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Gildan’s Sourcing Shifts Ding Q3 Profits but Offer Long-Term Benefits

Brought down in part by restructuring initiatives in its supply chain, Gildan Activewear Inc. saw net earnings for the third quarter ended Sept. 29 fall 8.2 percent to $104.9 million compared with net earnings of $114.3 million in the year-ago period.

The company said “manufacturing optimization initiatives,” including consolidation of textile, hosiery, sewing and yarn operations, as well as warehouse consolidation, contributed to restructuring and acquisition-related costs in the quarter of $4.4 million compared to $3.1 million in the same period last year.

Gildan noted that as part of these initiatives, at the end of October it decided to move ahead with plans to close its textile and sewing operations in Mexico and relocate the equipment to its operations in Central America and the Caribbean Basin. The company said it’s also evaluating additional opportunities to reduce costs and enhance the execution of growth drivers, including reducing complexity in certain areas of the business.

“We continue to remain focused on the execution of our supply chain initiatives aimed at driving increased operational efficiency across our manufacturing base and continue to expect benefits from these initiatives to materialize, translating to gross margin expansion as we move into 2020,” Gildan said.

Glenn Chamandy, president and CEO of Gildan, said on a conference call with analysts that Mexican production represented about 8 percent to 9 percent of capacity, which will now be moved to Central America and Honduras and “be absorbed pretty quickly,” Gildan expects to wind up with a net increase in capacity due to operational efficiencies.

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“We’ll have a better cost structure, as well,” Chamandy said. “We’re also aggressively moving ahead with our expansion in Bangladesh.”

In May, Gildan announced the completion of a $5 million land purchase in Bangladesh as part of a major Asian capacity expansion initiative to develop large-scale vertically integrated manufacturing in the region to support expected sales growth. Once fully operational, the complex is expected to have the capacity to service more than $500 million in sales. Initial production at the facility is expected to start in late 2021.

The company’s gross margin of 27.4 percent in the third quarter was down from 29 percent in the third quarter last year. A 160-basis point decline reflected higher manufacturing costs, including anticipated increases in raw material costs and inflationary pressure on other inputs, as well as unfavorable foreign exchange. These factors more than offset the benefit of a better product mix and slightly higher net selling prices.

During the quarter, capital expenditures were $40.2 million, primarily for expenditures related to the manufacturing capacity expansion. Operating income for quarter was $117.9 million, down from $127.6 million in the third quarter of 2018.

SG&A expenses for the third quarter of 2019 of $79 million were down $9.1 million compared to quarterly expenses of $88.1 million last year. As a percentage of sales, SG&A expenses were 10.7 percent, reflecting an improvement of 100 basis points over the same period last year.

Sales in the period fell 1.9 percent to $739.7 million year to year, which reflected preliminary results announced last month. Gildan cited weak sales of activewear in the imprintables channel in North America and internationally for the decline, as well as lower sock sales that largely offset strong sales of activewear.

However, the company said it does not believe the softness in the printed sportswear segment “reflects a structural change to our business as a leading supplier of basic replenishment apparel driven by our large scale, low-cost vertically integrated manufacturing system.”

“Further, our sales to retailers remains largely on track, particularly as we continue to leverage our position as a preferred supplier of private brands,” Gildan said.

Breaking down its sales results, the Montreal-based company said activewear rose 1.1 percent to $619.2 million, but hosiery and underwear declined 15.1 percent to $120.5 million. The sales decline in the hosiery and underwear category was mainly due to lower sock sales in mass and other channels, including the exit of a sock program in the dollar channel, as well as the impact of weaker industry demand in this category.

Gildan noted that while it had projected an improvement in demand in international markets from the first half of the year, demand softness in Europe and China extended through the third quarter.