Gildan Activewear expects improvement in gross margins in H2
16 May '09
5 min read
Gross margins in the second quarter were 15.8%, compared to 28.8% after recasting prior year comparatives to reflect the reclassification of manufacturing depreciation and certain items from selling, general and administrative expenses to cost of sales.
The decline in gross margins was due to significantly higher costs in previously manufactured inventory for cotton, energy, chemicals and dyestuffs, more unfavourable activewear product-mix including the impact of the sale of second-quality product, inefficiencies due to manufacturing downtime, the temporary impact of inefficiencies related to the transition in sock private label brands for Gildan's largest retail customer, higher depreciation expenses absorbed in cost of sales, and the impact of currency fluctuations, partially offset by slightly higher net selling prices for activewear and the non-recurrence of charges related to completing the integration of the acquisition of a sock manufacturer which were incurred in the second quarter of fiscal 2008.
The Company continues to plan its business on the basis of assuming that macro-economic conditions will continue to result in very weak activewear sales demand and severe selling price competition in the second half of the fiscal year. However, gross margins are expected to improve in the second half of the fiscal year, compared to the second quarter, due to more favourable manufacturing efficiencies which are reflected in inventory valuations at the end of the second fiscal quarter, including the benefit of lower energy and transportation costs, the non-recurrence of the abnormally high proportion of sales of second-quality merchandise in the second quarter, a higher proportion of sales of fleece and long-sleeve T-shirts, and the completion of the transition to new sock private label brands.
In addition, cotton costs in the second half of the year will decline compared to the second quarter of fiscal 2009, although gross margins in the second half of the current fiscal year will not yet reflect the full benefit of the decline in commodity costs, as the Company had previously committed itself to cotton purchases at higher cotton prices. Lower manufacturing and raw material costs in the second half of fiscal 2009, combined with more favourable product-mix, are expected to positively impact gross margins by over 10%, compared to the second quarter, and more than offset the negative impact of assumed further downtime and possible further selling price discounting in the second half of the year.
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