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Hosiery and Underwear Lift a Down Quarter for Gildan

While Gildan reported that the third quarter results were better than the second, sales and earnings were still down from last year.

In a Nutshell: Gildan Activewear Inc. said despite ongoing Covid-19 impacts, sales in the three months through September nearly tripled compared to the second quarter and gross margin improved. In addition, Gildan said its cash flow was strong, generating free cash flow of $137 million in the quarter, with free cash flow generation over the last two quarters now totaling over $300 million.

From a sales perspective, point-of-sales (POS) levels in the imprintables channel, although down on a year-over-year basis, remained relatively stable through the third quarter, while sales to retailers were up year-over-year. Increased capacity utilization and improved product mix in the period led to a significant sequential improvement in gross margin, which totaled 22.5 percent compared to a 600-basis point impact in the second quarter. Gildan said it expects the negative impact from product-mix to reverse as sales continue to normalize.

The company’s strong focus on cost control translated to sales, general and administrative (SG&A) expenses totaling $61.5 million, or 10.2 percent of sales, with expenses down 22 percent, or $17.5 million, from $79 million, or 10.7 percent of sales, for the same quarter last year. Gildan said the year-over-year reduction reflected lower compensation and lower volume-driven distribution expenses and the benefit of continued cost savings.

At the end of the third quarter, the company’s net debt stood at $850.4 million and its liquidity position at approximately $1.3 billion.

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Gildan, which had withdrawn 2020 guidance on March 23, said while it is not providing a financial outlook at this time, POS trends in its imprintables channels have improved more recently, with average POS for October down in the 10 percent range in the U.S. market and down on average between 20 percent and 25 percent in international markets compared to last year.

In retail, the company said it has seen continued sales growth for most products so far in the quarter.

“While this start to the fourth quarter is encouraging, we nonetheless remain cautious given the ongoing trajectory of the Covid-19 pandemic, as well as the uncertain outlook for the global economy and the overall impact this may have on the demand for our products,” the company said.

Sales: Sales for the third quarter ended Sept. 27 declined 18.6 percent to $602 million compared to last year’s period and were comprised of activewear sales of $456 million, down 26.3 percent from the prior year, and strong sales growth in the hosiery and underwear category of $146 million of sales, up 21.2 percent compared to the third quarter of 2019.

The increase in the hosiery and underwear sales category was driven by strong momentum from private-label and Gildan-branded underwear products that continued to gain share and doubled in sales in the quarter. Although hosiery sales in the quarter improved sequentially, sales were slightly down compared to the prior year.

The decline in activewear sales was primarily driven by lower unit volume, an unfavorable product mix and higher promotional discounting in the imprintables channel. Imprintables sales volume was down 21 percent in North America and 25 percent in international markets, reflecting the ongoing impact from the Covid-19 pandemic.

Earnings: Net earnings in the quarter declined 46.2 percent to $56.4 million, or 28 cents per diluted share, from net earnings of $104.9 million, or 51 cents per diluted share in the third quarter last year.

Operating income was $68.8 million in the quarter, down from $117.9 million last year. Gross margin in the period was 22.5 percent, reflecting a strong improvement from the gross loss incurred in the second quarter related to significant Covid-19 impacts and Back to Basics charges.

Compared to the third quarter last year, gross margin was down 490 basis points mainly due to a 280-basis point unfavorable product-mix impact, an approximate $15 million or 250-basis point impact on gross margin related to lower manufacturing capacity utilization costs, as well as lower net selling prices due to the continuation of higher promotional imprintables discounting in the quarter. These factors more than offset the benefit of manufacturing cost efficiencies stemming from the Back to Basics initiatives and lower raw material costs compared to the prior year.

CEO’s Take: Glenn J. Chamandy, president and CEO, said: “We were pleased with the recovery of our sales and earnings during the third quarter. Retail sales performance was driven by momentum in underwear, and while the lack of large events continues to impact imprintable channels, we are nonetheless seeing areas of opportunity. Further, we continue to be pleased with the results we are seeing from our Back to Basics strategy as we continue to place a strong focus on meeting our customers’ needs and growing market share through simplification of our product portfolios, removal of cost and complexity from our business, and fully leveraging our world class, sustainably focused, vertically integrated manufacturing platform.”