Higher raw material costs wring Gildan's Q4 profit margins

10 Feb '11

5 min read

Gildan Activewear Inc announced its financial results for the first quarter of its 2011 fiscal year, and also updated its outlook for the full fiscal year, including further discussion of the impact of increases in the cost of cotton on projected gross margins, industry pricing and industry demand.

First Quarter Sales and Earnings

Net earnings for the first fiscal quarter ended January 2, 2011 were U.S. $35.9 million or U.S. $0.29 per share on a diluted basis, including a restructuring charge of U.S. $0.01 per share related to the consolidation of U.S. distribution activities announced on December 10, 2009.

Excluding the restructuring charge, adjusted net earnings for the first quarter were U.S. $36.6 million or U.S. $0.30 per share, up 25.3% and 25.0% respectively from adjusted net earnings of U.S. $29.2 million or U.S. $0.24 per share in the first quarter of fiscal 2010. Both net earnings and earnings per share in the first quarter of fiscal 2011 were a record for the first quarter of a fiscal year, which is seasonally the lowest quarter in the fiscal year for sales of T-shirts.

The growth in net earnings compared to last year was due to strong growth in sales revenues for activewear. The positive impact of significantly higher unit sales, which were achieved in spite of low activewear finished goods inventories throughout the first quarter, and higher net selling prices for activewear compared to the first quarter of fiscal 2010 was partially offset by higher cotton costs and start-up inefficiencies in distribution and manufacturing.

Start-up inefficiencies in the new retail distribution centre in Charleston, S.C. continued to negatively impact the Company's ability to service sales demand for socks in the peak Christmas holiday season and also resulted in significantly increased distribution expenses in the first quarter. Start-up inefficiencies also resulted in higher manufacturing costs for socks during the first quarter.

Net sales in the first quarter amounted to U.S. $331.3 million, up 50.3% from U.S. $220.4 million in the first quarter of fiscal 2010. The Company had previously forecast that first quarter sales would exceed U.S. $300 million. Sales of activewear and underwear amounted to U.S. $270.1 million, up 76.7% from fiscal 2010, and sales of socks were U.S. $61.2 million, down 9.3% from last year.

The growth in sales of activewear and underwear compared to the first quarter of fiscal 2010 was due to a 66.5% increase in unit volume shipments and an 11.9% increase in average net selling prices for activewear, partially offset by unfavourable activewear product-mix.

The increase in unit volumes was attributable to inventory replenishment by U.S. wholesale distributors during the quarter, 7.9% growth in overall industry demand in the U.S. distributor channel during the quarter, strong growth in international and other screenprint markets and increased shipments of underwear and activewear to mass-market retailers.

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