Canada's Gildan Activewear records sales of $896 mn in Q2 2022

“We are pleased with our record sales and earnings for the quarter, underpinned by the Gildan sustainable growth strategy, including our focus on innovation and ESG,” said Glenn J. Chamandy, Gildan president and CEO, according to a press release issued by Gildan Activewear Inc. “Furthermore, our first half performance points to the tight control we currently have over our supply chain and cost structure, which puts us in a good position to support our customers' demand as we move through the remainder of the year.”

Gildan Activewear delivered record GAAP diluted EPS of $0.85 and adjusted diluted EPS of $0.86, up 15 per cent and 27 per cent, respectively, compared to the second quarter of 2021. Cash generated from operating activities in the quarter totalled $210 million and after capex investments of approximately $50 million, the company delivered $159 million of free cash flow. Consistent with its capital allocation priorities, Gildan Activewear continued to be active on its share buyback programme, repurchasing approximately 3.6 million shares in the quarter.

With the company’s current programme now coming to expiry in early August, the Board of Directors approved the implementation of a new normal course issuer bid (NCIB) programme to repurchase 5 per cent of the company’s issued and outstanding common shares over the next twelve months. The apparel maker ended the quarter with a total debt position of $922 million, while net debt increased slightly to $848 million, bringing the net debt leverage ratio to 1.1, at the low end of the company's target range, as per the release.

Sales for the second quarter ending July 3, 2022, of $896 million, were up 20 per cent over the prior year, consisting of activewear sales of $758 million, up 27 per cent and sales in the hosiery and underwear category of $138 million, down 8 per cent over the prior year. The activewear sales increase was due to higher net selling prices, which reflected base price increases and lower promotional discounting this year, as well as favourable product-mix, and higher activewear shipments in North America. These positive factors were partly offset by lower international shipments due to demand weakness in Asia. In the hosiery and underwear category, the sales decline was driven by lower unit sales due to softening demand in retail, as well as the impact of the non-recurrence of stimulus payments that positively impacted demand for these categories in the prior year.

During the second quarter, the company generated gross and adjusted gross profit of $265 million, compared to gross profit of $241 million and adjusted gross profit of $228 million in the prior year quarter. The improvement in gross and adjusted gross profit was mainly driven by the strong growth in net sales. Gross and adjusted gross margin of 29.6 per cent in the quarter were down 260 basis points and 90 basis points, respectively, compared to last year. The decline in gross margin on a GAAP basis included the impact of the non-recurrence of net insurance gains of approximately $13 million (or 175 basis points) which benefited gross margin last year.

Excluding this impact, the gross margin and adjusted gross margin decline reflected the impact of higher fibre costs, as well as inflationary pressures on other manufacturing costs which more than offset the benefit of higher net selling prices and favourable product mix. SG&A expenses for the second quarter of $88 million were up approximately $8 million compared to $80 million last year primarily due to the impact of cost inflation and higher volume-driven distribution expenses.

SG&A expenses as a percentage of net sales improved 80 basis points to 9.9 per cent compared to 10.7 per cent last year, due to the benefit of sales leverage and SG&A cost management, which more than offset inflationary cost pressures. Gildan generated operating income of $174 million, or 19.4 per cent of sales in the quarter and adjusted operating income of $176 million, or 19.6 per cent of sales compared to operating income of $160 million, or 21.4 per cent of sales, and $149 million, or 19.9 per cent of sales, on an adjusted basis last year.

The increase in operating and adjusted operating income was due to higher sales, partly offset by lower operating margins. After reflecting net financial expenses and income taxes which were up $3 million in total over the prior year, the manufacturer reported net earnings of $158 million and $160 million on an adjusted basis, up 8 per cent and 18 per cent, respectively, compared to last year. Diluted EPS for the quarter totalled $0.85 and adjusted diluted EPS was $0.86, up 15 per cent and 27 per cent, respectively, compared to diluted EPS of $0.74 and adjusted diluted EPS of $0.68 in the second quarter last year.

The increase in diluted and adjusted diluted EPS also included the benefit of a lower outstanding share base due to share repurchases made under the Company's NCIB programmes. The cash from operating activities in the second quarter totalled $210 million and the brand generated free cash flow of $159 million compared to $208 million last year.

The decrease in free cash flow reflected planned increases in capital expenditures and inventory, including the impact of inflation on unit costs, as well as the non-recurrence of an $18 million net cash benefit from insurance proceeds received in the second quarter last year, which offset higher operating earnings. The increase in capital expenditures relates to planned capacity expansion in Central America, the Caribbean, and Bangladesh. The company ended the second quarter of 2022 with total debt of $922 million and net debt of $848 million, and a leverage ratio of 1.1 times net debt to trailing twelve months adjusted EBITDA.

Net sales for the six months that ended on July 3, 2022, were $1,670 million, up 25 per cent over the same period last year, reflecting an increase of 32 per cent in activewear sales, partly offset by a decline of 4 per cent in the hosiery and underwear category. The year-over-year increase in activewear sales where the company generated sales of $1,425 million was primarily driven by higher net selling prices, favourable product-mix, and higher unit sales volumes, added the release.

Activewear volume growth reflected the continued recovery in demand from COVID-19 and its ability to better service demand this year due to stronger inventory levels as compared to the prior year, which were impacted by the hurricanes in Central America that occurred towards the end of 2020.

The decline in the hosiery and underwear category where Gildan generated sales of $245 million in the first half of 2022 reflected the impact of lower unit sales volumes due to weaker demand in retail. For the first half of 2022, the company generated gross profit of $505 million, or 30.3 per cent of sales compared to gross profit of $429 million, or 32.1 per cent of sales for the same period last year. On an adjusted basis, gross profit totalled $504 million, or 30.2 per cent of sales compared to adjusted gross profit of $412 million, or 30.8 per cent of sales in the first six months of 2021.

The increase in gross and adjusted gross profit was primarily driven by higher sales, partly offset by gross and adjusted gross margin declines of 180 and 60 basis points, respectively, compared to the same period last year. The decline in gross and adjusted gross margin was primarily due to higher fibre and other manufacturing costs and the impact of the non-recurrence of a one-time cotton subsidy received in the first quarter last year which benefited the prior year’s year-to-date margins by $18 million or 130 basis points.

The unfavourable impact of these factors was offset by the benefit of higher net selling prices and favourable product-mix. In addition, the decline in gross margin on a GAAP basis compared to the same period last year also reflected the impact of the non-recurrence of net insurance gains of approximately $19 million or 140 basis points. SG&A expenses in the first six months of 2022 totalled $169 million, or 10.1 per cent of sales, up $16 million from $153 million, or 11.5 per cent of sales, in the same period last year.

The increase in SG&A expenses was primarily due to higher volume driven distribution expenses and the impact of inflation on overall costs. As a percentage of sales, the 140 basis point improvement in SG&A expenses reflected the benefit of sales leverage and continued focus on cost management which more than offset inflationary cost pressures.

On a year-to-date basis, Gildan generated operating income of $336 million up from $273 million, and on an adjusted basis $334 million up from $259 million last year driven primarily by the 25 per cent year-to-date increase in sales. Operating margin of 20.1 per cent for the first half of the year was down 40 basis points over last year. Adjusted operating margin of 20.0 per cent improved 60 basis points from 19.4 per cent in the first half of 2021 reflecting the benefit of SG&A leverage, partly offset by the lower adjusted gross margin due to inflationary cost pressures.

As a result, Gildan reported net earnings and adjusted net earnings for the first half of 2022 of $305 million and $304 million, up 24 per cent and 32 per cent, respectively, compared to last year. Diluted and adjusted diluted EPS for the first half of the year totalled $1.62, up 32 per cent and 40 per cent, respectively compared to diluted EPS of $1.23 and adjusted diluted EPS of $1.16 last year, the increases of which also reflected the benefit of share repurchases made under the Company's NCIB programmes.

As Gildan moves into the second half of the year, while some slowing has been seen, the company believes the recovery of large events and travel and tourism remains a tailwind to demand, which is supported by the feedback Gildan is getting from major imprintables distributors. Also, while those at Gildan are seeing a softening retail environment, for the company this is primarily impacting national account customer sales of activewear, hosiery, and underwear products, which represents a smaller part of the overall business.

Fibre2Fashion News Desk (NB)