its full assortment of Gildan branded men’s underwear on Amazon. Results for the quarter were also impacted, as anticipated, by higher raw material and other input costs, plus planned investments in the areas of e-commerce and distribution. Gildan incurred capital expenditures of $22.4 million in the quarter, primarily for investments in textile capacity expansion, distribution, information technology and sewing capacity.

The company’s first quarter performance was largely in line with its expectations and Gildan is on track to attain its full year financial targets. For the full year, Gildan reaffirmed projected net sales growth in the low to mid-single-digit range and adjusted earnings before interest, taxes, depreciation and amortization in the range of $595 to $620 million.

Sales: Net sales in the first quarter ended April 1 fell 2.7% to $647.3 million compared to $665.4 million in the prior-year period, reflecting a 3.2% increase in activewear sales and a 20.4% decline in the hosiery and underwear category. The company attributed the gain in activewear sales to higher net selling prices, including foreign exchange and double-digit growth in the fashion basics category, including American Apparel, Comfort Colors and its Gildan Softstyle ring-spun offering.

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International sales in the first quarter were up 24 percent, with strength in all markets. The decline in the hosiery and underwear sales category was mainly due to an anticipated falloff in unit sales of socks at mass retailers that are shifting emphasis toward their own private label brands.

Earnings: Net earnings for the three months declined 18.7% to $67.9 million from $83.5 million for the prior-year period. Gross margin in the quarter was 27.2%, reflecting a 120 basis point decrease over the same period last year. The decline was mainly due to the anticipated impact of higher raw material and other input costs, partly offset by higher net selling prices, including foreign exchange and the positive impact of a richer product-mix.

CEO’s Take: Glen J. Chamandy, president and CEO, said on a conference call with analysts, addressing potential acquisitions, “We’re continuing to monitor our growth opportunities through acquisitions. It’s been part of our strategy to reinvest our free cash flow. I think, short-term, we have a lot on our plate on our realignment, which we’re focusing on. So I would say, in the short term, there’s a lot of synergies we’re going to get and a lot of SG&A reductions.”

The company combined its Printwear and Branded Apparel businesses into one divisional operating structure, centralizing marketing, merchandising, sales, distribution and administrative functions. The combination of the two operating businesses is intended to drive a leaner and more streamlined organization that is expected to improve operational efficiencies.

Charmany also discussed American Apparel’s expansion with an “online store” that’s now be available in more than 200 countries. He said, “American Apparel is doing very well…and is exceeding expectations. The one area where we have a lot of opportunity is to fulfill e-commerce type business and our biggest Achilles heel really has been the distribution side of it. We now will be coming online in Q2 to be able to support incremental opportunity and it all comes down to being able to ship and service because like when you’re shipping, for example, on Amazon, you have three days to prepare and ship the product and a lot of products aren’t really direct-to-consumer ready.”

Regarding acquisitions in denim and American Apparel, he added that “denim is the No. 1 item for American Apparel right now.”