Fourth Quarter Results
Gildan today reported net earnings of U.S. $89.0 million or U.S. $0.73 per share on a diluted basis for its fourth fiscal quarter ended September 30, 2012, compared with net earnings of U.S. $48.5 million or U.S. $0.40 per share in the fourth quarter of fiscal 2011. Results for the fourth quarter of fiscal 2012 include restructuring and acquisition-related costs amounting to U.S. $5.9 million after-tax, primarily related to the write-down of real estate assets held for divestiture since the closure of U.S. sock manufacturing operations, as well as severance costs resulting from the integration of acquisitions. Before the restructuring and acquisition-related costs, adjusted net earnings for the fourth quarter of fiscal 2012 were U.S. $94.9 million or U.S. $0.78 per share, up 82.5 percent and 81.4 percent respectively compared to U.S. $52.0 million or U.S. $0.43 per share in the fourth quarter of last year. The Company had previously projected adjusted net earnings of close to U.S. $0.80 per share for the fourth quarter, when it reported its third quarter results on August 2, 2012. Adjusted net earnings for the fourth quarter include an after-tax charge of U.S. $0.02 per share related to a product labelling issue disclosed on October 16, 2012. This charge had not been anticipated in the Company''s prior guidance for the fourth quarter.
The growth in the Company''s net earnings in the fourth quarter compared to last year was due to the benefit of significantly lower cotton costs, higher Printwear unit sales volumes, more favourable product-mix and higher selling prices for Branded Apparel, and the initial accretion from the acquisition of Anvil Holdings Inc. (Anvil). These positive factors were partially offset by lower net selling prices for Printwear, primarily reflecting the selling price reductions implemented in the first quarter of fiscal 2012, unfavourable Printwear product-mix, higher electricity, labour and other manufacturing input costs, the above-mentioned charge relating to the labelling issue, and higher income taxes due to the improved profitability of Branded Apparel.
Net sales in the fourth quarter amounted to U.S. $561.7 million, up 16.6 percent from U.S. $481.6 million in the fourth quarter of fiscal 2011, and in line with the Company''s previous guidance of approximately U.S. $560 million. Sales for the Printwear segment amounted to U.S. $376.8 million, up 7.5 percent from U.S. $350.5 million in the fourth quarter of fiscal 2011, and sales for the Branded Apparel segment were U.S. $184.8 million, up 41 percent from U.S. $131.1 million from the fourth quarter of last year.
The increase in sales in the Printwear segment compared to the fourth quarter of fiscal 2011 was due to higher unit sales volumes, as a result of continuing organic growth in the U.S. market, the impact of the Anvil acquisition, and continuing penetration in the Company''s target international markets. The impact on Printwear net sales revenues of higher unit sales volumes was partially offset by lower net selling prices, unfavourable product-mix, and higher seasonal inventory destocking in the U.S. distributor channel compared to the fourth quarter of fiscal 2011. The Company believes that distributor inventories of Gildan® brand products at the end of the fourth quarter were in good balance to service screenprinter demand.
The 41 percent growth in sales for the Branded Apparel segment was due primarily to the impact of the acquisition of Anvil, together with more favourable product-mix and higher net selling prices. Excluding Anvil, sales revenues for Branded Apparel in the fourth quarter were up approximately 18 percent compared to the fourth quarter of fiscal 2011.
Consolidated gross margins in the fourth quarter were 28.5 percent compared to 20.6 percent last year. The significant increase in gross margins was due to the impact of lower-cost cotton and more favourable product-mix and higher selling prices for Branded Apparel, partially offset by lower selling prices and unfavourable product-mix for Printwear, together with higher manufacturing input costs.
Selling, general and administrative (SG&A) expenses in the fourth quarter were U.S. $64.1 million, or 11.4 percent of net sales, compared with U.S. $53.4 million, or 11.1 percent of net sales, in the fourth quarter of last year. Excluding the impact of the acquisition of Anvil, SG&A expenses in the fourth quarter of fiscal 2012 were approximately U.S. $58.0 million, up approximately 8.6 percent from fiscal 2011 due largely to increased marketing and advertising expenses and higher legal and professional fees.
In the fourth quarter, the Printwear segment reported operating income of U.S. $100.7 million, compared with U.S. $68.4 million in the fourth quarter of fiscal 2011. The more favourable results for the Printwear segment were primarily due to the impact of lower cotton costs, higher unit sales volumes, and the accretive impact of the Anvil acquisition, partially offset by lower selling prices and unfavourable product-mix. The Branded Apparel segment reported quarterly operating income of U.S. $15.1 million, compared with an operating loss of U.S. $5.7 million in the fourth quarter of fiscal 2011. The improved results for Branded Apparel were due to lower cotton costs, more favourable product-mix, higher selling prices and the accretive impact of the Anvil acquisition, partially offset by the charge for the labelling issue.
Full Year Sales and Earnings
Net sales revenues for fiscal 2012 amounted to U.S. $1,948.3 million, up 12.9 percent from U.S. $1,725.7 million in fiscal 2011 and in line with the Company''s most recent guidance of approximately U.S. $1.95 billion provided on August 2, 2012. The increase in net sales versus fiscal 2011 was due to the acquisitions of Gold Toe Moretz Holdings Corp. (Gold Toe) and Anvil, as well as higher Printwear unit sales volumes, and higher selling prices and more favourable product-mix for Branded Apparel, partially offset by lower Printwear selling prices.
Net earnings were U.S. $148.5 million or U.S. $1.22 per share in fiscal 2012, compared to net earnings of U.S. $234.2 million or U.S. $1.91 per share in fiscal 2011. Adjusted net earnings before restructuring and acquisition-related costs amounted to U.S. $157.3 million or U.S. $1.29 per share, compared to adjusted net earnings of U.S. $246.9 million or U.S. $2.02 per share in fiscal 2011, and were in line with the Company''s most recent guidance of approximately U.S. $1.30 per share. The decline in adjusted EPS in fiscal 2012 compared to last year was primarily due to the significant increase in cotton costs in the first half of the fiscal year, lower Printwear selling prices and higher income taxes. These factors were partially offset by higher Printwear unit sales volumes, the accretive impact of the acquisitions of Gold Toe and Anvil and higher selling prices and favourable product-mix for Branded Apparel.
Cash Flow and Financial Position
The Company generated free cash flow of U.S. $158.9 million in the fourth quarter, due to the strong operating earnings and lower seasonal accounts receivable. Free cash flow for the full fiscal year amounted to U.S. $145.0 million, after financing capital expenditures of U.S. $76.8 million, and was utilized to fund the acquisition of Anvil, the Company''s quarterly dividend payment and to reduce bank indebtedness. Capital expenditures for fiscal 2012 were slightly below the Company''s previous projection of approximately U.S. $90 million, due to the later timing of certain expenditures which will now be incurred in fiscal 2013. Free cash flow for fiscal 2012 exceeded the Company''s previous estimate of free cash flow in excess of U.S. $100 million provided on August 2, 2012, primarily as a result of lower than anticipated working capital requirements and capital expenditures. The Company ended the fiscal year with bank indebtedness of U.S. $181.0 million and cash and cash equivalents of U.S. $70.4 million.
New Branded Apparel Programs
The Company announced that it has been successful in securing important new branded programs for fiscal 2013 with national retail customers, as well as with regional retail chains, which will provide significant exposure and visibility for the Gildan® brand. These new programs include underwear, socks and activewear and are largely expected to begin shipment in the second half of fiscal 2013. The Company is continuing to pursue other branded programs including further development of the Gildan® brand and the Gold Toe® portfolio of brands. In addition, the Company is continuing to pursue opportunities to continue to grow its sales of Under Armour® and New Balance® branded programs. In order to maximize the opportunity provided by the new branded programs, the Company is making a significant investment in advertising in support of its Gildan® and Gold Toe® brands in fiscal 2013.
Yarn-Spinning Integration Strategy
During the first quarter of fiscal 2013, the Company completed the acquisition of the remaining 50 percent of CanAm Yarns LLC (CanAm), its 50 percent-owned yarn-spinning joint venture. Gildan is currently planning to modernize and expand the two CanAm yarn-spinning facilities and is also planning a new yarn-spinning facility in the U.S.
The strategic rationale for the Company''s investment in vertically-integrated yarn-spinning is to support its projected sales growth and to continue to pursue its business model of investing in global low-cost manufacturing technology and in product technology which will provide consistent superior product quality. The Company is investing in ring-spun yarn technology which will provide enhanced quality features as well as qualify for duty-free access to U.S. markets under CAFTA-DR, which requires the use of U.S. yarn or yarn spun in other CAFTA-DR member countries. Ring-spun products will be utilized as part of the Company''s branded product offering in Branded Apparel.
Fiscal 2013 Guidance
The Company is initiating its guidance for fiscal 2013 with projected adjusted EPS of U.S. $2.60-$2.70, on projected net sales revenues of approximately U.S. $2.1 billion. Net sales for Printwear are projected to be approximately U.S. $1.4 billion and net sales for Branded Apparel are projected to be approximately U.S. $0.7 billion.
The projected increase in adjusted EPS in fiscal 2013 is based on the assumptions of significantly lower cotton costs, compared with an average of U.S. $1.33 per pound in fiscal 2012, higher unit sales volumes and more favourable product-mix in Printwear and Branded Apparel, increased manufacturing efficiencies, and further accretion from the acquisitions of Gold Toe and Anvil. These positive factors are assumed to be partially offset by lower selling prices and increased promotional discounting, inflation in labour, energy and other manufacturing cost inputs, a projected increase in SG&A expenses to approximately 13 percent of sales and a higher consolidated effective tax rate of approximately 4 percent. The projected increase in SG&A expenses is mainly due to an approximate U.S. $15 million increase in advertising expenses in support of the Gildan® and Gold Toe® brands in fiscal 2013 and higher variable compensation expenses.
The ramp-up of Rio Nance V has been largely completed and Rio Nance I is projected to begin to come back on stream in the third quarter of fiscal 2013.
The Company is projecting adjusted EPS of U.S. $0.28-$0.31 in the first quarter of fiscal 2013, on projected net sales revenues in excess of U.S. $400 million, compared to a net loss of U.S. $0.38 per share in the first quarter of fiscal 2012. The projected growth in EPS in the first quarter compared to the first quarter of fiscal 2012 is based on the assumptions of significantly lower cotton costs, the non-recurrence of the special distributor inventory devaluation discount in the first quarter of fiscal 2012, higher unit sales volumes, more favourable product-mix in Branded Apparel, manufacturing efficiencies and the accretive impact of the Anvil acquisition. These positive factors are assumed to be partially offset by higher SG&A expenses and lower selling prices.
Fiscal 2013 Cash Flow
The Company is currently projecting free cash flow in excess of U.S. $200 million in fiscal 2013. Capital expenditures are projected to be approximately U.S. $200 million, including a total of approximately U.S. $85 million for yarn-spinning investments. The balance of the fiscal 2013 capital expenditure program is primarily for expansion of textile capacity in Honduras, including the carry over of expenditures from fiscal 2012 for Rio Nance V and the refurbishment of Rio Nance I, as well as for expansion of distribution capacity, including the construction of a new distribution centre in Honduras and continued investments in biomass projects. The Company will continue to seek selective acquisition opportunities which complement its organic growth strategies.
Increase in Quarterly Dividend
Due to the Company''s strong cash flows and balance-sheet, the Board of Directors has approved a 20 percent increase in the amount of the current quarterly dividend and has declared a cash dividend of U.S. $0.09 per share, payable on January 7, 2013 to shareholders of record on December 13, 2012. 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.
Disclosure of Outstanding Share Data
As of October 31, 2012, there were 121,605,705 common shares issued and outstanding along with 1,238,036 stock options and 871,514 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 percent 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.
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