Higher raw material costs wring Gildan's Q4 profit margins
10 Feb '11
5 min read
These positive factors were partially offset by a decline in Gildan's market share in the U.S. wholesale distributor channel, as the Company was unable to fully service demand for its brand due to continuing low finished goods inventory levels and capacity constraints. Gildan's share of inventories in the U.S. distributor channel was 52.4% on December 31, 2010, compared with its market share of 60.2% for the first fiscal quarter.
The table below summarizes the data from the S.T.A.R.S. report produced by ACNielsen Market Decisions, which tracks unit volume shipments of activewear from U.S. wholesale distributors to U.S. screenprinters for the calendar quarter ended December 31, 2010.
ACNielsen has decided to discontinue the S.T.A.R.S. report with effect from the end of the 2010 calendar year, and Gildan will now subscribe to the CREST report produced by Capstone Research Inc. to track industry growth and market share in the U.S. distributor channel.
The decline in sales of socks compared to the first quarter of last year was due to continuing difficulty in servicing industry demand from the new U.S. distribution centre, which significantly impacted sales during the peak Christmas holiday selling season in December, and lower selling prices including the impact of a lower-valued more basic product-mix.
Gross margins in the first quarter were 24.7% compared with 29.8% in the first quarter of last year, and were in line with the Company's forecast of approximately 25% provided on December 2, 2010. The decline in gross margins compared to last year was due to higher cotton, energy and other purchased input costs, start-up manufacturing inefficiencies which significantly impacted gross margins for socks and underwear, increased sewing overtime costs to maximize production of activewear and unfavourable activewear product-mix. These factors more than offset the positive impact of significantly higher net selling prices for activewear.
Selling, general and administrative expenses in the first quarter were U.S. $41.6 million, or 12.6% of sales, compared to U.S. $34.0 million, or 15.4% of sales, in the first quarter of fiscal 2010. The increase in selling, general and administrative expenses was largely due to start-up inefficiencies in the new retail distribution centre and higher volume-driven distribution expenses in the Company's wholesale distribution centre in Eden, N.C.
First Quarter Cash Flow
The Company used cash of U.S. $25.1 million in the first quarter to finance a seasonal build-up of activewear inventories and its ongoing major capital expenditure program. The main capital expenditure projects in the first quarter were the ramp-up of the Rio Nance IV sock factory and the expansion and automation of the U.S. wholesale distribution centre. The initial quarterly dividend of U.S. $0.075 per share for the first fiscal quarter will be paid on March 18, 2011 to shareholders of record on February 23, 2011. The Company has not yet repurchased any of its shares under its Normal Course Issuer Bid announced on December 2, 2010.
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