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Gildan Activewear (GIL)
Q2 2011 Earnings Call
May 11, 2011 8:30 am ET
Laurence Sellyn - Chief Financial & Administrative Officer and Executive Vice President
Glenn Chamandy - Chief Executive Officer, President and Director
Sophie Argiriou - Director of Investor Communications
Candice Williams - Canaccord Genuity
Eric Tracy - FBR Capital Markets & Co.
Susan Sansbury - Miller Tabak + Co., LLC
Jessy Hayem - TD Newcrest Capital Inc.
Kenneth Stumphauzer - Sterne Agee & Leach Inc.
Jim Duffy - Stifel, Nicolaus & Co., Inc.
Tal Woolley - RBC Capital Markets, LLC
Claude Proulx - BMO Capital Markets Canada
Susan Anderson - Citigroup Inc
David Glick - Buckingham Research Group, Inc.
Kenric Tyghe - Raymond James Ltd.
Spencer Churchill - Paradigm Capital, Inc.
Previous Statements by GIL
» Gildan Activewear's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Gildan Activewear CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Gildan Activewear Q2 2010 Earnings Call Transcript
Thank you, Lacey. Good morning, everyone, and thank you for joining us. This morning, we issued our press release announcing our earnings results for the second 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.
Joining me here this morning are Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Laurence will provide a brief overview of our second quarter financial results and our business outlook. After which, we will open the call to questions.
Before we begin, let me 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.
Good morning. This morning, we reported our fifth consecutive quarter of record quarterly results. In addition, we substantially increased our earnings guidance for the full fiscal year in spite of significantly higher cotton cost in the second half of the fiscal year compared to the first six months.
Sales for the second quarter were $383 million, up 17.3% from $327 million in the second quarter last year. EPS before restructuring charges was $0.53, a record for the second quarter of our fiscal year and up 29% from $0.41 per share in the second quarter of fiscal 2010. The growth in sales revenues was primarily due to the impact of higher net selling prices for activewear, which increased by close to 20% as a result of successive selling price increases and lower promotional activity.
In addition, unit sales volumes for activewear and underwear increased by 6% in spite of continuing low finished goods inventory and capacity constraints, which prevented the company from maximizing its market share and fully servicing distributor demand to replenish inventories.
Although we were able to sequentially increase our market share to approximately 63% compared to approximately 58% in the first quarter, according to the CREST report, replenishment of Gildan inventories in the distributor channel was lower than in the second quarter of fiscal 2010. At the end of the quarter our share of distributor inventory was 52% compared to our market share of 63%, and we currently continue to have a significant open order position.
We continue to achieve good growth in international and other screenprint markets, despite of our low inventory levels and capacity constraints. Sales of socks were down by 24% due to lower retailer inventory replenishment, the discontinuation of a large uneconomic sock program in the third quarter of fiscal 2010 and a lower valued more basic product mix.
In the third quarter last year, we completed the rationalization of unprofitable sock programs that we had acquired from Kentucky Derby and Prewett and are now positioned to build from our base of private label and branded Gildan sock programs. Our new Gildan branded sock programs are selling through strongly to consumers.
We expect to have a strong back-to-school season this year and to be able to service demand from our retail customers.
Sales of activewear and underwear to retailers increased by over 50% compared to the second quarter of fiscal 2010. Selling price increases averaging approximately 5% were implemented in the quarter in the retail market and further increases are being implemented in the second half of the fiscal year.
Gross margins were slightly higher than the second quarter of last year at 28.1% versus 27.8% a year ago. The increase in activewear selling prices offset the impact of higher cotton, energy and other purchase input costs, start-up manufacturing inefficiencies, which impacted margins for socks and underwear and more favorable activewear product mix due to a higher proportion of basic T-shirts and a higher proportion of sales of the regulars.
SG&A expenses in the second quarter included a $3.7 million loss on the sale of our former corporate aircraft, which was recently replaced by an operating lease for a new aircraft. Excluding this item, SG&A expenses increased by 13.7% from the second quarter of last year and were 11.5% of sales compared to 11.8% of sales a year ago. The increase in dollar SG&A expenses over fiscal 2010 was primarily due to the ramp-up of the new retail distribution center, expenses for retail advertising, our year-to-date adjustment to performance driven variable compensation and the impact of the higher valued Canadian dollar on corporate administrative expenses.
Results for the second quarter reflected income tax recoveries of $5 million, of which approximately 1/2 related to the first quarter. The tax recoveries are due to recognition of the tax benefits of year-to-date losses from U.S. legal entities, which are being recognized as a result of our projected future earnings in these entities, which are expected to enable us to fully utilize the losses.