💙 🔷 Not impressed by Big Tech in Q3? Explore these Blue Chip Bargains insteadUnlock them all

Earnings call: Gildan Activewear Q2 2024 earnings show steady growth

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 11:18 a/m
© Reuters.
GIL
-

Gildan Activewear (TSX:GIL) Inc . (NYSE:GIL), a leading apparel manufacturer, reported a sales increase of 3% to $862 million in the second quarter of 2024, driven by a strong performance in their Activewear segment.

Despite a 16% decline in their Hosiery and Underwear category due to the phase-out of the Under Armour (NYSE:UA) business, the company's gross margin improved to 30.4%.

Gildan announced a new share repurchase program and provided a positive outlook, expecting revenue growth to be flat to low-single-digit and adjusted operating margin slightly above their 18% to 20% target range for the full year. Additionally, they anticipate mid-single-digit net sales growth and mid-teen adjusted diluted EPS growth from 2025 to 2027.

Key Takeaways

  • Gildan Activewear's sales rose to $862 million, a 3% increase year-over-year.
  • Activewear segment sales increased by 6%, while Hosiery and Underwear declined by 16%.
  • Gross margin improved to 30.4% due to lower raw material and manufacturing costs.
  • A new share repurchase program was announced.
  • The company expects flat to low-single-digit revenue growth and adjusted operating margin slightly above 18%-20% for 2024.
  • From 2025 to 2027, Gildan anticipates mid-single-digit net sales growth and mid-teen adjusted diluted EPS growth.

Company Outlook

  • Gildan forecasts flat to low-single-digit growth for 2024, with a slightly higher than target operating margin.
  • The three-year outlook includes mid-single-digit net sales growth and mid-teen adjusted diluted EPS growth.
  • Expectations of strong gross margin performance in upcoming quarters and a 27% operating margin by 2024.

Bearish Highlights

  • Hosiery and Underwear category saw a 16% drop due to the phase-out of the Under Armour business.
  • Challenges in meeting demand for fleece products due to a factory relocation.

Bullish Highlights

  • Strong demand for fleece products with a large order book for upcoming quarters.
  • Market share gains in the US Printwear industry, especially in the fashion segment.
  • Opportunities for growth in fleece, retail, and international markets.

Misses

  • Some orders for fleece products may not be fulfilled in Q3 due to factory relocation, causing spillage into Q4.

Q&A Highlights

  • CEO Glenn Chamandy discussed the impact of cotton prices, stating they will be neutral in 2025 and support inflationary costs.
  • The company is focused on returning capital to shareholders and confident in its organic growth strategy.
  • Chamandy emphasized the competitive advantage and commitment to innovation over the next three years.

Gildan Activewear's management expressed satisfaction with the Q2 results and optimism for future growth. They highlighted efforts to drive operating margins and optimize manufacturing, including increasing capacity at their Bangladesh facility and leveraging SG&A for future growth. The company also discussed its confidence in driving market share gains and delivering shareholder value, with plans to continue share repurchases in the second half of 2024.

Despite some challenges, such as the impact of cotton prices and the temporary decline in point of sale for fleece products due to hot weather, Gildan's management remains confident in their ability to achieve strong margins and growth. They emphasized their competitive positioning in the US Printwear market and the ongoing innovation in their product offerings. The call concluded with a note of gratitude for the participants and anticipation for future discussions.

InvestingPro Insights

Gildan Activewear Inc . (GIL) has not only been performing robustly in terms of sales and operational efficiency, but it also shows promising financial health and shareholder value focus as per the latest data and InvestingPro Tips. With a market capitalization of approximately $6.72 billion and a healthy P/E ratio of 16.91, Gildan demonstrates a strong market position. The company's commitment to shareholder returns is evident, as management has been aggressively buying back shares, a move that often signals confidence in the company's future prospects. Additionally, Gildan has raised its dividend for three consecutive years, showcasing a dedication to providing consistent returns to its investors.

InvestingPro Tips also highlight that Gildan operates with a moderate level of debt, which is a reassuring sign for investors concerned about financial stability. The company's liquid assets exceed short-term obligations, further underpinning its solid financial footing. Moreover, analysts predict that Gildan will be profitable this year, which aligns with the company's positive outlook for the coming years.

In terms of performance metrics, Gildan's gross profit margin stands at an impressive 29.65% for the last twelve months as of Q2 2024, supporting the improved gross margin of 30.4% reported in the article. The company's return on assets is also noteworthy at 11.27%, indicating efficient utilization of assets to generate earnings.

For those interested in delving deeper into the financial nuances of Gildan Activewear, there are additional InvestingPro Tips available at https://www.investing.com/pro/GIL, providing a comprehensive analysis that can further inform investment decisions.

Full transcript - Gildan Activewear Inc (GIL) Q2 2024:

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2024 Gildan Activewear Earnings Conference Call. Please be advised that today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Jessy Hayem, Vice President, Head of Investor Relations. Please go ahead.

Jessy Hayem: Thank you, Jeannie. Good morning, everyone. Earlier we issued a press release announcing our results for the second quarter of 2024, along with our interim shareholder report containing management's discussion and analysis, as well as consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the US Securities Commission today, and they'll also be available on our corporate website. Joining me on the call today are Glenn Chamandy, President and CEO of Gildan; Rhod Harries, Executive Vice President and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing and Distribution. This morning, we'll take you through the results for the quarter and then a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the US Securities and Exchange Commission, and Canadian Securities Regulatory Authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'm very happy to turn the call over to Glenn.

Glenn Chamandy: Well, thank you, Jessy, and good morning, everybody. First, I'd like to take a moment to sincerely thank all of our employees, shareholders and customers and our new Board of Directors for their incredible support to the company and to myself personally over the past several months. I'm very proud to be here today celebrating Gildan's 40th anniversary with our dedicated team. Last fall, I communicated to shareholders that Gildan's positioning had never been stronger with the largest pipeline of innovation in the company's history rolling out this year. Today, I can confirm that everything is on track, and we're continuing to widen our competitive advantage. We continue execute on Gildan's sustainable growth strategy. We're delivering on each of our three pillars where we're seeing significant progress to-date. On capacity growth, our Bangladesh ramp up is on track. We'll be at 75% exit capacity at the end of this year. On innovation, our soft cotton technology is performing well, where we're starting to see good results in the market with positive POS on basics in Q2. On ESG, we just launched our 20th anniversary ESG report focusing on our accomplishments of which we're very proud of. We reported Q2 results that were strong and in line with our expectations with solid top line and strong adjusted operating margins. We also announced in our press release that we're reconfirming our full year 2024 guidance and we're providing our three year outlook. We're capitalizing on our GSG strategy, where we're well positioned to deliver top line growth in the mid-single-digit range, adjusted diluted EPS growth in the mid-teen range over 2025 through 2027 period in line with our supercharge plan. I'm looking forward to answering your questions after Rhod's formal remarks, and thank you again.

Rhodri Harries: Thank you, Glenn, and good morning, everyone, and thank you for joining us today to discuss our second quarter results. I'll start by going over the specifics of the quarter. I'll talk briefly about our new NCIB program, and then I will comment on our outlook and guidance for 2024, before recapping our outlook for the 2025 to 2027 period. So let's get started. As Glenn mentioned in his remarks, the quarter unfolded largely as we anticipated. We reported sales of $862 million, up $22 million or 3% at the higher end of our guidance for the quarter of flat to low-single-digit growth. If we exclude the impact of the phase out of Under Armour, net sales for the quarter are up mid-single-digits year-over-year. This was driven by a strong performance in Activewear, up $45 million or 6%, where we saw increased Activewear shipments reflecting positive POS trends across all channels and geographies as well as favorable mix, which was driven by higher replenishment of fleece by North American distributors ahead of our peak selling season. Strong Activewear sales in the quarter were further reinforced by continued market share gains in fleece and ring spun products, which are key growth categories. We were also pleased to see a positive market response to products that we recently introduced, which feature key innovations such as our soft cotton technology. Finally, in international markets, we performed well in the quarter with sales up by 7%. Turning to Hosiery and Underwear. As expected, this category was down 16% versus the prior year, mainly owing to the phase out of the Under Armour business and to a lesser extent to unfavorable mix and continued broader market weakness in Innerwear. That said, if we would exclude the impact of the Under Armour phase out, our Hosiery and Underwear sales would have been up mid-single-digits year-over-year. Turning our focus to margins for the quarter. Our gross margin was 30.4% versus 25.8% in the prior year, a 460 basis point improvement, primarily due as anticipated to lower raw material and manufacturing input costs. Moving to SG&A. Expenses were $124 million in the quarter and included significant charges related to the proxy contest and related matters, which totaled $57 million in the quarter. These charges are detailed fully in our press release and our MD&A and impact the GAAP numbers. Excluding these charges, adjusted SG&A expenses were down 15% to $66 million or 7.7% of net sales versus 9.3% for the same period last year. The reduction reflected the significant positive benefit of the jobs credit introduced by Barbados as part of their economic policies, which was retroactive to January 1st, 2024, and which totaled $17 million in the quarter. Note that SG&A would have been approximately 9% of net sales if we had reflected the benefit of the jobs credit only for the second quarter as opposed to a retroactive impact. Putting these elements together and adjusting for proxy contest matters, we generated an operating margin of 22.7%, up 620 basis points compared to the prior year, coming in above the high end of our 18% to 20% target range and in line with our previously provided guidance. With the retroactive enactment of Global Minimum Tax in Canada and Barbados, income tax expenses increased significantly year-over-year in the second quarter. In fact, the company's adjusted effective income tax rate for the quarter was 27% compared to 4.8% last year, bringing the year-to-date adjusted tax rate to approximately 18% in line with our expectations. Reflecting higher net financial and income tax expenses and our lower outstanding share base, we reported GAAP EPS of $0.35. Adjusting for the charges related to the proxy contest matters, second quarter adjusted earnings per share were $0.74 versus $0.63 in the prior year, a 17% increase. Moving onto cash flow and balance sheet items. After absorbing a cash impact of $40 million from the proxy contest, cash flow from operating activities was $140 million compared to $182 million in the prior year, which included the net positive effect of a $74 million insurance gain. After CapEx of $36 million, company generated free cash flow of approximately $104 million in the second quarter. Finally, reflecting our strong commitment to returning capital to shareholders, we resumed share repurchases in the final month of the quarter, repurchasing approximately 3 million shares and returning $182 million in capital to shareholders in the second quarter, including dividends. With the current NCIB program approaching expiry this month, our Board of Directors approved a new program to repurchase up to 10% of the company's public float over the next 12 months. We ended the quarter with net debt of $1.24 billion and a net debt to EBITDA leverage ratio of 1.6 times. Turning to our strategy and outlook. As Glenn mentioned earlier, we continue to progress on the three pillars of our GSG strategy, which includes capacity driven growth, innovation and ESG. On the first pillar, we're very pleased with the progressive ramp up of our new manufacturing complex in Bangladesh, which is ramping up fully as planned. On the innovation front, thanks to proprietary cotton technology, we continue to improve fabric softness all while improving printability. We have announced the release of numerous new products incorporating this and other technologies across various product lines and the reception has been positive. Touching briefly on ESG, we're proud of our 20th ESG report issued mid-June, which highlights Gildan's continued progress against key targets, two years into the implementation of our next generation ESG strategy. In this regard, we're also proud of the recognition that we've recently received. In fact, for the third consecutive year, we were recognized as one of the best 50 corporate citizens in Canada by Corporate Knights and we're the only company in the textiles and clothing manufacturing peer group to have received this recognition. Furthermore, Gildan was one of only 12 Canadian companies to be included in the recent inaugural edition of Time's World's Most Sustainable Companies. So all-in-all, a strong recognition for the important work we are doing on the ESG front for all stakeholders. So this brings us to our 2024 outlook. While we are encouraged by the positive demand trends for our products in all our channels in the first half of 2024, the macroeconomic backdrop remains mixed globally, driving a generally cautious consumer spending outlook. Nonetheless, we are reiterating our previously provided 2024 guidance, underscoring our confidence in our continued execution against our GSG strategy. So recapping our guidance for 2024. We still expect revenue growth for the full year to be flat to up low-single-digits, noting that if we were to exclude the impact of the Under Armour license agreement, 2024 full year revenue growth would be in the low to mid-single-digit range. We continue to expect adjusted operating margin to be slightly above the high end of our 18% to 20% target range for 2024. This takes into account the benefit of the refundable jobs credit recently introduced by Barbados as described earlier, which will reduce our SG&A in 2024. We've also incorporated the estimated impact of the recently enacted GMT legislation in Canada and Barbados on our effective tax rate, retroactive to January 1st, 2024. The company's adjusted effective income tax rate is expected to be approximately 18% for the full year. Our adjusted diluted EPS is expected to be in the range of $2.92 to $3.07 up significantly between 13.5% and 18.5% year-over-year. We expect CapEx to come in at approximately 5% of sales and even after absorbing the cash impact for the proxy contest and related matters, we still expect free cash flow to be above 2023 levels. Finally, given the strength of our balance sheet, our expected strong free cash flow and the renewed NCIB program, we plan to continue share repurchases in the second half of 2024 with a revised leverage framework of 1.5 to 2.5 times net debt to adjusted EBITDA. Now providing some color on our expectations for Q3. Net sales are expected to be flat to up low-single-digits year-over-year and adjusted operating margin is expected to come in above the high end of our 18% to 20% target range for 2024 after reflecting the positive benefit of the refundable jobs credit. As Glenn mentioned earlier, today we are also providing our three year outlook for the 2025 to 2027 period and we expect the following. Net sales growth at a compound annual growth rate in the mid-single-digit range. Annual adjusted operating margin to further improve over the three year period as compared to 2024. CapEx as a percentage of sales of about 5% per year on average to support long-term growth and vertical integration. We expect to continue our share repurchases in line with the leverage framework of 1.5 to 2.5 times and we expect adjusted diluted EPS growth at a compound annual growth rate in the mid-teen range. Assuming no deterioration in the current macroeconomic environment, we're confident that our targeted priorities will position the company to continue to drive market share gains in key product categories and unlock further opportunities in target markets. As such, as we further capitalize on the GSG strategy and pursue our disciplined approach to returning capital to shareholders, we believe that the company is well positioned to deliver strong value for shareholders over the long-term. So that's all I wanted to cover from a financial perspective. While we acknowledge that there is a lot going on with our numbers this quarter with the phase out of the Under Armour license, the retroactive impact of the Global Minimum Tax and jobs credits and unfortunately the impact of significant proxy related costs. We are overall pleased with our results and enthusiastic about our outlook. In short, we believe that our cost structure remains well under control. Our balance sheet is strong and we are encouraged by our performance relative to peers as we continue to gain market share in a somewhat mixed environment. So in closing, we want to thank you all for joining us today and for your patience and support during the last several months. We are proud to say that our team has remained very engaged, staying focused on our key pillars and working diligently to create long-term shareholder value. And with that I will now turn it back over to Jessy.

Jessy Hayem: Thank you, Rod. This concludes our prepared remarks and now we'll be taking your questions. Before moving to the Q&A session, as usual, I'd like to remind you to limit your questions to two and then we'll circle back for a second round if time permits. Jeannie, you may begin the Q&A session, please.

Operator: Thank you. The floor is now open for questions. [Operator Instructions] And your first question comes from the line of Paul Lejuez with Citi. Please go ahead.

Paul Lejuez: Hey, thanks guys. 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? You've got some weak competitors out there. I think you would say and I'm curious how that might be impacting the pricing environment, if at all.

Glenn Chamandy: Okay. Well, why don't we start off with the competitive landscape and then maybe Chuck can cover the POS. Look at, I mean, we're continuing to strive and invest and innovate in our market. And look we're developing a competitive advantage. We've widened the gap. We think against a lot of our competitors. You can see some of our competitors have -- Delta has actually filed for Chapter 11. And we think other companies in the industry are not doing well as well. So we're very optimistic that that's an opportunity for us to continue to execute particularly in the areas of growth which is the fashion T-shirt category and fleece where we have a dominant position. So we're very excited, and we think that the landscape is weak and we're keeping widen the gap on our competitive positioning.

Chuck Ward: And Paul, regarding the POS, I mean as we progress through the quarter, we saw improving POS through the quarter overall, with June ending mid-single-digits. First part of July started off a little slower, but it's improved as we've gone through the month to where we're ending July kind of flat to slightly down. But, overall, the strength continues to be in the fleece and the ring spun categories, where we're doing very well and we're taking share. If you look at the market overall, the market was down a bit, but we were up. So we're continuing to see strength in our fleece and ring spun categories. And then overall on the retail side, I would say the Underwear market has been kind of mixed overall. But again we think we're continuing to perform well there. Then on the international front, we're actually seeing great improvement on the international side with international up high-single-digits. Kind of still some mix between the UK and Continental Europe with Continental Europe being higher, but overall good positive growth there in the international markets.

Paul Lejuez: Got it. Have you seen a change in the pricing environment with the Delta situation? Are you doing anything different to take advantage of market share?

Glenn Chamandy: Look, I mean, early in the season, obviously, they were liquidating a lot of inventory, so it put a little bit of price pressure, particularly in our national account segment. But that inventory has dried up pretty quickly. And as we go forward, that would be an upside in terms of stabilization in that segment. And also look the Delta's revenues in this segment were roughly around close to $400 million and that's an opportunity for us as we move into next year. And we continue to focus on driving our national account business, which is where they had, I think, their largest sales penetration.

Glenn Chamandy: Got it. Great. Thank you and welcome back.

Paul Lejuez: And then just and sorry just one last point and pricing is stable in the market.

Glenn Chamandy: Thank you.

Operator: Your next question comes from the line of Mark Petrie with CIBC (TSX:CM). Please go ahead.

Mark Petrie: Yes, thanks. Good morning. I wanted to just follow-up on the comment with regards to fleece. You called out growth, but then Chuck, I think you were saying that the category was softer. Could you just clarify that? And when it comes to Gildan's performance specifically, how much of that would be market share gains versus the restocking that you called out?

Glenn Chamandy: Well, maybe just to start with is that we think that the overall market was down probably around mid-single-digits basically for the quarter. And what Chuck alluded to is that we've done really well really because if you look at our POS in Q2, it started off slow, but in June, we had positive 4% POS in a somewhat down market. So we're gaining share. And all that share gain is coming out of fashion basics and fleece. So we are performing really well. We're taking share. The category is growing. We've seen very, very strong sales in fleece. And we have a huge order book in fleece for Q3 and Q4 already. And we're well positioned to execute on our guidance for 2024.

Mark Petrie: Okay. And 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 six to 12 months in your view?

Chuck Ward: I would say overall, inventory is in line and in balance. As we look at it, you have some accounts that are a little bit better stock than others and others may be a little short. But overall, I would say, it's well in balance. That includes retail distributors. On the international side, I would say, there's areas where it's a little light, but with the Bangladesh ramp up that both Glenn and Rhod talked about earlier. We should see that resolved in Q4 so that we're seeing better inventory positions in international by that point. So again, overall imbalance.

Mark Petrie: Okay. So not expecting inventory to be a positive or a negative other than the Bangladesh the impact of the Bangladesh ramp up giving you some opportunity in international?

Chuck Ward: Yes, that's correct.

Mark Petrie: Yes, okay. Appreciate the comments guys. All the best.

Operator: Your next question comes from the line of Brian Morrison with TD (TSX:TD) Cowen. Please go ahead.

Brian Morrison: Thank you. Good morning and nice feedback in the chair, Glenn. 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 2?

Glenn Chamandy: Okay. Well, I would say that, look, everything is on track with Bangladesh. And maybe just to take a step backwards and you look at Gildan's whole manufacturing system today, we have a lot of room for optimization and continued improvement. And one of the things I think that we've underwent a couple of years ago which is our yarn modernization plan, which is still being completed. So we fully haven't optimized our cost structure of all of our yarn facilities. And another point of reference I think for us would be is that we pointed out that we're only running around 85% capacity. And that's also another big opportunity for the company as we move into the future where we continue to look at filling up our capacity with a much more optimized level. So and then as far as Bangladesh is concerned, we're ramping up the facility. We believe we'll be at 75% of our exit capacity of the facility by the end of this year. And that ramp up is coming also at a cost. So all these big three initiatives are important because these are I think initiatives that will continue to give us some upward momentum in our operating margins as we move forward, as we continue to optimize our manufacturing. And I think we're in a good position. We're looking at Phase 2 right now. We believe within the three year period in terms of our guided CapEx about the 5% that would include actually the development of that facility in our CapEx. And one thing that's happened is that with the growth of fleece and fleece takes a lot more fabric than T-shirts, I mean, three times the amount of material to make a sweatshirt than a T-shirt. So our mix is changing. So we're utilizing our textiles at a much greater extent, so which will allow us to bring on additional textile capacity probably earlier than we originally anticipated and fully utilize our system and bring our costs in a better equilibrium. So everything is I think is working. I did go out and visit all of our facilities since I've been back. I'm planning to with our team inaugurate our facility in Q4 in Bangladesh, which I will be visiting. And we're excited about we continue to execute on our strategy.

Brian Morrison: That's great. Can I just follow-up on that? Is there any impact from the recent civil unrest? And did I understand correctly that it was margin dilutive in Q2, the Bangladesh facility?

Glenn Chamandy: Well, I would say to you, look I mean, in our -- look at -- in our and the point I'm trying to make if you look at the operating margins that we're delivering today, embedded in those operating margins are the start-up of Bangladesh are the inefficiencies of not running our facilities at 100%. And we haven't really optimized our yarn spinning to its fullest. So as we continue to execute and deliver and build these three areas that will allow us to actually increase our operating margins as we move forward. So we've already got really good operating margins and the point is that we've got negative efficiencies embedded in them. And as we move forward and that's what we guided to is that we will have continued improvement in our operating margins. And regarding the civil unrest look it was we were down for a couple of days. I mean nothing happened to our facilities. It was not material to us and we're running full and the business like usual and we're all back working right now.

Brian Morrison: That's excellent. My follow-up question maybe Rhod, I appreciate the operating margin leverage guidance, especially the SG&A call out for the quarter. What do you think is a sustainable level of SG&A inclusive of the Barbados tax credit in our forward outlook?

Rhodri Harries: Yes, Brian. So we try to give you as much guidance as we could on SG&A. And I think, overall, we believe we're performing very well, right? SG&A has been a big focus. It was a big focus under back to basic. And as we've moved into the GSG strategy, we really are delivering on it. So if you look at the call out for the quarter, effectively 7.7% is very low, but we do have the benefit. I indicated that in my remarks that if you adjust for the retroactive impact, we're basically would have been around 9%. And I think if you move forward, we're probably going to be, I would say, near term in that 9%, 9.5% range, right? That's the way to think about it as we move through the year and as we move into 2025. But look bottom line on SG&A, we can leverage it as we go forward. We can get leverage off of SG&A. And I think one of the things that we are excited about and we called that out for the three year outlook that we can improve our operating margin going forward. Some of that's going to come on the gross margin line and some of that's going to come on the SG&A line. But we're in great shape really to deliver margins on a go forward basis as we grow at the higher rates as we start 2025.

Brian Morrison: Thank you very much.

Operator: Your next question comes from the line of Vishal Shreedhar with National Bank Financial. Please go ahead.

Vishal Shreedhar: Hi. Thanks for taking my questions. Rhod, just following up on the comment that you gave us about expansion in gross margin. What was driving that? Is that mix? Or is that pricing? How should we think about it?

Rhodri Harries: So if you look at expansion in the quarter, a lot of the expansion came from improvement in raw material costs and on the manufacturing side. Now we've been flagging that for a long time,Vishal, as you will recall. And we've seen the benefit of that as we with respect to improved raw material costs as we moved into the fourth quarter of last year and then it was moved into the first quarter of this year, second quarter. We'll continue to see some of that as we move forward, but it'll abate, right, because obviously on a wraparound basis, you won't get the level of improvement on a go forward basis. But the margins are performing very well. And as Glenn said, we still have not really seen the full impact of our manufacturing structure with 85% capacity utilization in Central America, the ramp up of Bangladesh still coming through, I would say, we're excited about what we see with respect to the margin evolution. So I would say overall, if you look at the cost side of the business, we're running very well. And then if you go to the top line, I would think all the things that we're very excited about on market share gains with fleece, with ring spun, with product innovation. Product innovation in our basics, which I think is very exciting. The new products, some of our brands are doing very, very well. We haven't talked that much about Comfort Colors, but Comfort Colors are very strong brand and it's flying and that provides support to margins overall. So I would say, again, we've given a three year outlook and we feel good about all of the different areas that are driving margin both from the top line and on the cost structure.

Vishal Shreedhar: Okay. So from so should I take from your answer that in the three year outlook, it's a little bit of everything, the mix, the manufacturing efficiency, the top line leverage. Is that a fair comment or is there any in particular that you'd point out?

Rhodri Harries: No, it is. All of the different areas we're focusing is firing, right? So if you actually look at the three year outlook, our Activewear business is running very well. And if you even if you look at the numbers the past few quarters from a growth perspective, as you look on a go forward basis, Activewear is running very well and it's related to all the things that we've talked about, market share gains, innovation, new programs, international growth, they're all driving the growth as we go forward. So on the Activewear side, you can think of that as a high-single-digit type growth business. On the Innerwear side, it's lower. It's more like a low-single-digit type growth business. But I would say, we are really doing very well across all of the different product categories and channels that we're focusing on. And that is driving that strong, I would say, view of the growth that then ultimately will benefit from that as we bring all of our capacity online and drive, I would say, a really good outlook in that mid-teen EPS compound growth rate over the next three years.

Vishal Shreedhar: Okay. Thank you for that. 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? Or is it when you as you transition the prices of the products will be similar?

Glenn Chamandy: No, we're pricing the products similarly then we haven't changed our prices. And the cost will be absorbed by other manufacturing efficiencies within our system.

Vishal Shreedhar: Okay. And are you seeing higher demand as a result of this transition?

Glenn Chamandy: Well, we're starting to see look, for the first time in Q2, we've actually seen positive POS in basic. So it's -- and it's just being rolled out. So we have I think people who've tried the product, they love it. It prints better. It's softer. It feels better. I mean, so when you're offering a better quality at the same price and better printability, I think, it's a home run. And we think that this is it's actually going to be really, really strong for us.

Vishal Shreedhar: Okay. Thank you.

Operator: Your next question comes from the line of Martin Landry with Stifel. Please go ahead.

Martin Landry: Hi. Good morning everyone. And Glenn, it's great to have you back in the seat. So my first question is on the three year outlook. I was wondering right now if we look at your position in the US Printwear 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?

Glenn Chamandy: Well, look, I mean, with the market in 2023, I think, was down probably a little higher than mid-single-digits and we outperformed the market. I think we're outperforming the market again this year. So I think we're in a good position. We keep taking market share and particularly in the categories of fashion and fleece. But as we look forward, what we've done is we've taken a modest view of the market where we think the market is going to be flat to low-single-digits. And we'll be able to what we think we're going to continue to do is gain share in the fashion segment, continue driving in growth of fleece products. We're going to benefit from our innovation and our basics. And we like we saw in Q2 that we've actually for the first quarter we saw positive POS. The Comfort Colors that Rhod mentioned before is actually doing really well. I mean this is a very strong brand with lots of runway. And we have a lot of runway with American Apparel as well, which we're continuing to spend against and look at driving that product line as well. And we have a lot of new programs in our pipeline. I mean our GLB business is strong. We're working with our retail customer partners. Our international growth has been weak over the last three years and starting to rebound. Chuck mentioned that we've seen good growth and looking to believe that we're on a roll back to driving international again into good growth levels. And as we move forward, I think importantly and as we move forward into 2025, we've got good visibility on all of these factors. So I think we feel very comfortable. We also feel very comfortable on the operating margin side because we're performing well. We're at the same time we have tons of opportunity, I mean, between our yarn spinning, our capacity, our Bangladesh ramp up, our SG&A leverage. I mean all these things working together I think that we've guided with confidence that we can deliver over the next three years.

Martin Landry: Okay. That's -- you've answered part of my follow-up. I was trying to see what is what are your market share assumptions embedded in your three year guidance? And if I understand correctly, I think, you're expecting the US Printwear market to be flat to up slightly over the next three years, flat market share in fleece and T-shirts and maybe market share gains in fashion. Is that fair?

Glenn Chamandy: No, I would say that the market is going to be flat to low-single-digits our assumption for the market. Obviously, we're projecting to grow with the market plus take share in the distributor market. So that's only one part of our business. And then at the same time, we're also going to be taking new programs in retail, GLB, international. So we add all that together, the mid-single-digit is our growth rate.

Martin Landry: Okay. It would be great at some point to get a more clear picture of your market share in the distributor segment, just to get a sense of what more share gains you have ahead of you guys?

Glenn Chamandy: Well, look, we said before that, look, just maybe to answer your question, we have a large share in the basic segment and what we've been saying over the last couple of years is that the area for growth for us in the distributor market is in the fashion basic segment, which we're continuing to take share. So that's the area that we're going to gain the most share. Fleece as a category, we have a large share of fleece, but fleece is growing as a category and it's growing high-single-digits basically every year because people are and consumers are wearing more sweatshirts and we're benefiting from that. And the area that we've seen negative growth has been in basics basically. And we've actually with our innovation, we hope to reverse that trend and get people buying more of our shirts. So I think overall in the distributor business, we're comfortable as well as Comfort Colors is going. And then the point here is that it's not one dimensional. That's still half of our business. The other half of our business, which is our national account business, our GLB, our retail, our international, they're all doing well as well. So the sum of the whole will deliver that mid-single-digit growth. And I think that's what you need to focus on.

Chuck Ward: And Martin, just to add, I think to be clear, we do see fleece market share gain as we go forward, right? We don't, as Glenn said, we have a big share, but we still see more opportunity on the Printwear side. We see opportunity in retail. We see opportunity in international as well. So you made the comment around flat market share there. We're growing market share in fleece, we're growing it in ring spun, and these are really important drivers because they drive volume, they drive mix, they drive price. They really, I would say, are big drivers along with all the other areas that we've talked about. So just to be clear, we're growing share everywhere.

Martin Landry: Okay, super. Thank you and best of luck.

Glenn Chamandy: Thank you.

Operator: Your next question comes from the line of Jay Sole with UBS. Please go ahead.

Jay Sole: Great. Thank you so much. Glenn, a couple of questions. Number one is just given the unusual kind of time period that just went that just played out, did you had some time away from the business? Can you just talk about any insights you had just maybe from just having different perspective looking at the business from where you were versus from before? And then secondly, 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 buyback stock as you increase the leverage? Thank you.

Glenn Chamandy: I'll talk about the first part and Rhod will answer the leverage part. But I would say to you, looking back, I mean, like I said in my comments earlier is that in the fall, I've never thought the company has been in better position on a go forward basis. I mean, everything was firing on all cylinders and we were prepared. We invested in Bangladesh where we knew that that was going to be a key to the success of our fashion basics and also offsetting some of the trends of inflation in Central America. We've developed the largest innovation pipeline on every single product. And we keep mentioning basics, but it's including fleece has been totally revamped. Our Comfort Colors brand. We've got a lot of new technology there as well. So we've spent two years developing all this. So like we were and I would say that in the fall, we were in a breakout mode of really, I think, firing on all these cylinders and taking a step backwards, I was saying to myself, and say look this was a little bit crazy to be honest with you. And now that I'm back I can see that everything is intact. I think that nothing has changed. All those opportunities are still here. I think one thing that I think is important is I think that the team internally, the management team, the employees, all the ranks on file basically are motivated more than ever. And I think that that's the one I think positive out of this whole outcome is that the management team, the company, there's a resurgence of energy, motivation, so it's great. And we're really excited and we're looking forward to over the next few years in delivering great results and creating shareholder value.

Rhodri Harries: And Jay, on the share buyback. So we finished the end of the second quarter with leverage 1.6 times. You can tell we're excited about the strength of the business on a go forward basis. And you can also see that our free cash flow will be very strong as we move through the back half of the year. So as we effectively move through Q3, Q4, we do expect to continue to repurchase shares. And ultimately, we're going to drive towards two times leverage at the end of the year. So we've got a lot of firepower as we move through the back half. And that obviously, we've increased our NCIB by 10% to give us the flexibility to do that. So we again, in parallel with the way that the business is effectively running and the strength of the business, we feel very good about returning capital to shareholders and we plan to do that. And as we move now to the really a midpoint of two times in the middle of our 1.5 to 2.5 times leverage, we expect to continue to buyback at a higher rate as we move through the end of the year. And then as we go into 2025 and 2026 and 2027, again, the strength of the business, return on capital will effectively be, I would say, a meaningful part of our capital allocation strategy as we ultimately combine that with the fundamentals to drive the strong EPS growth.

Jay Sole: Understood. Thank you so much.

Operator: Your next question comes from the line of Stephen MacLeod with BMO (TSX:BMO) Capital Markets. Please go ahead.

Stephen McLeod: Thank you. Good morning, everyone. Good morning, guys. Just a couple of questions I had about industry performance through the quarter. I was just wondering if you could give the POS for fleece and fashion basics, I guess as well as basics for the industry and for Gildan's performance as well. Just to see how you're comparing when you're driving those market gains?

Chuck Ward: Sure. Thanks, Stephen. I think overall, we saw good performance in POS across the board. I mean, as we talked about, it started with the quarter a little slower, but it continued to progress each month. As Glenn mentioned about the basics, we did see positive POS in the basic COE for the first time in a while, and it's really driven by our innovation. We talked about our soft cotton technology, and it's been well received by the market, and I think it's having an impact. And so I think we're outperforming the market in that segment as well. When we look at the ring spun, I mean, if we look at it, we were up mid to high-single-digits in ring spun in the quarter as well. And again, as we look at some of the competitors, they were in the negative range. So we continue to gain share across that. And then on fleece, we're looking at fleece, and we were mid low to mid on fleece and then had the ability to continue to take share from them as well. So I think we're performing well across the markets in each category.

Stephen McLeod: Okay. That's great color. Thanks, Chuck. And then just on the gross margin, I mean, you've talked about the SG&A and how that's expected to evolve in sort of a longer term target. 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?

Rhodri Harries: Yes, Stephen, look, we expect strong gross margin, right? As we continue to move through the year, if you look at what we've guided from an operating profit margin perspective, I made some comments earlier about SG&A. You can see the gross margin will stay strong as we move through 20 -- the Q3, Q4. And again, I mean, all the drivers are in place in order to deliver on that. And then we do expect operating margin growth as we go from 25% to 27% driven by all the things that we've talked about. So I would say, we do believe that we have now, I would say, moved our gross margin really, I would say, a bit higher versus where we've historically run. And that combined with SG&A leverage gives us the strong confidence on our ability to take the, I would say, what will be a very good operating margin when we finish the end of '24 and continue to drive that over the next three years.

Stephen McLeod: That's great. Thanks, Rod. And then maybe just one more if I could. Just on the fleece business, I know you talked about strong replenishment in the quarter. With the warm weather we've been having, have you seen any initial signs of maybe sell-through weakness or has that not really materialized?

Glenn Chamandy: Well, look, I mean POS in the beginning of July was like we said was down and that was pretty much across the board. But that's a function of [indiscernible] basically that went through most of the United States, the hot weather, also 4th of July holiday. So it's come back. We've seen already our POS come back. I mean, fleece in Q2 up until this period is really not the largest POS sell-through when you look at it as a percentage of sales. So distributors bring in their inventory basically and then their large POS time frame is really as we move into the season and into Q4 when you actually get the height of the POS. But the one thing maybe to point out is that, look, we have a huge order book on fleece. We had strong sales in Q2. We have strong demand in Q3 and in Q4. We're actually chasing fleece as we speak today. So we probably won't be able even to deliver all of our commitments in Q3 that may spill into Q4 because back in the fall, we closed down one of our sewing factories and part of our optimization of our sewing cost and we relocated that to Nicaragua. And that ramp up is just taking a little bit longer than we anticipated. So we're a little behind, I would say, in terms of where we want to go in terms of fleece. But we will be towards the end of Q3 and Q4 we'll be back on track. So demand is strong. We have all the orders pretty much in house to continue driving good growth in fleece and we're pushing as hard as we can to fulfill our orders.

Stephen McLeod: That's great. Thanks so much, Glenn. Nice to have you back. Thank you.

Glenn Chamandy: Thank you. Thanks so much.

Operator: Your next question comes from the line of Chris Lee with Desjardins. Please go ahead.

Chris Li: Thank you. Good morning, everyone. Just maybe a first question on cotton. I know that it's been gradually pulling back through the year. And I'm just wondering what you think the impact could potentially be on your margin for next year? Do you think it's going to be neutral or positive? Just some high level comments would be great.

Glenn Chamandy: Well, look, I think just taking cotton in general, cotton has come down. But as if you look at cotton and our overall cost, it's around 25%, right? So as you go forward, I would say, that there's other inflationary items like labor, transportation, energy costs. Labor is going up, particularly in Central America. So I would say that in a typical inflationary environment that we are in today, where you have labor, transportation, energy going up, normally you would see price increases to support those inflationary costs. And I think that the cotton will basically give us a little bit of runway to maintain probably pricing flat as we move into next year and be able to support some of the inflationary areas. So I would say that the whole cotton inflationary impact will be neutral to us as we move forward into 2025.

Chris Li: Okay. That's great. And second question, Glenn, maybe just on M&A. Just wondering where does that rank in your capital allocation? I just ask because as you mentioned some of your competitors are weakening. I'm wondering if there are any potentially attractive opportunities that you think would be a good use of capital?

Glenn Chamandy: Well, look, I think we called out that we've just increased our NCIB. So our focus is to return capital to shareholders. We're very comfortable with our organic strategy, delivering to mid-single-digits, strong and improving operating margins and obviously, which translates into strong EPS, which will obviously give us a good return. So I think that's our priority. I mean some of the competitors that are in trouble today are weak. I mean there's not a lot of value associated with them and their equipment because we've got capacity available to us today. And I think we can get all those sales organically. So as far as we're concerned, I think, we're in a really good position. We're competitive we're widening our competitive advantage. We've got a large wave of innovation across all segments of the company. We're firing on all four cylinders. So we're going to stay focused right now and continue to deliver on our strategy that we just called out over the next three years.

Chris Li: It's great to hear and welcome back.

Glenn Chamandy: Thank you.

Operator: That concludes our Q&A session. I will now turn the conference back over to Jessy Hayem for closing remarks.

Jessy Hayem: Thank you, Jeannie. Once again, we'd like to thank everyone for joining us and attending our call today and we look forward to speaking with you soon. Have a great day.

Operator: This does conclude today's call. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.