Gildan has gained from locating production close to its main markets

Gildan has gained from locating production close to its main markets

The rise and fall of cotton pricing is having a continued impact on the results of Canadian apparel business Gildan Activewear – a boost in the fourth quarter, and a burden in the months ahead.

In announcing a near-9% rise in fourth quarter earnings – and a doubling of them for the full year – the business had much to thank the recent decline in cotton pricing for.

But the coming months of the new 2014 financial year will be a different affair: CFO Laurence Sellyn warned of “sequentially higher” cotton costs in the first half of the year, before comparisons ease and even improve at the back end of the year.

The net result, however, will be overall annual costs at a similar level to the fiscal year just past, Sellyn said.

The effects of the cotton rollercoaster are felt beyond Gildan’s cost base, with printwear sales in particular impacted by falling prices, which led to an 18.7% volume uplift, but revenue gains of only 12.5% as those cotton savings were passed on to customers.

However, Sellyn also indicated that “higher cotton costs in the first half are not currently assumed to be fully passed through into higher selling prices, as cotton prices have now declined significantly from their recent peak”.

Beyond cotton, Gildan’s final quarter and the year as a whole were marked by a significant boost to its international business, with shipments to Europe and Asia Pacific rising 37% in the three months to 29 September.

Branded apparel revenues were up 9.4% thanks to new retailer programmes involving the Gildan underwear and Gold Toe socks brands, as well as improving sales for the premium Gildan Platinum and Gold Toe G brands.

This positive news, however, had unwanted consequences for the company: “We continued to be impacted by capacity constraints in the quarter,” Sellyn told analysts.

“In particular, we were unable to fully satisfy seasonal distributor demand for fleece.

“Also, although shipments to Europe increased by over 30%, we were unable to fully capitalise on our strong momentum in the distributor channel in the European market due to lack of product availability.”

Production investments
This bottleneck in production helps, in part at least, to explain a planned spike in capital expenditure by Gildan in the year ahead – it’s set to roughly double to US$300-350m.

Of that figure, about half is to be spent on new yarn-spinning facilities, alongside the planned ramping up of production from the company’s Rio Nance I facility and the completion of modernisation work at the Honduras textile factory formerly owned by acquisition Anvil.

But the company is already looking further ahead to longer-term expansion of textile capacity, analysing two sites in Central America, but not – this time – in Honduras.

“This will ensure that we continue to leverage our existing manufacturing infrastructure and best practices, and that our manufacturing facilities continue to be strategically located to service our target markets in North America, including supporting the penetration of our brands with US retailers,” Sellyn said.

Gildan is set to finalise the location of the new facility in the second quarter of fiscal 2014, with investment due to begin early in the second half, construction work to take place during fiscal 2015 and production to be ramped up in fiscal 2016.

Relocating orders
Gildan’s policy of locating production close to its main markets is showing signs of being imitated as a consequence of recent compliance scares involving worker safety in Bangladesh, according to company CEO Glenn Chamandy.

Asked about orders relocating from Bangladesh to central America, Chamandy said: “Look, definitely it’s going to happen…A lot of energy has been spent on compliance of labour, not a lot of effort has been based on compliance of other aspects of building structures, waste water treatment, etc.

“So I think there’s more scrutiny in terms of dealing in these countries, I mean it’s a lot of reputational risk…People are going to continue to look to produce more goods in this hemisphere.”

And this, Chamandy said, showed that Gildan was “positioned right” at the start of the new fiscal year: “We’re investing in manufacturing and this is really what our key core competency is, having low-cost manufacturing, combining it with quality brands and providing value to all of our customers.”