Gildans third-quarter profit jumped 47.3% to $115.8m

Gildan's third-quarter profit jumped 47.3% to $115.8m

Record third quarter profits and booming branded apparel sales for Gildan Activewear have left the Montreal-based company with food for thought over future production capacity.

The business was helped to record profit levels by lower cotton costs, higher unit sales volumes, increased efficiencies and a more favourable product mix – but sales were only up 2.3%, less than expected due to production constraints.

Addressing that concern after the results were announced last week, Gildan CFO Laurence Sellyn admitted that the company’s 10% increase in shipments to Europe would have been more impressive still if more product had been available.

“The capacity constraint was twofold,” explained Glenn Chamandy, Gildan’s founder, president and CEO.

“There’s one that’s mix, in terms of us selling more coloured T-shirts, which take more dyeing capacity, and there’s some disruption in our Bangladesh facility, basically, because [of] some of the political unrest there.

“But that will all be behind us by August, and we should be in a good position going forward from that point.”

Another key factor in Gildan’s success during the three months to 30 June is the early – very early – success of its national branded underwear programme with retail giant Wal-Mart.

“The success of our underwear roll-out to Wal-Mart has been phenomenal,” said Chamandy.

“I mean, it exceeded our expectations: we were pretty aggressive in what we projected in terms of initial roll-out, and we’ve exceeded it [by] between 30% and 40%.”

As the business grows, however, tweaks are necessary – the most recent being the restructuring of the price list for printwear, reflected in the 3.6% decline in revenues in the quarter.

Reducing prices on certain product lines, the company applied the benefits of those cuts to existing distributor inventories, offsetting the impact on margins by eliminating short-term promotions.

In effect, this is a strategic substitution of a lower permanent price for the more volatile tactic of ad hoc promotional activity, but the impact on sales and earnings for the third quarter was, said Sellyn, about US$6m.

He explained: “Firstly, we are using budgeted unspent promotional monies to finance a special distributor devaluation and enhance the profitability of our distributor partners.

“Secondly, we are realigning product pricing to respond to distributor needs and provide more rational pricing for them.”

Sellyn was positive about most of the strands of Gildan’s business during the third quarter, pointing to the “good equilibrium” between cotton costs and printwear selling prices, alongside unit volume growth and increased manufacturing efficiencies.

Those lower cotton costs – which are now swinging slightly back up again, incidentally – helped operating margins for branded apparel to hit 15.1%, up from 9.4% last year and also helped by a more favourable mix of higher-value Gildan and Gold Toe branded products.

Moving to Gold Toe, Gildan remains pleased with its market share performance, highlighting its industry-leading market share in men’s and women’s socks in department stores and national chains, with market share for men’s socks moving beyond 24% in the quarter.

And the company also mentioned additional distribution gains for its Gold Toe G brand, aimed at a younger consumer demographic.

The continued growth of the company as a whole – and the constraints on availability of certain products – raises questions about Gildan’s future investment in production capacity.

The acquisition of New Buffalo in the third quarter is designed to help growth at Gildan’s Anvil business, which acts as a supply chain partner to athletic and lifestyle brands – but Chamandy admitted that it would probably be necessary to double the size of the current New Buffalo facility.

Elsewhere, the accent is on maximising current plant capacity, but Gildan is already analysing options for building a “major textile facility”, and Chamandy indicated that the company is thinking big.

“It will be the biggest, largest low-cost facility in probably our arsenal at that time, by the time we get it up and running,” he said, with indications that construction will commence in 2014.

Gildan also indicated that it continued to monitor potential acquisition opportunities, but Sellyn was quick to point out that these were not necessarily a must-have to drive planned growth.

“The driving force behind continuing to do acquisitions is to utilise our excess free cash flow that we’re generating to create value for shareholders, and not because we need it to do it to drive top-line growth, which we can achieve organically,” he said.

And just how far can that growth go in the longer term? Again, Chamandy is clearly thinking big: “We expect, in 2014, to be the number three brand in underwear in United States,” he said.

“So we’re probably, today, the largest sock provider in the US, and as we continue to grow all of [our] other product categories, we – just like we did in wholesale, we’ll start one share point at a time.

“And, hopefully, in 25 years from now or 20 years – whatever time it takes – we’ll be number one in every single category, and that’s really our objective.”