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Gildan Posts Q4 Miss on Retailer Pull Back

Lower sales in activewear, hosiery and underwear—impacted in part by the pullback on inventory replenishment—hurt fourth quarter results at Gildan Activewear Inc.

In a Nutshell: Gildan saw activewear sales fall 5 percent to $595 million in the quarter. Compounding the decline was a 21 percent drop sales in its hosiery and underwear categories to $125 million.

Gildan cited overall lower sales at retail stores, as well as the “absence of inventory replenishment” versus year-ago levels. The company also said its hosiery and underwear category—in part, lower demand in men’s underwear and hosiery— was impacted by retailers reducing their inventory levels, offset slightly by higher net selling prices.

That’s a shift from the third quarter when an 13 percent bump in activewear sales drove the company’s sales. Gildan expects the “demand environment” will be problematic for the first part of 2023, “particularly as we cycle post-pandemic inventory replenishment in the first quarter.” Margins will be under pressure for the next few months as Gildan works through the higher raw material and input costs at play in its current inventory.

Glenn J. Chamandy, president and CEO, said a 10.9 percent full-year revenue gain stood out versus 2021 levels and cited “strong margin delivery in every fiscal quarter.”

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During a conference call, Chamandy said that “POS [point-of-sale] is picking up almost flat to last year,” saying this is an encouraging sign after “booming” POS trends in January and February last year that deteriorated through December.

Rhod Harries, executive vice president and chief financial and administrative officer, told analysts of the quarter’s “strong sell-through of ring spun and fleece products, where we believe our market share continues to grow.” Gildan saw higher year-over-year shipments in international markets as distributors in Europe replenished their inventory levels, Harries added.

Gildan’s inventory levels fell below “optimal levels” last year due after “hurricanes in Honduras in 2020 and a tight yarn supply environment in 2021,” he continued. “Our inventory levels now put us in a strong position to service our customers as we move through 2023.”

Gross margin was up 340 basis points to 32.6 percent in the quarter versus 2021, but that was due mainly to the impact of additional hurricane insurance recoveries recognized in quarter just ended. Excluding insurance recoveries, adjusted gross margin was 29.1 percent, down 150 basis points from 20.6 percent in 2021. The decline was due primarily to both higher raw material and manufacturing costs, which effectively canceled out the higher net selling prices. Cotton prices in particular were elevated and volatile last year.

The company said its results indicate the progress it has made on itstheSustainable Growth strategy it outlined a year ago, noting that its adjusted operating margin of 19.7 percent is at the higher end of its annual target range of 18 percent to 20 percent.

Harries said the plan and capital investments made thus far “have translated into increased manufacturing capacity and flexibility throughout our supply chain. This has allowed us to invest in inventory and improved product availability, which together with leadership and pricing and ESG is enabling us to adapt to the current environment and take market share in key product categories.”

“Our leadership in pricing, product availability and sustainability, combined with our increased manufacturing flexibility is enabling us to grow our market share in key product categories,” the company said. In addition, other favorable industry trends that Gildan said should benefit the company and give it long-term growth opportunities include the casualization of apparel, interest in private label products, developments in digital printing and interest in nearshoring and sustainable practices.

Net Sales: For the three months ended Jan. 1, 2023, net sales fell 8.2 percent to $720.0 million from $784.3 million in the year-ago quarter.

For the year, net sales grew 10.9 percent to $3.24 billion from $2.92 billion in 2021.

Earnings: Net income for the fourth quarter dropped 51.8 percent to $83.9 million, or 47 cents a diluted share, from $173.9 million, or 89 cents, in the same year-ago quarter. On an adjusted basis, earnings per share (EPS) was 65 cents.

The fourth quarter included a non-cash impairment charge of $62 million connected to its hosiery cash-generating unit that related to intangible assets acquired in previous sock and hosiery acquisitions. That impact gave the company an operating margin of 12.9 percent.

Wall Street was expecting adjusted diluted EPS of 67 cents on revenue totaling $759.5 million.

For 2023, Gildan said adjusted diluted EPS should be in line with 2022, on a projected revenue growth for the year in the low single digit range.

For the year, net income was down 25 percent to $494.7 million, or $2.93 a diluted share, from $659.4 million, or $3.07, in 2021.

CEO’s Take: “Despite near term headwinds related to the economic environment, which impacted our performance in the fourth quarter and which may persist through the first part of 2023, we remain excited about the Gildan Sustainable Growth strategy,” Chamandy said.