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Gildan Activewear (GIL) Q4 Earnings Lag Estimates, Sales Beat

Zacks Equity Research

Gildan Activewear, Inc. GIL posted fourth-quarter 2018 results, wherein adjusted earnings missed the Zacks Consensus Estimate, while the top line surpassed the same. Further, both top and bottom lines increased year over year for the third straight quarter.

Results gained on solid growth in fashion basics, double-digit growth in international and global lifestyle brands, and robust e-commerce sales. Apart from these, reduced SG&A costs and operational efficiencies have also aided performance. 

Gildan Activewear, Inc. Price, Consensus and EPS Surprise

Gildan Activewear, Inc. Price, Consensus and EPS Surprise | Gildan Activewear, Inc. Quote

Q4 Summary

The company reported adjusted earnings of 43 cents a share, up 39% from the year-ago quarter.This can be attributed to increased adjusted operating income and lower share count, partly negated by higher income tax. However, the bottom line missed the Zacks Consensus Estimate of 44 cents.

Moving on, Gildan Activewear generated net sales of $742.7 million, up 13.6% from the year-ago quarter. Net sales in this segment surpassed the Zacks Consensus Estimate of $710 million. The top line was fueled by strong growth in activewear category, partly negated by soft performances in hosiery and underwear categories. 

This Zacks Rank #4 (Sell) company witnessed gross margin contraction of 80 basis points (bps) to 26.3% in the quarter under review, mainly due to elevated expenses of raw materials and other inputs, higher costs related to activewear growth, and supply-chain headwinds. 

Adjusted operating margin expanded 230 bps to 13.5% in the quarter. Moreover, selling, general & administrative (SG&A) expenses as a percentage of net sales decreased 300 bps to 12.9% in the reported quarter.

Revenues in Detail

Sales in the company’s activewear category improved 22.3% to $569.3 million, driven by rise in unit sales volumes, improved product-mix due to higher fleece shipments and increased net selling prices.

Meanwhile, its hosiery and underwear category saw sales decline of 7.9% to $173.4 million, owing to lower sales of Gildan sock in mass and less mass retailer renewal of Gildan underwear, partly negated by shipments under a new private label underwear program.

Delving deeper, the company posted region wise sales for the reported quarter. Sales in the United States, Canada and International areas grew 13.5%, 5.5% and 19.3% year over year to $641.8 million, $34.8 million and $66.1 million, respectively.

Balance Sheet and Cash Flow

As of Dec 30, 2018, Gildan Activewear had approximately $46.7 million in cash and cash equivalents, long-term debt of $669 million and total stockholders’ equity of $1.9 billion. Also, the company generated cash from operations of $274.1 million in the reported quarter.

The company incurred capital expenditure of $26.2 million. Additionally, Gildan Activewear bought back 664,289 common shares worth $19.6 million in the reported quarter. 

Gildan Activewear’s board has also announced 20% dividend hike to 13.4 cents per share payable on Apr 1, 2019, to shareholders of record as on Mar 7, 2019. This marks the company’s seventh successive dividend hike. 

Business Development

During the reported quarter, the company closed its AKH textile facility in Honduras, which was previously acquired as part of the Anvil acquisition in 2012. Production of fashion basics, including socks, at this facility was transferred to its new Rio Nance 6 textile facility. Rio Nance 6 textile facility offers state of the art provisions, with better equipment for more efficient production.

Outlook

For first-quarter 2019, the company expects adjusted earnings to be 24-26 cents per share, a substantial decrease from 34 cents reported in the year-ago quarter. Bottom-line view also stands below the current Zacks Consensus Estimate of 38 cents. The year-on-year earnings decline may be attributable to rise in raw material and other input costs along with sales decline of mid to high-single digit. Delving deeper into the top-line view, hosiery and underwear categories are likely to remain dull. Further, the company anticipates the afore-mentioned product categories to recover in the second quarter.   

Management also provided guidance for 2019, wherein the bottom line is anticipated to grow 10% to $2.00-$2.10 per share, which is below the current Zacks Consensus Estimate of $2.11. This projection doesn’t include $20 million costs related to restructuring plans and acquisitions. Additionally, management hinted that the bottom line in the first half of 2019 is likely to be lower than that in the year-ago period. Moreover, the company projects sales growth in 2019, backed by solid sales volume in core areas including fashion basics, international markets and global lifestyle brands. Apart from these, underwear category is expected to perform well in 2019. Higher selling prices and better product mix are also anticipated to favour sales and offset high raw-material expenses. However, management assumes soft performance in socks and antiwear basics to affect sales. Also, currency headwind is expected to prevail in 2019.

Adjusted EBITDA for 2019 is expected to be $630 million or more. Further, the company sees free cash flow of approximately $350-$400 million.

Price Performance

Shares of this company have gained 16.2% in the past six months, against the industry’s decline of 3.6%.

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Under Armour UAA has long-term earnings growth rate of 22.7% and a Zacks Rank #2 (Buy).

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