Gildan Q3 Earnings Flat Y/Y, Revenues Surge, Mixed Outlook

Gildan Activewear Inc.'s GIL third quarter adjusted earnings of 95 cents per share not only met the previously provided guidance, but also came in line with the prior-year period figure. However, the company's quarterly earnings came a penny below the Zacks Consensus Estimate.

Reported earnings benefited from strong sales recorded at both its business segments, offset by increased cotton cost, increased inflationary expenses and some production inefficiencies. Further, results were aided by an extra week during the quarter, which was slightly moderated due to a national holiday falling during that week.

Delving Deeper

Aided by double-digit rise in both its segments, net sales of this activewear retailer surged 12.9% to $693.8 million, almost in line with the Zacks Consensus Estimate of $694 million. However, net sales fell short of the previous forecast of achieving $700 million.

Despite erratic market conditions during the quarter, Gildan's top line benefited from greater volumes at the global and North American printwear markets, greater product prices along with a favorable mix. Further, robust consumer demand for the company's licensed brands and global lifestyle brands augmented sales.

Gildan is planning to enhance its underwear capacity by two-fold in order to back its growth plans for the next fiscal year.

Margins and Costs

Gildan's gross profit marginally increased to $194.2 million from $193.3 million in the year-ago comparable quarter whereas gross margin contracted 350 basis points (bps) to 28%, reflecting the effect of production inefficiencies and higher cotton costs, partially offset by increased selling prices at the company's Printwear segment.

Selling, general and administrative (SG&A) expenses climbed 2.7% year over year to $71.8 million while as percentage of sales it fell 110 bps to 10.3% from 11.4% in the prior-year period. The rise in SG&A was attributable to a hike in distribution expenses resulting from greater volumes. However, there was partial relief from a fall in variable compensation cost and favorable effect of the weakening Canadian currency, on corporate head office costs.

The company's operating income came in at $121.8 million, almost flat compared to $121.9 million last year. However, the operating income margin shriveled 220 bps to 17.6%.

Segmental Information

Sales at the company's Printwear segment soared 11.6% to $483.4 million, reflecting an increase in volumes and higher selling price. The segment's operating income increased 8.8% to $129.7 million while as a percentage of sales it contracted 70 bps to 26.8%.

At the Branded Apparel segment, sales advanced 16% to $210.4 million, driven by enhancements in all categories like undergarments, activewear and socks. Higher shipments of global lifestyle brands and solid sales at licensed brands and Gildan and Gold Toe brands also facilitated robust sales at this segment.

The segment's operating income, however, plummeted 42.9% to $15.6 million compared with $27.3 million in the year-ago comparable quarter. Further, operating margin contracted 760 bps to 7.4% as the benefit from increased sales and leveraged SG&A expenses were more than offset by higher cotton costs and manufacturing inefficiencies.

Financial Details

Gildan ended the quarter with negative cash and cash equivalents balance of $45.1 million. Its long-term debt stood at $135.0 million.

Management announced a cash dividend of 10.8 cents per share to stockholders of record on Aug 14, 2014, payable on Sep 8, 2014.

Going Forward

The Canada-based company lowered its earnings guidance for fiscal 2014, to reflect the impact of the Doris acquisition charges, the expectation of continuing production inefficiencies and unfavorable product mix. Management now envisions adjusted earnings to lie in a band of $3.00 – $3.03, as against its previous forecast of $3.00 – $3.10 per share. The Zacks Consensus Estimate for fiscal 2014 stands at $3.09, and is subject to a downward revision.

However, the company raised its net sales forecast for the fiscal to slightly over $2.40 billion from the earlier projection of $2.40 billion. Printwear sales are expected to be a little over $1.55 billion and Branded Apparel sales to be roughly $850 million, for fiscal 2014.

Further, the company continues to project capital expenditures to touch the higher end of the earlier guidance range of $300–$350 million during the year, mainly for yarn-spinning, making upgrades to its existing facilities, continuing to invest in its new manufacturing facility and other energy saving projects. Moreover, Gildan now expects free cash flow to fall below $50 during fiscal 2014.

Concurrent to this press release, the company declared its plan to build a new textile facility in Honduras at the Rio Nance complex, mainly to optimize production inefficiencies at Gildan's other facilities.

For the fourth quarter of fiscal 2014, the company envisions earnings of $1.06 – $1.09 per share, up 27.7% – 31.3% from the year-ago quarter. The current Zacks Consensus Estimate is pegged at $1.14 per share. Net sales for the quarter are expected to rise by over 11.8% to more than $700 million.

Other Stocks to Consider

Gildan currently holds a Zacks Rank #2 (Buy). Other stocks in the industry looking attractive at current levels include Hanesbrands Inc. HBI, Vince Holding Corp VNCE, with a Zacks Rank #1 (Strong Buy) and V.F. Corporation VFC with the same Zacks rank as Gildan.