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Gildan Activewear Reports Second Quarter 2019 Results and Updates 2019 Full Year Guidance

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  • Record second quarter sales and adjusted diluted EPS1
  • Q2 2019 sales of $802 million, up 5%, GAAP diluted EPS of $0.49, and adjusted diluted EPS of $0.56 up 8% over prior year quarter
  • Company reaffirms 2019 sales guidance and updates full year adjusted EPS guidance to higher end of range

(1) Please refer to "Definition and reconciliation of non-GAAP financial measures" in this press release.

(all amounts are in U.S. dollars except where otherwise indicated)

MONTREAL, Aug. 01, 2019 (GLOBE NEWSWIRE) -- Gildan Activewear Inc. (GIL: TSX and NYSE) today announced its results for the second quarter ended June 30, 2019 and updated its full year guidance.

As expected, sales for the second quarter returned to a growth trajectory, consistent with the expected sales cadence for 2019 previously communicated. Sales of $802 million in the quarter, which set another second quarter record, were up approximately 5% over last year, setting us on track to deliver our full year sales target of mid-single-digit growth. Our growth drivers continued to perform well, including growth momentum in fashion basics, fleece, and global lifestyle brand sales. Underwear sales grew more than 50% over the prior year quarter, reflecting the successful launch of our new private label men's underwear program with our largest mass retail customer. We are pleased with the performance of the product launch and have received confirmation from the retailer that we will be awarded additional shelf space to expand the program offering in the fourth quarter.

For the second quarter of 2019, we generated GAAP diluted EPS of $0.49, and adjusted diluted EPS of $0.56 up 8% over the prior year quarter, reflecting the benefit of a richer product-mix, higher net selling prices, and a 50-basis point improvement in SG&A expenses as a percentage of sales. These positive factors more than offset gross margin pressure from increases in raw materials and other input costs, which were anticipated and previously communicated. During the quarter, we continued to execute on our manufacturing optimization initiatives and remain on track to generate gross margin expansion which we expect to flow through in the fourth quarter as we exit the year.

Q2 2019 operating results
Sales for the second quarter totaled $801.6 million, up 4.9% compared to the prior year quarter. Higher sales reflected activewear sales of $665.6 million, up 6.5% compared to the second quarter of 2018, partly offset by a 2.2% decline in the hosiery and underwear category where we generated $136.0 million in overall sales. Activewear sales growth was driven by higher unit sales volumes of fashion basics and fleece, volume growth in global lifestyle brand products, and higher e-commerce sales volumes, as well as more favourable product-mix and higher net selling prices, partly offset by lower unit sales of basics. While international sales were up slightly, we saw softness in Europe and slower growth in China, particularly in the first two months of the quarter, which we believe was largely tied to the pace of broader economic activity in these regions. Growth in international sales was stronger in the month of June and we continue to project double digit growth in the second half of the year. The slight sales decline in the hosiery and underwear category resulted from lower sock sales volumes which were largely offset by the large increase in underwear sales during the quarter. The underwear sales increase was due to the full roll-out of a new private label men's underwear program with our largest mass retail customer, which began to ship at the end of the first quarter this year. This new program replaced our previous branded program with this retailer and now occupies significantly more shelf space than our former branded program. The decline in sock sales was primarily due to lower unit sales in mass, including the exit of a sock program in the dollar channel, as we had previously communicated, and lower sales in other channels, including sports specialty, partly offset by higher sock sales to global lifestyle brands.

As expected, gross margin of 27.8% in the second quarter of 2019 was down from 28.3% in the second quarter last year. The 50-basis point decline reflected anticipated increases in raw material costs, inflationary pressure on other input costs, and unfavourable foreign exchange. These factors more than offset the benefit of higher net selling prices and favourable product-mix.

SG&A expenses for the second quarter of 2019 of $92.0 million remained essentially flat compared to the second quarter of 2018, despite the rise in sales. As a percentage of sales, SG&A expenses were 11.5%, reflecting a 50-basis point improvement over the same period last year, primarily due to cost benefits stemming from the Company's ongoing focus on SG&A rationalization.

The Company incurred $16.3 million of restructuring and acquisition-related costs in the second quarter, compared to $3.0 million in the same period last year. Restructuring and acquisition-related costs in the second quarter of 2019 related primarily to previously announced manufacturing optimization initiatives, including consolidation of textile, hosiery, sewing, and yarn operations, as well as warehouse consolidation and sales and marketing initiatives.

Operating income for the second quarter of 2019 totaled $114.1 million, down from $121.0 million in the second quarter of 2018.  After excluding restructuring and acquisition-related costs in both years, adjusted operating incomefor the three months ended June 30, 2019 amounted to $130.4 million, up $6.4 million, or 5.2% higher than the same period last year. As a percentage of sales, adjusted operating income for the second quarter was 16.3%, 10 basis points better than adjusted operating margin1 of 16.2% in the second quarter of 2018.  The improvement was due to the benefit of SG&A leverage, which more than offset gross margin pressure primarily from higher raw material and other input costs.

Net earnings for the three months ended June 30, 2019 amounted to $99.7 million, or $0.49 per share on a diluted basis, compared with net earnings of $109.0 million, or $0.51 per share on a diluted basis, for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs in both years, Gildan reported adjusted net earnings1 of $115.0 million, or $0.56 per share on a diluted basis, up from $111.5 million, or $0.52 per share on a diluted basis, in the second quarter of 2018.  The 7.7% increase in adjusted diluted EPS was mainly due to increased sales and adjusted operating margin, as well as the benefit of a lower share count compared to the prior year, partly offset by higher net financial expenses.

The Company generated $26.0 million of free cash flow1 in the second quarter of 2019 compared to free cash flow of $98.0 million in the second quarter last year reflecting higher working capital requirements and higher capital expenditures. During the second quarter of 2019, capital expenditures were $56 million primarily for the acquisition of land in Bangladesh and expenditures related to manufacturing capacity expansion initiatives. During the quarter, the Company repurchased 2,617,710 common shares at a total cost of approximately $97.4 million pursuant to its normal course issuer bid (NCIB) program. The Company ended the second quarter of 2019 with net debt1 of $989.2 million and a net debt leverage ratio1 of 1.8 times net debt to trailing twelve months adjusted EBITDA1, in line with the Company's target leverage range.

Year-to-date operating results
Net sales for the six months ended June 30, 2019 totaled $1,425.6 million, up 1.0% from net sales of $1,411.5 million for the same period last year, reflecting an increase of 1.7% in activewear sales, partly offset by a 2.0% decline in the hosiery and underwear category. The growth in activewear where we generated sales of $1,159.2 million was mainly driven by favourable product-mix, particularly from fleece sales and higher net selling prices, partly offset by lower unit sales volumes of basics. The decline in the hosiery and underwear sales category was mainly due to lower unit sales of socks, including the impact of our exit of a sock program in the dollar channel, mostly offset by higher underwear sales and more favourable product-mix.

Gross margin of 26.9% for the first six months of 2019 was down 90 basis points compared to the same period last year due to higher raw material and other input costs, including inflationary pressures and unfavourable foreign exchange, partly offset by higher net selling prices and more favourable product-mix. SG&A expenses of $185.0 million for the six months ended June 30, 2019 were essentially unchanged from last year's level, improving 10 basis points as a percentage of sales to 13.0%, reflecting the Company's focus on SG&A rationalization.

Operating income for the first six months of 2019 totaled $146.8 million, or 10.3% of sales, down from $197.3 million, or 14.0% of sales, mainly due to the impairment of trade accounts receivable of $24.4 million which was recorded in the first quarter this year relating to the receivership of Heritage Sportswear, higher restructuring and acquisition-related costs associated with the Company's manufacturing and warehouse consolidation initiatives, and lower gross margin. Excluding the impact of restructuring and acquisition-related costs, adjusted operating income for the six months ended June 30, 2019 totaled $173.7 million, or 12.2% of sales, compared to $206.7 million, or 14.6% of sales for the same period last year.

Net earnings for the six months ended June 30, 2019 amounted to $122.4 million, or $0.59 per share on a diluted basis, compared with net earnings of $176.9 million, or $0.82 per share on a diluted basis, for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs in both years, Gildan reported adjusted net earnings of $147.8 million, or $0.72 per share on a diluted basis, down from $186.1 million, or $0.86 per share on a diluted basis for the first six months of 2018.  The decrease in GAAP diluted EPS and adjusted diluted EPS was mainly due to the decline in operating and adjusted operating margin and higher net financial expenses. On a diluted per share basis, the decline was partly offset by the benefit of a lower share count compared to the prior year.

Outlook
With results for the first half of 2019 tracking well within the Company's expectations, the Company reconfirmed its 2019 full year sales guidance projecting sales growth in the mid-single-digit range and updated its full year EPS and adjusted diluted EPS guidance to the upper half of the ranges previously provided. The Company is now projecting 2019 GAAP diluted EPS of $1.80 to $1.85 and adjusted diluted EPS of $1.95 to $2.00, compared to its previous guidance range projecting GAAP EPS of $1.75 to $1.85 and adjusted diluted EPS of $1.90 to $2.00. The Company also reconfirmed its projection for after-tax restructuring and acquisition-related costs for 2019 of approximately $30 million and capital expenditures of approximately $175 million. The Company expects to generate adjusted EBITDA1 in excess of $615 million and continues to project free cash flow for 2019 in the range of $300 to $350 million.

For the third quarter of 2019, the Company is projecting sales growth to be in the mid-single-digit range, lower than previously anticipated due to revised timing of fleece sales. The Company now expects to deliver more fleece than previously projected in the fourth quarter as it continues to ramp up production. We have good order visibility for fleece products for the second half of the year and are improving our fulfillment capability for these high-margin products as we move into the fourth quarter. With lower than previously anticipated fleece sales in the third quarter combined with the impact of continued gross margin pressure from higher raw material and other input costs, as previously communicated, we now expect adjusted EPS growth to be flat in the third quarter.  For the fourth quarter of 2019, we are projecting strong sales and adjusted EPS growth, aligning to our updated full year guidance.  We continue to project solid gross margin expansion in the fourth quarter as increases in raw material and other input costs subside and projected cost benefits from our manufacturing initiatives start to flow through, positioning us with strong momentum heading into 2020.

Declaration of quarterly dividend
The Board of Directors has declared a cash dividend of $0.134 per share, payable on September 9, 2019 to shareholders of record on August 15, 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.

Disclosure of outstanding share data
As at July 26, 2019, there were 203,686,402 common shares issued and outstanding along with 2,255,238 stock options and 95,736 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined 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 Inc. will hold a conference call to discuss second quarter 2019 results and its business outlook today at 8:30 AM ET. A live audio webcast of the conference call, as well as a replay, will be available on its corporate site or on the following link: http://www.gildancorp.com/events. The conference call can be accessed by dialing (877) 282-2924 (Canada & U.S.) or (470) 495-9480 (international) and entering passcode 1359678#. A replay will be available for 7 days starting at 11:30 AM ET by dialing (855) 859-2056 (Canada & U.S.) or (404) 537-3406 (international) and entering the same passcode.

Notes
This release should be read in conjunction with Gildan's Management's Discussion and Analysis and its unaudited condensed interim consolidated financial statements as at and for the three and six months ended June 30, 2019 available on Gildan's corporate website, which will be filed by Gildan with the Canadian securities regulatory authorities and with the U.S. Securities and Exchange Commission.

Certain minor rounding variances may exist between the unaudited condensed interim consolidated financial statements and the table summaries contained in this press release.

 
Supplemental Financial Data
               
CONSOLIDATED FINANCIAL DATA (UNAUDITED)
               
(in U.S.$ millions, except per share amounts or otherwise indicated) Q2 2019   Q2 2018   Variation (%)     YTD 2019   YTD 2018   Variation (%)  
Net sales 801.6   764.2   4.9 %   1,425.6   1,411.5   1.0 %
Gross profit 222.8   215.9   3.2 %   383.5   391.7   (2.1 )%
SG&A expenses 92.0   92.1   (0.1 )%   185.0   184.9   0.1 %
Impairment of trade accounts receivable 0.4   (0.1 ) n.m.     24.8   0.1   n.m.  
Restructuring and acquisition-related costs 16.3   3.0   n.m.     26.9   9.4   n.m.  
Operating income 114.1   121.0   (5.7 )%   146.8   197.3   (25.6 )%
Adjusted operating income(1) 130.4   124.0   5.2 %   173.7   206.7   (16.0 )%
Adjusted EBITDA(1) 174.5   166.0   5.1 %   257.8   290.1   (11.1 )%
Financial expenses 10.6   8.0   32.5 %   19.7   13.2   49.2 %
Income tax expense 3.8   4.0   (5.0 )%   4.7   7.2   (34.7 )%
Net earnings 99.7   109.0   (8.5 )%   122.4   176.9   (30.8 )%
Adjusted net earnings(1) 115.0   111.5   3.1 %   147.8   186.1   (20.6 )%
               
               
Basic EPS 0.49   0.51   (3.9 )%   0.59   0.82   (28.0 )%
Diluted EPS 0.49   0.51   (3.9 )%   0.59   0.82   (28.0 )%
Adjusted diluted EPS(1) <
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