MONTREAL — May 2, 2018 — Gildan Activewear Inc. today announced its results for the first quarter ended April 1, 2018, and reaffirmed its full year guidance.
The company’s first quarter performance was largely in line with its expectations and the company is on track to attain its full year financial targets. As expected and consistent with the company’s guidance initiated on February 22, 2018, adjusted EPS was down in the quarter compared to the record level achieved in the first quarter last year. The company continued to see strong sales momentum in higher growth product areas such as fashion basics, as well as strong double digit sales growth in international markets, although as anticipated, temporary product availability constraints limited the company’s ability to fully capitalize on sales demand in the quarter. 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 and planned investments in the areas of e-commerce and distribution. SG&A cost reductions resulting from the company’s organizational consolidation effected at the beginning of 2018 started to flow through in the quarter. The benefit from these cost reductions is expected to have a larger impact in the second half of the year. Free cash flow in the first quarter was better than the company anticipated.
Operating results
Net sales of $647.3 million in the first quarter ended April 1, 2018, were down 2.7% compared to the prior year reflecting a 3.2% increase in activewear sales and a 20.4% decline in the hosiery and underwear category. The increase in activewear sales was mainly due to higher net selling prices, including foreign exchange and favorable product-mix driven by double digit sales growth in the fashion basics category, including American Apparel®, Comfort Colors®, and our Gildan® Softstyle ring-spun offering. International sales in the first quarter were up 24%, reflecting strong growth momentum in all markets. The decline in the hosiery and underwear sales category was mainly due to the anticipated decline in unit sales volumes of socks at mass retailers which are shifting emphasis toward their own private label brands. In addition, lower sock sales reflected the impact of the non-recurrence of the initial roll-out of a licensed program to a large national chain retailer, which occurred in the first quarter of the prior year. Underwear point of sales (POS) continued to perform strongly in the quarter. According to NPD’s Retail Tracking Service, market share for Gildan® branded men’s underwear was 12.1% for the March quarter, up 140 basis points compared to the March quarter last year, reflecting in part the impact of expanded distribution in the e-commerce channel. POS growth of Gildan® men’s underwear outpaced the overall POS growth for men’s underwear for the total measured market per NPD.
Gross margin in the first quarter of 2018 totaled 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.
SG&A expenses for the first quarter of 2018 amounted to $93.1 million, or 14.4% of sales, compared to $89.2 million, or 13.4% of sales, in the first quarter of 2017. The $3.9 million increase was primarily due to planned higher selling and distribution expenses related to the enhancement of the company’s e-commerce and distribution capabilities, partly offset by cost reductions resulting from the company’s recent organizational consolidation.
For the first quarter of 2018, the company generated operating income of $76.3 million and adjusted operating income of $82.7 million, down 18.0% and 17.0%, respectively, compared to the same period last year. Adjusted operating margin for the first quarter was 12.8% compared to 15.0% in the first quarter of 2017.
Net earnings for the three months ended April 1, 2018 amounted to $67.9 million, or $0.31 per share on a diluted basis, compared with net earnings of $83.5 million, or $0.36 per share on a diluted basis for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs of $6.7 million in the quarter and
$6.6 million in the prior year quarter, Gildan reported adjusted net earnings of $74.6 million, or $0.34 per share on a diluted basis for the first quarter of 2018, down from $90.1 million, or $0.39 per share on a diluted basis in the same quarter last year. The 12.8% decrease in adjusted diluted EPS in the quarter was mainly driven by lower gross profit and higher SG&A expenses, partly offset by lower income tax expense and the benefit of a lower share count compared to the prior year.
The company consumed $40.0 million of free cash flow in the first quarter 2018 compared to free cash flow generation of $41.3 million in the same quarter last year. The decline was primarily due to higher working capital requirements, driven primarily by higher raw material costs, and lower earnings in the quarter, partly offset by lower capital expenditures. Capital expenditures of $22.4 million in the quarter were primarily for investments in textile capacity expansion, distribution, information technology, and sewing capacity. During the first quarter of 2018, the company repurchased 3,058,666 common shares at a total cost of approximately $89 million, pursuant to its normal course issuer bid (NCIB). The Company ended the first quarter of 2018 with net debt of $723.5 million and a leverage ratio of 1.3 times net debt to trailing twelve months adjusted EBITDA.
Outlook
The company reaffirmed its full year 2018 financial guidance of adjusted diluted EPS in the range of $1.80 to $1.90 on projected net sales growth in the low to mid-single-digit range, adjusted EBITDA in the range of $595 to $620 million, and projected free cash flow of approximately $400 million for the year. The company continues to project capital expenditures of approximately $125 million for 2018.
Projected growth in adjusted diluted EPS for 2018 continues to reflect the projected impact of higher sales, anticipated cost reductions related to efficiency gains expected from the streamlining of the company’s sales and marketing infrastructure in connection with its organizational consolidation, and the benefit of a lower share count compared to the prior year. These positive factors are projected to be partly offset by higher raw material and other input costs, expenses related to e-commerce and distribution initiatives to support direct-to-consumer fulfillment capabilities, and slightly higher income tax expense. The company continues to assume an income tax rate of approximately 4% in 2018.
While the company is projecting sales growth in the second quarter of 2018, it continues to work to increase availability, particularly for certain higher-margin activewear products. Further, as previously stated, adjusted operating margin in the second quarter is expected to be down year-over-year due to anticipated higher raw material and other input costs, and planned increases in e-commerce and distribution investments, partly offset by anticipated cost reductions stemming from the company’s organizational consolidation. These cost reductions are expected to have a larger positive impact in the second half of the year and the company continues to expect SG&A as a percentage of sales in the third and fourth quarters of 2018 to improve in the range of 100 to 200 basis points on a year-over-year basis.
Declaration of quarterly dividend
The Board of Directors has declared a cash dividend of $0.112 per share, payable on June 11, 2018 to shareholders of record on May 17, 2018. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.
Normal course issuer bid
On February 22, 2018, the company announced the renewal of a NCIB beginning February 27, 2018 and expiring February 26, 2019, to purchase for cancellation up to 10,960,391 common shares, representing approximately 5% of the company’s issued and outstanding common shares as of February 16, 2018.
During the three months ended April 1, 2018, the company repurchased for cancellation a total of 3,058,666 common shares under the NCIB for a total cost of $89.2 million, of which a total of 175,732 common shares were repurchased under the previous NCIB. Of the total cost of $89.2 million, $2.2 million was charged to share capital and $87.0 million was charged to retained earnings. Of the 3,058,666 common shares purchased for cancellation, the settlement of 229,778 common shares occurred post quarter-end, for which $6.7 million is recorded in accounts payable and accrued liabilities as at April 1, 2018. The company repurchased an additional 2,372,843 common shares under an automatic share purchase program during the remainder of the month of April 2018 at a total cost of $69.8 million.
Disclosure of outstanding share data
As at April 30, 2018, there were 214,013,806 common shares issued and outstanding along with 2,991,665 stock options and 102,567 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share from treasury at the end of the vesting period, without any monetary consideration being paid to the company. However, the vesting of at least 50% of each Treasury RSU grant is contingent on the achievement of performance conditions that are primarily based on the company’s average return on assets performance for the period as compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts, or as determined by the Board of Directors.
Posted May 3, 2018
Source: Gildan Activewear Inc.
