The company had projected net sales for the quarter in excess of U.S. $550 million. Earnings landed at the top end of the guidance range which the company had provided on Feb. 5.
The growth in sales and EPS in the second quarter compared to last year was achieved in spite of the impact of colder weather which negatively impacted demand for T-shirts and contributed to soft retail market conditions. The company's results reflected strong growth in sales of underwear to U.S. retailers, increased sales to global lifestyle brands and international printwear markets and the non-recurrence of a distributor inventory devaluation discount in the second quarter of fiscal 2013. These positive factors were partially offset by higher cotton costs compared to the second quarter of last year.
Consolidated gross margins in the second quarter were 27.9 percent compared to 28.9 percent in the second quarter of last year, as the impact of higher cotton costs compared to last year was only partially passed through into higher net selling prices in Printwear and selling prices for Branded Apparel were not increased. Gross margins were also negatively impacted by inflationary cost increases and transitional manufacturing inefficiencies which are being incurred primarily in sock operations and the former Anvil textile operations, to support new programs and the introduction of new products, and which offset the favourable impact of other manufacturing cost reduction projects.
SG&A expenses in the second quarter were U.S. $69.3 million, compared with U.S. $73.6 million in the second quarter of last year. The reduction in SG&A expenses was primarily due to lower variable compensation expenses and the impact of the lower-valued Canadian dollar on corporate head office expenses. As a percentage of sales, SG&A expenses declined to 12.6 percent from 14.1 percent a year ago.
During the second quarter of fiscal 2014, the company utilized U.S. $79.9 million of cash, primarily to finance seasonal working capital increases and capital expenditures of U.S. $85.8 million. The company ended the second quarter with cash and cash equivalents of U.S. $58.6 million and outstanding bank indebtedness of U.S. $148.0 million.
Second Quarter Segmented Results
Net sales for the Printwear segment amounted to U.S. $378.5 million, up 2.9 percent from U.S. $368.0 million in the second quarter of fiscal 2013. Unit sales volumes in Printwear were essentially flat compared to last year, as higher sales volumes in international markets were offset by lower shipments in the U.S. and Canada, due to the impact of colder weather conditions on seasonal demand for T-shirts. The impact of lower T-shirt demand was partially mitigated by higher net selling prices and more favourable product-mix, due to higher sales of fleece and long-sleeve T-shirts. Distributor inventory levels at the end of the second quarter continued to be in good balance relative to projected industry demand.
Net sales for Branded Apparel were U.S. $170.3 million, up 9.9 percent from U.S. $155.0 million in the second quarter of last year. The growth in sales for the Branded Apparel segment was primarily due to continuing strong consumer demand for Gildan® branded underwear and increased shipments to global lifestyle brands. Sales of Gildan® branded products increased by approximately 50 percent compared to the second quarter of last year and continue to show very strong positive momentum for the second half of the fiscal year and for fiscal 2015, even though overall retail market conditions continue to be weak.
In the second quarter, the Printwear segment reported operating income of U.S. $92.2 million, up 5.6 percent from U.S. $87.3 million in the second quarter of fiscal 2013. Operating margins for Printwear were 24.3 percent compared with 23.7 percent in the second quarter of last year. The higher margins for Printwear were due to the non-recurrence of a distributor inventory devaluation discount in the second quarter of last year and increased textile manufacturing efficiencies, partially offset by higher cotton costs and other inflationary cost increases.
The Branded Apparel segment reported operating income of U.S. $13.3 million, compared to U.S. $13.4 million in the second quarter of fiscal 2013. Operating margins were 7.8 percent versus 8.6 percent a year ago. The positive impact on operating margins for Branded Apparel in the second quarter of increased sales volume leverage on SG&A expenses was offset by the short-term manufacturing inefficiencies, inflationary cost increases and higher cotton costs compared to the second quarter of last year, which the company has not passed through into higher selling prices in order to drive strong unit volume growth.
Year-to-date Sales and Earnings
Net sales revenue for the first six months of fiscal 2014 amounted to U.S. $1.0 billion, up 6.0 percent from U.S. $943.8 million in the same period last year. The increase in consolidated net sales was mainly due to higher unit sales volumes in both operating segments and more favourable printwear product-mix.
Net earnings for the first six months of fiscal 2014 were U.S. $120.9 million, or U.S. $0.98 per share on a diluted basis, compared to U.S. $107.6 million, or U.S. $0.88 per share, up 12.4 percent and 11.4 percent respectively compared to the first six months of fiscal 2013. Before reflecting after-tax restructuring and acquisition-related costs in both years, adjusted net earnings were U.S. $122.6 million or U.S. $1.00 per share in the first six months of fiscal 2014, up 9.7 percent and 9.9 percent respectively compared to adjusted net earnings of U.S. $111.8 million or U.S. $0.91 per share in the same period last year. The increase in net earnings was mainly due to the increased sales in Printwear and Branded Apparel and manufacturing efficiencies from cost reduction projects, partially offset by higher cotton costs and the transitional manufacturing costs to upgrade the company's manufacturing operations and support future growth.
Outlook
The company has increased its guidance for sales revenues for the full fiscal year to approximately U.S. $2.4 billion, compared to the company's prior guidance of approximately U.S. $2.35 billion. Sales revenues for Printwear are now projected to be approximately U.S. $1.55 billion, compared with the company's prior guidance of in excess of U.S. $1.5 billion, and up approximately 5.5 percent compared with fiscal 2013. Sales revenues for Branded Apparel are projected to be approximately U.S. $850 million, compared with the company's prior guidance of in excess of U.S. $825 million, and up approximately 19 percent compared with fiscal 2013.
Adjusted EPS for the full year are still projected to be in the range of U.S. $3.00-$3.10, up 11.5 percent-15.2 percent compared to fiscal 2013. The earnings impact of slightly higher sales revenues is projected to be offset by the impact of the transitional manufacturing inefficiencies which will be higher than previously anticipated and now include additional costs to train sewing operators and ramp up sewing operations to support a planned further significant increase in underwear sales and sales of higher-valued products in fiscal 2015.
The company's guidance continues to assume no material deterioration in overall economic conditions which would negatively impact overall market demand.
The company now expects that capital expenditures will be at the high end of its previous range of U.S. $300-$350 million. The fiscal 2014 capital expenditure program is primarily for the company's strategy to invest in vertically-integrated yarn manufacturing, as well as expenditures for more underwear knitting equipment at Rio Nance I to support the company's planned growth in underwear, the initial investment in the new textile manufacturing facility, the reconfiguration and upgrading of the equipment at the former Anvil manufacturing facility in Honduras, new sock manufacturing equipment, a new sewing facility in the Dominican Republic, further investments in energy saving projects, and the new distribution centre in Honduras.
The company has announced that its new textile facility which it previously announced will be located at a site in the province of Guanacaste in north-western Costa Rica, which is strategically located for duty-free, quota-free access to the company's major markets in the U.S. In addition, the site is close to the company's sewing plants in Nicaragua and accessible to ports on both the eastern and western coasts of the country.
The company is continuing to assess its capacity requirements due to the introduction of new higher-valued products and projected further sales growth from new retail programs and increased shelf space. The company expects to provide a further update on its manufacturing plans and the ramp-up of its manufacturing facilities to support its planned sales growth, when it reports its third quarter results.
As a result of the higher capital expenditures, the company expects to be at the lower end of its prior guidance for free cash flow for fiscal 2014 of U.S. $50-$100 million. The company expects to generate free cash flow of approximately U.S. $200 million in the second half of the fiscal year.
The company is projecting that adjusted EPS in the third fiscal quarter will be essentially unchanged compared to the third quarter of last year, when it reported adjusted EPS of U.S. $0.95. Net sales revenues in the third quarter of fiscal 2014 are projected to be close to U.S. $700 million, up approximately 14 percent compared with U.S. $614.3 million in the third quarter of last year.
Cotton costs in the third quarter of fiscal 2014 will be slightly reduced from the second quarter but higher than the third quarter of fiscal 2013. Gross margins in the third quarter will also be negatively impacted by the transitional costs being incurred to further improve the efficiency and product capabilities of certain manufacturing operations, and by inflationary cost increases.
Results for the fourth quarter compared to the third quarter are projected to reflect the benefit of higher-value retail programs and the initial benefit of manufacturing cost reductions from the company's capital investment projects. Although results for the fourth quarter of the fiscal year will continue to be impacted by inflationary cost increases, which will partially offset the benefit of manufacturing cost reductions in the quarter from the company's capital investment projects, the company expects to end the fiscal year with very strong momentum in sales and earnings in the fourth quarter, which will provide a strong base for growth in fiscal 2015.
CFO Succession Plan
The company has announced that Laurence G. Sellyn will remain with the company until the end of calendar 2014 before retiring, having reached the age of 65 and having served as the company's CFO for more than 15 years. The company is confident that this will ensure that it has sufficient time to finalize its succession plan and ensure an orderly transition in its finance and other corporate head office functions.
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