Gildan Activewear, Inc. (GIL)

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Gildan Activewear (GIL)

Q1 2011 Earnings Call

February 08, 2011 5:00 pm ET

Executives

Laurence Sellyn - Chief Financial & Administrative Officer and Executive Vice President

Glenn Chamandy - Chief Executive Officer, President and Director

Sophie Argiriou - Director of Investor Communications

Analysts

Candice Williams - Canaccord Genuity

Hugues Bourgeois - National Bank Financial, Inc.

Eric Tracy - FBR Capital Markets & Co.

Mark Petrie

Scott Rattee - Blackmont Capital

Jessy Hayem - TD Newcrest Capital Inc.

Martin Landry - Desjardins Securities Inc.

Spencer Churchill - Westwind Partners

Anthony Zicha - Scotia Capital Inc.

Omar Saad - Crédit Suisse AG

David Glick - Buckingham Research

Jim Duffy - Stifel, Nicolaus & Co., Inc.

Tal Woolley - RBC Capital Markets, LLC

Claude Proulx - BMO Capital Markets Canada

Kenric Tyghe - Raymond James Ltd.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Gildan Activewear Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] And I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed.

Sophie Argiriou

Thank you, Caris. Good afternoon, everyone, and thank you for joining us. Earlier, we issued our press release announcing our earnings results for the first quarter of fiscal 2011 and our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents will be filed with the Canadian Securities Regulatory Authority and the U.S. Securities Commission and are also available on our website at www.gildan.com.

I'm joined here this evening by Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Laurence will be providing you with a brief overview of our first quarter financial results and our business outlook, after which, we will open the call to questions.

At this time, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authority that may affect the company's future results. I would now like to turn the call over to Laurence Sellyn.

Laurence Sellyn

Good afternoon. We are pleased to announce today a fourth successive quarter of record results. Sales and earnings were both records for the first quarter of the fiscal year. These results reflected very strong sales for activewear, partially offset by higher cost of cotton and startup inefficiencies in distribution and manufacturing which negatively impacted results for socks and underwear.

Net sales revenues for the first quarter were $331 million, up 50% from the first quarter of fiscal 2010. And we achieved EPS growth of 25% over the first quarter of last year. EPS in the quarter was $0.30 per share. Unit sales volumes of activewear and underwear increased by approximately 66.5% from the first quarter last year and net selling prices for activewear increased by approximately 12%. The increase in unit sales was due to inventory replenishment by U.S. wholesale distributors who have reduced inventories in the first quarter of last year; continuing strong recovery in sales demand from screenprinters, which increased by approximately 8% in the first quarter; continuing strong growth in international and other screenprint markets; and strong growth in activewear and underwear for mass-market retailers from a small base in fiscal 2010.

The strong growth in unit sales for activewear and underwear was achieved in spite of production capacity constraints and low finished goods inventory throughout the quarter. The company was unable to fully service demand for its brand in the U.S. distributor channel, resulting in a decline in its market share during the quarter, to 60.2%, compared with 61.3% in the first quarter of last year and 64% in the fourth quarter of last year.

Gildan's share of inventories in the U.S. distributor channel was 52.4% at December 31, compared to our market share in the first quarter of 60.2%, and we are comfortable with our level of inventories in the distributor channel at the present time. We continue to have a very high level of open orders from distributors in the second quarter.

The significant increase in activewear net selling prices was due to the implementation of previously announced selling price increases, as well as lower promotional activity due to the favorable market conditions. A further selling price increase averaging approximately 7% was announced in the U.S. screenprint market in January. In line with previous selling price announcements, this increase will not be applicable to back orders.

We indicated in our press release that ACNielsen is discontinuing the S.T.A.R.S. report, which we have historically utilized to track unit volume shipments of activewear from U.S. wholesale distributors to U.S. screenprinters. Going forward, we will now subscribe to the CREST report produced by Capstone Research, which uses a slightly different distributor database and reflect some differences in methodology.

Sales of socks were $61.2 million, down 9.3% from $67.5 million in the first quarter of last year. The main reason for our failure to achieve the sales growth, which we have projected for the quarter, was our difficulty in servicing retail demand from our new U.S. distribution center. Continuing ramp up issues at these facility significantly impacted our sock deliveries and sales during the peak Christmas holiday selling season.

Gross margins in the first quarter were 24.7% compared with 29.8% in the first quarter last year. The decline in gross margins compared to last year was due to an increase in cotton cost to $0.78 per pound from $0.60 per pound in the first quarter last year, which negatively impacted gross margins by 450 basis points, and higher costs for energy and other purchase cost inputs, together with ramp up and the factoring inefficiencies, which resulted in very low gross margins for socks and underwear, as well as additional sewing overtime cost to maximize production of activewear and our lower valued activewear product mix, due to a higher proportion of basic T-shirts.

These factors more than offset the positive gross margin impact of the significantly higher net selling prices for activewear. Although selling general and administrative expense were 12.6% of sales, compared to 15.4% in the first quarter a year ago, SG&A expenses increased in dollar terms to $41.6 million compared to $34 million last year. This increase was largely due to the startup inefficiencies of the new Charleston retail distribution center, which negatively impacted SG&A expenses by approximately $3 million and by higher volume driven distribution expenses at our Eden, North Carolina screenprint distribution center which, however, were partially offset by efficiency improvements at this facility, largely as a result of our ongoing capital expenditure project to expand and automate the facility.

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