Ms. Sophie Argiriou reports
GILDAN ACTIVEWEAR REPORTS STRONG RESULTS FOR THE FOURTH QUARTER OF 2018
Gildan Activewear Inc. has released results for the fourth quarter and year ended Dec. 30, 2018, and initiated guidance for 2019 (all amounts are in U.S. dollars except where otherwise indicated).
The company ended 2018 on a strong finish, meeting its full-year financial targets after successfully navigating through unanticipated weather impacts and supply chain disruptions during the year, and executing well on its organizational consolidation initiatives. Strong performance in the fourth quarter reflected an increase of 16 per cent in GAAP (generally accepted accounting principles) diluted EPS (earnings per share), and an increase of 39 per cent in adjusted diluted EPS, driven by sales growth of approximately 14 per cent and a 230-basis-point improvement in adjusted operating margin over the same quarter last year. On a full-year basis, the company reported GAAP diluted EPS of $1.66, up 3 per cent over the prior year, and adjusted diluted EPS of $1.86, up 8 per cent on sales growth of close to 6 per cent, in line with the company's latest guidance for adjusted diluted EPS of $1.85 to $1.87 and mid-single-digit sales growth.
The company was pleased with the underlying factors supporting its financial performance for the year. Sales growth for 2018 was driven by gains in key focus areas, including continued growth in fashion basics, strong double-digit growth in international and global lifestyle brands sales, new private label program wins, which shipped primarily in the fourth quarter, and the doubling of the company's e-commerce sales. Operationally, the company made good progress on initiatives related to the organizational consolidation it announced at the beginning of the year. The company was able to drive operational efficiencies across the organization and reduce its SG&A (selling, general and administrative) expenses, while driving top-line growth. In the fourth quarter alone, SG&A expenses as a percentage of sales improved by 300 basis points, and for the full year, despite planned increases in distribution and e-commerce investments in the first half of the year, SG&A expenses as a percentage of sales improved 100 basis points over 2017. The company generated strong free cash flow of $429-million for the year, exceeding the company's initial guidance for 2018. The company also completed the buyback of 12.6 million shares under its normal course issuer bid program. Combined with dividends, the company returned more than $460-million to shareholders in 2018, and today, the company announced the seventh consecutive 20-per-cent increase in the amount of its quarterly dividend and the renewal of the company's normal course issuer bid to repurchase up to 5 per cent of the company's issued and outstanding common shares.
Over all, 2018 was a solid year of execution on the company's key growth drivers while driving increased efficiency across the organization. As a result, the company generated a higher return on net assets (RONA), an important measure of performance for the company. RONA for 2018 improved to 15.6 per cent, up 70 basis points from 14.9 per cent in 2017.
Fourth quarter results
Net sales for the fourth quarter ended Dec. 30, 2018, of $742.7-million were up 13.6 per cent compared with the fourth quarter of 2017 driven by a 22.3-per-cent increase in activewear sales, partly offset by a 7.9-per-cent sales decline in the hosiery and underwear category, which was anticipated. The increase in the activewear category in the fourth quarter, where the company generated $569-million in net sales, was mainly due to higher unit sales volumes, a better product mix driven primarily by higher fleece shipments, and higher net selling prices. Activewear volume growth reflected higher shipments of imprintable products in North America and a 29-per-cent increase in international shipments, as well as higher sales to global lifestyle brands and retailers. Sales in the hosiery and underwear category totalled $173-million, as anticipated, down $15-million from the fourth quarter last year primarily due to lower Gildan sock sales in mass and lower mass retailer replenishment of Gildan underwear in the quarter, partly offset by shipments under one of the company's new private label underwear programs in the fourth quarter.
Gross margin in the fourth quarter was down 80 basis points to 26.3 per cent compared with the prior-year quarter. The decrease was mainly due to higher raw material and other input costs, activewear growth ramp-up costs, and the flow-through of the balance of the costs related to supply chain disruptions which the company incurred earlier in the year. These factors more than offset the benefit from higher net selling prices and more favourable product mix compared with the prior-year quarter.
SG&A expenses for the fourth quarter of 2018 of $95.5-million were down 8 per cent compared with $103.9-million in the fourth quarter of 2017. As a percentage of sales, SG&A expenses were 12.9 per cent, down 300 basis points from 15.9 per cent in the fourth quarter last year primarily reflecting the benefit of cost reductions driven by the company's organizational consolidation and a higher sales base. Operating margin and adjusted operating margin in the fourth quarter of 2018 were 10.5 per cent and 13.5 per cent, respectively, better by 100 and 230 basis points, respectively, compared with the fourth quarter of 2017. The improvement was mainly due to lower SG&A expenses as a percentage of sales, partly offset by a lower gross margin.
The company incurred $21.7-million and $34.2-million of restructuring and acquisition-related costs in the fourth quarter of 2018 and for the full year, respectively. These costs primarily related to the company's organizational realignment and the consolidation of textile and sock manufacturing, warehouse distribution, and garment dyeing operations. The company had initially projected restructuring- and acquisition-related costs for 2018 to be in the range of $15-million to $20-million. The higher-than-previously-anticipated restructuring- and acquisition-related costs were largely associated with the consolidation of textile manufacturing and sock production capacity, as well as the closure of an additional distribution facility in North Carolina, which were not assumed in the company's initial guidance. With respect to textile manufacturing, during the fourth quarter of 2018, the company made the decision to close its AKH textile facility in Honduras, which was acquired as part of the Anvil acquisition in 2012, and was operating in leased premises outside of the company's large manufacturing complex in Rio Nance. The company transitioned this production that was largely for fashion basics products into its new state-of-the-art Rio Nance 6 textile facility, which it is ramping up with new equipment geared for more efficient production of fashion basics. In addition, during the fourth quarter, the company began the consolidation of its sock operations, integrating the majority of its sock production in Honduras into its Rio Nance 4 facility, with its Rio Nance 3 facility now largely focusing on its garment dyeing operations.
Income tax expense for the quarter was $10.0-million compared with $1.2-million in the fourth quarter of 2017. Income tax expense in both periods included deferred income tax expense adjustments of $7.6-million and $1.7-million, respectively, associated with restructuring- and acquisition-related actions and the impact of tax rate changes. On a full-year basis for 2018, the effective income tax rate, excluding the impact of restructuring- and acquisition-related costs and the aforementioned deferred tax adjustments, was 3.3 per cent, slightly lower than the anticipated full-year tax rate of 4 per cent.
Net earnings totalled $59.6-million or 29 cents per share on a diluted basis for the three months ended Dec. 30, 2018, compared with net earnings of $54.9-million or 25 cents per share for the three months ended Dec. 31, 2017. Adjusted net earnings of $88.9-million were up 31.5 per cent from $67.6-million in the fourth quarter last year. The company generated adjusted diluted EPS for the fourth quarter of 43 cents, up 38.7 per cent compared with last year mainly due to higher adjusted operating income and the benefit of a lower share count compared with the prior year, partly offset by higher financial and income tax expenses.
The company generated strong free cash flow of $252.4-million in the fourth quarter, up $86.7-million over the prior-year quarter due mainly to higher earnings, more favourable working capital changes and slightly lower capital expenditures. Full-year free cash flow totalled $428.9-million and was in line with the increased guidance the company provided in August calling for free cash flow in excess of $425-million. Capital expenditures for the fourth quarter amounted to $26.2-million bringing the company's full-year capital expenditures at $125.2-million for the year, in line with the company's guidance. Capital expenditures for the quarter and for the full year reflected investments primarily in textile capacity and related sewing expansion, distribution, and information technology. During the fourth quarter the company repurchased 664,289 common shares for cancellation at a total cost of $19.6-million completing a total of 12.6 million common share repurchases for the full year of 2018 at a total cost of $367.5-million. Net debt at the end of the year amounted to $622.3-million and the company's net debt leverage ratio of 1.0 times net debt to trailing 12-month adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for 2018 was in line with the company's target leverage framework.
Full-year results
Net sales of $2,908.6-million in 2018 were up 5.7 per cent over last year and in line with the company's guidance. Sales growth for the year reflected a 13.6-per-cent increase in activewear sales, partly offset by a 17.0-per-cent decline in the hosiery and underwear category as projected in the company's latest guidance. The increase in activewear sales was driven by higher unit sales volume and net selling prices, more favourable product mix, and positive foreign exchange impacts compared with the prior year. Activewear unit volume growth was mainly due to higher shipments of imprintable products in the United States, including fashion basics and fleece products, combined with strong double-digit unit sales volume growth in international markets and higher unit sales of global lifestyle brand products. The decline in the hosiery and underwear category was mainly due to lower sock volumes in the mass market channel, particularly as a result of the shift to private label brands by mass retailers, as well as declines in licensed and Gold Toe brand sales. Favourable product mix was driven by higher sales of fleece and fashion basics and higher-value sock sales.
Gross margin for 2018 totalled 27.7 per cent, down 140 basis points over the prior year, mainly due to higher raw material and other input costs, as well as higher manufacturing costs primarily related to disruptions in the company's supply chain which occurred earlier in the year, and costs related to the ramp-up of activewear capacity, partly offset by higher net selling prices and the benefit of a richer product mix compared with last year.
SG&A expenses of $368.5-million were down $8.8-million, or 2.3 per cent, over the prior year, and as a percentage of sales, SG&A expenses in 2018 decreased by 100 basis points compared with 2017. The improvement in SG&A expenses was mainly due to the benefit of cost reductions resulting from the company's organizational realignment which the company began to implement at the start of the year. The company generated cost reductions from the consolidation of marketing, sales, distribution and administrative functions which more than offset investments related to e-commerce and distribution capabilities primarily in the first half of the year. SG&A expenses as a percentage of sales for the second half of 2018 were 12.3 per cent, down 220 basis points compared with 14.5 per cent in the second half of 2017, and exceeded the company's guidance calling for SG&A expenses as a percentage of sales in the second half of the year to be lower by 100 to 200 basis points compared with the prior year due to better than anticipated cost management. In line with the company's latest guidance, operating margin of 13.9 per cent for 2018 was down 70 basis points over the prior year, and adjusted operating margin of 15.0 per cent was slightly down by 40 basis points compared with 2017, primarily reflecting the gross margin decline which more than offset the benefit of lower SG&A expenses as a percentage of sales.
Net earnings for 2018 were $350.8-million, down from $362.3-million in 2017. On a diluted basis, GAAP EPS totalled $1.66, up 3.1 per cent from $1.61 in the prior year. Adjusted net earnings for 2018 were $393.1-million or $1.86 per diluted share, up 1.6 per cent and 8.1 per cent, respectively, compared with adjusted net earnings of $386.9-million or $1.72 per diluted share in 2017, and in line with the company's guidance of adjusted diluted EPS of $1.85 to $1.87. The increase in adjusted net earnings for 2018 over the prior year was mainly due to the contribution of higher sales, which more than offset the decline in adjusted operating margin and higher financial expenses. GAAP EPS and adjusted EPS on a diluted basis also benefited from a lower share count. Adjusted EBITDA for the year totalled $595.5-million, coming in just slightly under the low end of the company's guidance range.
Outlook
For 2019, the company is projecting GAAP diluted EPS growth of 17 per cent and adjusted diluted EPS growth of 10 per cent over 2018, at the midpoint of the company's guidance range, on projected sales growth in the mid-single-digit range. The company is initiating guidance for 2019 calling for GAAP diluted EPS of $1.90 to $2.00, and adjusted diluted EPS in the range of $2.00 to $2.10 after excluding the impact of projected restructuring- and acquisition-related costs of approximately $20-million, which the company expects to incur as it drives operational efficiencies across the organization. Adjusted diluted EPS in the first half of the year is projected to be down compared with the first half of 2018, and higher in the second half of 2019 over the same period in the prior year. Adjusted EBITDA for 2019 is expected to be in excess of $630-million and the company expects to generate approximately $350-million to $400-million in free cash flow for 2019.
Sales growth in 2019 is expected to be driven by higher sales volume in key growth areas, including fashion basics, international markets, global lifestyle brands and strong underwear growth. Projected sales growth also assumes the benefit of favourable product mix and selling price increases to cover higher raw material and other input costs. The positive impact of these factors on sales is expected to be partly offset by anticipated lower sales of activewear basics and socks, as well as an unfavourable impact of foreign exchange.
Projected growth in adjusted diluted EPS for 2019 reflects the company's sales growth assumptions, continued cost benefits from supply chain initiatives which are expected to start to flow through in the latter part of 2019, SG&A leverage and the benefit of share repurchases. These positive factors are projected to be partly offset by higher raw material and other input costs, including inflationary pressures. While raw material costs are expected to be up for the full year, the unfavourable impact is expected to be more meaningful in the first half of the year. For the full year the company is targeting gross margin in line with the prior-year level and the company is targeting SG&A expenses as a percentage of sales to continue to improve over 2018 levels. Accordingly, operating margin for 2019 is expected to be slightly higher than 2018 and the company's income tax rate is projected to be approximately 4 per cent.
The company is projecting adjusted diluted EPS of 24 to 26 cents for the first quarter of 2019, down from adjusted EPS of 34 cents in the first quarter of 2018, as a result of high raw material and other input cost pressures and a mid- to high-single-digit sales decline projected in the first quarter of 2019. The company is projecting lower sales of imprintables in the first quarter this year, as it does not anticipate the same level of distributor restocking that occurred in the same quarter last year in advance of the price increase implemented in the latter part of the first quarter of 2018. The company's sales projection for the first quarter of 2019 also assumes lower sales in the hosiery and underwear category, ahead of the rollout of the company's new private label men's underwear program which is planned to ship during the second and third quarters of 2019. These sales impacts are expected to normalize as the company moves into the second quarter, with sales growth expected during the remaining quarters of the year, aligning to deliver the company's overall sales guidance for 2019. Finally, the full-year unfavourable impact of foreign exchange on sales is expected to be more meaningful in the first half of 2019.
For 2019, the company is projecting capital expenditures of approximately $125-million primarily for the continued development of the Rio Nance 6 facility in Honduras, investments in existing textile facilities, sewing capacity expansion to align with increases in textile capacity as well as expenditures in information technology.
Increase in quarterly dividend and renewal of normal course issuer bid
The board of directors has approved a 20-per-cent increase in the amount of the current quarterly dividend and has declared a cash dividend of 13.4 cents per share, payable on April 1, 2019, to shareholders of record on March 7, 2019. 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. This is the company's seventh consecutive annual 20-per-cent increase in the quarterly dividend since inception of the dividend.
Gildan received approval from the Toronto Stock Exchange to renew its normal course issuer bid (NCIB) commencing on Feb. 27, 2019, to purchase for cancellation up to 10,337,017 common shares, representing approximately 5 per cent of Gildan's issued and outstanding common shares. As of Feb. 14, 2019, Gildan had 206,740,357 common shares issued and outstanding. Gildan is authorized to make purchases under the NCIB until Feb. 26, 2020, in accordance with the requirements of the TSX. Purchases will be made by means of open-market transactions on both the TSX and the New York Stock Exchange, or alternative trading systems, if eligible, or by such other means as a securities regulatory authority may permit, including by private agreements under an issuer bid exemption order issued by securities regulatory authorities in Canada. Under the bid, Gildan may purchase up to a maximum of 136,754 common shares daily through TSX facilities, which represent 25 per cent of the average daily trading volume on the TSX for the most recently completed six calendar months. The price to be paid by Gildan for any common shares will be the market price at the time of the acquisition, plus brokerage fees, and purchases made under an issuer bid exemption order will be at a discount to the prevailing market price in accordance with the terms of the order.
Gildan's current NCIB which was initially approved by the TSX on Feb. 21, 2018, and subsequently amended on Aug. 1, 2018, authorized Gildan to repurchase for cancellation up to 21,575,761 common shares. During the three months ended Dec. 30, 2018, Gildan repurchased for cancellation a total of 664,289 common shares under its current NCIB at a total cost of $19.6-million. During the 12 months ended Feb. 14, 2019, Gildan repurchased for cancellation a total of 12,634,693 common shares under its NCIB through the facilities of the TSX and of the NYSE for a total cost of $367.5-million and at a weighted average price paid per common share of approximately $29.09.
Gildan's management and the board of directors believe the repurchase of common shares represents an appropriate use of Gildan's financial resources and that share repurchases under the NCIB will not preclude Gildan from continuing to pursue organic growth and complementary acquisitions.
Adoption of advance notice bylaw
The company announced today that its board of directors approved the adoption of an advance notice bylaw, establishing a reasonable framework for advance notice of nominations of directors by shareholders of the corporation. Among other things, the advance notice bylaw fixes deadlines by which shareholders must submit a notice of director nominations to the company prior to any annual or special meeting of shareholders where directors are to be elected and sets out the information that a shareholder must include in the notice. The advance notice bylaw has been prepared to meet the guidelines of proxy advisory firms, including Institutional Shareholder Services Inc., and the requirements of the Toronto Stock Exchange, and is similar to the advance notice bylaws adopted by many other Canadian public companies.
The advance notice bylaw will be placed before shareholders for confirmation at the next annual meeting of shareholders scheduled to be held on May 2, 2019. If shareholders do not approve the ordinary resolution confirming the adoption of the advance notice bylaw, it will no longer be valid. A copy of the advance notice bylaw will be available under the company's profile at SEDAR and a copy and a summary of the advance notice bylaw will be included in the management information circular which will be sent to shareholders in due course.
Disclosure of outstanding share data
As at Feb. 14, 2019, there were 206,740,357 common shares issued and outstanding along with 2,662,446 stock options and 105,573 dilutive restricted share units outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a predetermined 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.
Conference call information
Gildan Activewear will hold a conference call to discuss fourth quarter 2018 results and its business outlook today at 8:30 a.m. Eastern Time. A live audio webcast of the conference call will be available on Gildan's website. To access the conference call, dial toll-free 800-447-0521 (Canada and U.S.) or 847-413-3238 (international) and enter pass code 48115845 followed by the number sign. A replay will be available for 30 days starting at 11 a.m. ET by dialling toll-free 888-843-7419 (Canada and U.S.) or 630-652-3042 (international) and entering the same pass code or by audio webcast on Gildan's corporate website.
CONSOLIDATED FINANCIAL DATA
(in millions, except per-share amounts or otherwise indicated)
Three months ended 12 months ended
Dec. 30, 2018 Dec. 31, 2017 Dec. 30, 2018 Dec. 31, 2017
Net sales $742.7 $653.7 $2,908.6 $2,750.8
Gross profit 195.4 177.0 806.0 801.2
SG&A expenses 95.5 103.9 368.5 377.3
Restructuring- and acquisition-related costs 21.7 11.0 34.2 22.9
Operating income 78.2 62.0 403.2 401.0
Adjusted operating income 99.9 73.0 437.4 423.9
Adjusted EBITDA 138.0 114.0 595.5 586.1
Financial expenses 8.7 5.9 31.0 24.2
Income tax expense 10.0 1.2 21.4 14.5
Net earnings 59.6 54.9 350.8 362.3
Adjusted net earnings 88.9 67.6 393.1 386.9
Diluted EPS 0.29 0.25 1.66 1.61
Adjusted diluted EPS 0.43 0.31 1.86 1.72
Gross margin 26.3% 27.1% 27.7% 29.1%
SG&A expenses as a percentage of sales 12.9% 15.9% 12.7% 13.7%
Operating margin 10.5% 9.5% 13.9% 14.6%
Adjusted operating margin 13.5% 11.2% 15.0% 15.4%
Cash flows from operating activities 274.1 199.1 538.5 613.4
Capital expenditures 26.2 33.6 125.2 94.8
Free cash flow 252.4 165.7 428.9 519.2
About Gildan Activewear Inc.
Gildan is a leading manufacturer of everyday basic apparel, which markets its products in North America, Europe, Asia-Pacific and Latin America, under a diversified portfolio of company-owned brands. Gildan owns and operates vertically integrated, large-scale manufacturing facilities, which are primarily located in Central America, the Caribbean Basin, North America and Bangladesh.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(in thousands of dollars, except per-share data)
Three months ended 12 months ended
Dec. 30, 2018 Dec. 31, 2017 Dec. 30, 2018 Dec. 31, 2017
Net sales $742,748 $653,695 $2,908,565 $2,750,816
Cost of sales 547,360 476,724 2,102,612 1,949,597
Gross profit 195,388 176,971 805,953 801,219
Selling, general and
administrative expenses 95,474 103,930 368,546 377,323
Restructuring- and
acquisition-related costs 21,713 11,023 34,228 22,894
Operating income 78,201 62,018 403,179 401,002
Financial expenses, net 8,693 5,888 31,045 24,186
Earnings before income taxes 69,508 56,130 372,134 376,816
Income tax expense 9,956 1,181 21,360 14,482
Net earnings 59,552 54,949 350,774 362,334
Other comprehensive income (loss),
net of related income taxes
Cash flow hedges (loss) (20,146) 3,747 (10,158) (27,071)
Actuarial (loss) on employee
benefit obligations (1,694) (64) (1,694) (64)
(21,840) 3,683 (11,852) (27,135)
Comprehensive income 37,712 58,632 338,922 335,199
Earnings per share
Basic 0.29 0.25 1.66 1.62
Diluted 0.29 0.25 1.66 1.61
We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.