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Gildan CEO: ‘We’re Leaving Sales on the Table’

Gildan Activewear generated sales of $747 million in the second quarter, up 225 percent over last year but still below pre-pandemic levels. On a two-year basis, net sales were down approximately 7 percent from the 2019 second quarter.

In a Nutshell: As the apparel manufacturer continues its turnaround efforts by going “Back to Basics” to simplify its product portfolio, the company is monitoring issues both at home and abroad.

In the U.S., labor shortages have been affecting domestic yarn production and as well as Gildan’s ability to rebuild higher inventory levels, according to company president and CEO Glenn Chamandy.

“As we brought back our production at the end of last year due to hurricanes compounding with the labor shortages in the market, it is taking us a little bit longer to bring folks back to our facilities and get them up and running,” Chamandy told investors in an earnings call.

However, “the facilities are now running at a better rate than they were before…and we’re going to continue to add incremental capacity,” Chamandy added. “During the year, we repurposed all the equipment from our [shuttered] Mexican operations, which will allow us to have a substantial increase in capacity.”

Globally, Gildan is seeing inflationary pressure due to the tightness in raw material inputs and spikes in transportation-related costs. As such, the manufacturer plans to adjust pricing into 2022, “irrelevant of our competition.”

The basics manufacturer is moving forward with the construction of a new manufacturing facility in Bangladesh, according to Chamandy. The multi-plant complex would be large enough to support more than $500 million in annual sales, with groundbreaking slated for the fourth quarter of 2022 and a construction finish date in 2023. Headquartered in Montreal, the vertically integrated manufacturer currently operates facilities in Honduras, Nicaragua, Haiti, the Dominican Republic, the U.S., and Bangladesh.

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Meanwhile, inventories contracted 30.2 percent to $720.7 million, down from $1.03 billion to close the second half of 2020.

“We’re leaving sales on the table basically and our inventories are relatively low [while] demand is strong,” Chamandy said. “I don’t think demand is just strong because of the comeback of the market. I think demand is also stronger because onshoring is also becoming a bigger factor. Both our brands and our retail partners basically are all looking to buy a product locally, so our screen printers that service mass market retailers are growing their businesses.”

Gross margin totaled 32.2 percent and adjusted gross margin was 30.5 percent, which, when excluding the one-time 300 basis points (3 percentage points) benefit from the USDA pandemic assistance payment in the first quarter of 2021, was up sequentially by 320 basis points (3.2 percentage points) and 240 basis points (2.4 percentage points), respectively.

The significant improvement over 2020 was mainly due to the strong sales recovery in sales, the non-recurrence of Covid- and Back to Basics-related charges incurred in the prior year quarter, favorable product-mix, lower raw material costs, as well as cost benefits stemming from the Back to Basics initiatives.

Gross margin performance also improved significantly over the second quarter of 2019, up 440 basis points (4.4 percentage points) and 270 basis points (2.7 percentage points) on an adjusted basis. This was mainly driven by lower cotton costs and Back to Basics cost savings, which more than offset lower imprintables selling prices.

Cash and cash equivalents as of July 4 were $310.9 million. Gildan has $362.5 million in net debt, down from the $577.2 million net debt on Jan. 3. 

Net Sales: Net sales for the second quarter totaled $747.2 million, up 225.3 percent over the prior year, but down 6.8 percent on a two-year basis.

Activewear sales in the second quarter of 2021 totaled $597.1 million, up 353.7 percent over the prior year. The increase reflected significantly higher unit sales volumes in all markets, particularly in imprintables. The recovery in demand also drove higher unit sales for activewear products sold in retail channels.

Hosiery and underwear sales were up 52.9 percent over the prior year to $150 million, driven by double digit growth in both socks and underwear, the non-recurrence of retailer inventory destocking and favorable product mix.

Imprintables demand levels have not fully recovered to pre-pandemic levels, with overall sales down approximately 8 percent compared to the same period in 2019. Sales in North America are down in the single-digit range, while sales in international imprintables markets were down close to 30 percent on a two-year basis.

In retail, overall sales were up during the quarter compared to the 2019 quarter. 

Net Earnings: Gildan reported net earnings of $146.4 million, or 74 cents per share on a diluted basis, compared to a net loss of $249.7 million, or $1.26 per diluted share in the 2020 second quarter.

The company reported total adjusted net earnings of $135.3 million, or 68 cents per share on a diluted basis, ahead of adjusted net loss of $196.6 million, or 99 cents per diluted share, respectively, in the second quarter last year. Adjusted net earnings exclude impairments from factors such as the discontinuance of personal protective equipment (PPE) SKUs, and the impact of the company’s strategic initiative to significantly reduce its retail product line SKU count. 

CEO’s Take: Chamandy noted that pandemic-idled facilities exacerbated already constrained global supply chains, either due to poor cost structure or outdated equipment, therefore taking manufacturing capacity out of the market.

“There’s been a big reduction of capacity,” Chamandy said. “If you look at the equipment market today and buy new equipment, it’s 12 to 18 months out, which tells you that things are going to be tight for quite some time as people are looking to rebuild capacity.”