Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gildan Activewear Inc (GIL, Financial) reported Q2 sales of $862 million, up 3% year-over-year, driven by strong performance in activewear.
- The company reconfirmed its full-year 2024 guidance and provided a positive three-year outlook, expecting mid-single-digit revenue growth and mid-teen EPS growth from 2025 to 2027.
- Gross margin improved significantly to 30.4% from 25.8% in the prior year, primarily due to lower raw material and manufacturing input costs.
- Gildan Activewear Inc (GIL) resumed share repurchases, buying back approximately 3 million shares and returning $182 million in capital to shareholders in Q2.
- The company continues to see strong market share gains in key categories like fleece and ring spun products, supported by positive market response to new product innovations.
Negative Points
- Hosiery and underwear sales were down 16% year-over-year, mainly due to the phase-out of the Under Armour business and broader market weakness in innerwear.
- SG&A expenses included significant charges related to the proxy contest, totaling $57 million in the quarter.
- The company's adjusted effective income tax rate increased significantly to 27% in Q2, compared to 4.8% last year, due to the retroactive enactment of global minimum tax in Canada and Barbados.
- Cash flow from operating activities decreased to $140 million from $182 million in the prior year, impacted by a $40 million cash outflow from the proxy contest.
- The macroeconomic backdrop remains mixed globally, driving a generally cautious consumer spending outlook, which could impact future performance.
Q & A Highlights
Q: Curious if you could talk about where you saw the strongest and weakest POS trends during the quarter and what POS has looked like in the third quarter to date? Curious if you've seen any changes that are influencing your outlook? And then second, can you just talk about the competitive landscape in both activewear and hosiery?
A: We saw improving POS through the quarter, with June ending mid-single digits. The first part of July started off slower but improved as the month progressed. The strength continues to be in the fleece and ring spun categories. On the competitive landscape, we are widening our competitive advantage, especially with some competitors like Delta filing for Chapter 11. This presents an opportunity for us to execute and gain market share, particularly in the fashion T-shirt category and fleece.
Q: Could you comment specifically on the inventory levels, both retail and distributor? How would you characterize that versus something you would call normalized and that sort of an opportunity or a risk in the coming 6 to 12 months in your view?
A: Overall, inventory is in line and balanced. Some accounts are better stocked than others, but generally, it's well balanced across retail and distributors. On the international side, there are areas where inventory is a bit light, but with the Bangladesh ramp-up, we expect this to be resolved by Q4.
Q: Can you maybe just talk about the current capacity utilization at Bangladesh today? I realize it's going to be 75% at year-end, the impact from the recent civil unrest. Glenn, have you visited the site? And where are we with respect to moving forward with phase two?
A: Everything is on track with Bangladesh. We believe we'll be at 75% of our exit capacity by the end of this year. The ramp-up is coming at a cost, but we see this as an opportunity for upward momentum in our operating margins. Regarding the civil unrest, it was not material to us, and we are running full and business as usual.
Q: What do you think is a sustainable level of SG&A, inclusive of the Barbados tax credit in our forward outlook?
A: We believe we're performing very well on SG&A, which has been a big focus. Adjusting for the retroactive impact, we would have been around 9%. Near term, we expect to be in the 9% to 9.5% range. We can leverage SG&A as we grow, and we are in great shape to deliver margins on a go-forward basis.
Q: Just following up on the comment that you gave us about the expansion in gross margin. What was driving that? Is that mix? Or is that pricing? How should we think about it?
A: A lot of the expansion came from improvement in raw material costs and manufacturing efficiencies. We have not yet seen the full impact of our manufacturing structure with 85% capacity utilization in Central America and the ramp-up of Bangladesh. We are excited about the margin evolution driven by cost improvements and market share gains.
Q: With respect to the transition to soft cotton, can you talk about the impact of that on the cost side and if that's going to help drive pricing higher in the industry as you make those transitions?
A: We are pricing the product similarly and have not changed our prices. The costs will be absorbed by other manufacturing efficiencies within our system. We are starting to see positive POS in basics for the first time in Q2, and the reception has been positive.
Q: I was wondering right now if we look at your position in the US print wear industry -- you've talked a lot about market share gains, would you be able to give us your best assumption of where you are in terms of market share gains when we look at all your products in aggregate?
A: We are outperforming the market and gaining share, particularly in fashion and fleece categories. We have taken a modest view of the market, assuming it will be flat to low-single digits, and we plan to gain share in the distributor market, retail, GLB, and international segments.
Q: Given the unusual time period that just played out, did you have some time away from the business? Can you just talk about any insights you had just maybe from just having a different perspective looking at the business from where you were versus from before?
A: In the fall, I believed the company was in a strong position with a large innovation pipeline and investments in Bangladesh. Taking a step back, I saw that everything was intact, and the team is more motivated than ever. We are excited about the future and delivering great results.
Q: Just on the raising the leverage, what's the timeframe you expect to raise the leverage to 2, 2.5 whatever it is? And would you expect to immediately buy back stock as you increase the leverage?
A: We finished the second quarter with leverage at 1.6 times. We expect to continue repurchasing shares and drive towards 2 times leverage by the end of the year. We have increased our NCIB by 10% to give us the flexibility to do that. We plan to continue buying back at a higher rate as we move through the end of the year.
Q: Just wondering if you can do the same for gross margin like how should we expect that to evolve through the year? I know eventually you'll be up against some of the tougher comps as you roll into next year. So just how can we think about gross margin, I guess, for the balance of this year as well as into that three-year margin expansion target that you're highlighting?
A: We expect strong gross margin as we continue through the year. Gross margin will stay strong in Q3 and Q4, and we expect operating margin growth from '25 to '27. We believe we have moved our gross margin higher than historically and combined with SG&A leverage, we have strong confidence in our ability to drive operating margins over the next three years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
