Gildan Q2 Earnings Beat, Touches New High - Analyst Blog

Shares of Gildan Activewear Inc. GIL soared to a new 52-week high of $55.29 on Friday, May 2, 2014 after the company posted better-than-expected second-quarter fiscal 2014 bottom-line results and provided an upbeat earnings guidance for the fiscal. The stock closed trading at $55.06, up 6.4% from the previous day's price.

Gildan's second quarter earnings increased 8.5% year over year to 64 cents per share and came in line with previously provided higher-end guidance. This marked record second quarter earnings for the company in any fiscal year. Moreover, the company's quarterly earnings came a penny ahead of the Zacks Consensus Estimate.

The year-over-year improvement in earnings came on the back of strong sales recorded at both of its business segments, partly offset by increased cotton costs.

Delving Deeper

Net sales of this activewear retailer climbed 4.9% to $548.8 million but marginally fell short of its previous forecast of achieving over $550.0 million. Moreover, it missed the Zacks Consensus Estimate of $555.0 million. Despite weak retail conditions during the quarter due to colder weather in the U.S., Gildan's top-line benefited from strong sales of underwear, higher demand for international lifestyle brands and increased sales of international Printwear.

Gildan's gross profit marginally increased to $153.2 million from $151.2 million in the year-ago comparable quarter whereas gross margin contracted 100 basis points (bps) to 27.9%, reflecting the effect of higher cotton costs, partially offset by increased selling prices at the company's Printwear segment.

Selling, general and administrative (SG&A) expenses declined 5.8% year over year to $69.3 million while as percentage of sales it fell 150 bps to 12.6% from 14.1% in the prior-year period. Lower variable compensation and benefit from weak Canadian-dollar exchange rate at corporate head office lead to a year over year decline in SG&A expenses.

The company's operating profit advanced 9.1% to $83.9 million with margins expanding 60 bps. The improved operating results mainly benefited from lower SG&A expenses as a percentage of sales partially offset by lower gross margin.

Segmental Information

Sales at the company's Printwear segment improved 2.9% to $378.5 million, reflecting an increase in selling prices and favorable product mix. The segment's operating income increased 5.6% to $92.2 million while as a percentage of sales it improved 60 bps to 24.3%.

At the Branded Apparel segment, sales rose 9.9% to $170.3 million, primarily driven by increased customer demand for Gildan brand's undergarments and higher shipments of global lifestyle brands. The segment's operating income, however, remained almost flat at $13.3 million compared with $13.4 million in the year-ago comparable quarter. Further, operating margin contracted 80 bps to 7.8% as the benefit from increased sales and leveraged SG&A expenses were more than offset by higher cotton costs and short-term manufacturing inefficiencies.

Financial Details

Gildan ended the quarter with cash and cash equivalents of $58.6 million. Its long-term debt stood at $148.0 million. Further, to sponsor the occasional rise in inventories in order to meet anticipated consumer demand, the company used its free cash flow worth $79.9 million. Finally, the company incurred $85.8 million as capital expenditure in the second quarter of fiscal 2014.

Going Forward

The Canada-based company re-affirmed its previously provided guidance for fiscal 2014 in which it envisions adjusted earnings to lie in a band of $3.00-$3.10 per share, which is up 11.5–15.2%, compared with fiscal 2013. The Zacks Consensus Estimate for fiscal 2014 stands at $3.06, lying within the company's currently predicted band.

However, the company raised its net sales forecast for the fiscal to $2.40 billion from the earlier projection of $2.35 billion. Printwear sales are expected to be $1.55 billion and Branded Apparel sales to be $850 million, for fiscal 2014, up from the previous guidance of $1.5 billion and $825 million, respectively.

Further, the company anticipates 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, it now expects free cash flow to remain at the lower end of previous guidance of $50–$100 million during fiscal 2014.

For the third quarter of fiscal 2014, the company envisions earnings of 95 cents per share, in line with the year-ago quarter. Net sales for the quarter are expected to rise 14% to $700 million.

Gross margins are anticipated to be pressured in the third quarter.

Dividend Information

Management announced a cash dividend of 10.8 cents per share to stockholders of record on May 15, 2014, payable on Jun 9, 2014.

Other Stocks to Consider

Gildan currently holds a Zacks Rank #3 (Hold). Other better-ranked stocks in the Textile-Apparel retail space worth considering are Columbia Sportswear Company COLM, Hanesbrands Inc. HBI and V.F. Corporation VFC. While Columbia Sportswear holds a Zacks Rank #1 (Strong Buy), Hanesbrands and V.F. Corp. carry a Zacks Rank #2 (Buy).