Gildan Activewear Inc. (NYSE:GIL) Q4 2023 Earnings Call Transcript
Gildan Activewear Inc. (NYSE:GIL) Q4 2023 Earnings Call Transcript February 21, 2024
Gildan Activewear Inc. beats earnings expectations. Reported EPS is $0.75, expectations were $0.72. Gildan Activewear Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jeanie and I will be your conference operator today. I would like to welcome you to the Q4 2023 Gildan Activewear Earnings Conference Call. 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]. Thank you. I would now like to turn the call over to Jessy Hayem, Vice President, Head of Investor Relations. You may begin your conference.
Jessy Hayem: Thank you, Jeanie. Good morning, everyone. Earlier we issued a press release announcing our results for the fourth quarter and full-year 2023 as well as our first time guidance for 2024. The company's management discussion and analysis and consolidated financial statements are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today and will also be available on our corporate website. Joining me on the call today are Vince Tyra, President and CEO of Gildan; Rhod Harries, our 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 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 U.S. 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'll turn it over to Vince.
Vince Tyra: Thank you, Jessy. Good morning everyone, and welcome. I've been looking forward to engaging with you all, and I'm thrilled to address you today in my first earnings call as the newly appointed CEO of Gildan Activewear. As for the results, we delivered a solid Q4, thanks to the outstanding operational execution by our highly skilled team of employees across our global footprint. In fact, 2023 was a year of strong progress on Gildan's sustainable growth strategy, despite an overall challenging macroeconomic backdrop and tough year-over-year comparative periods. This foundation, together with a solid balance sheet puts us in an enviable position, enhance upon it as we go forward. In my early weeks with the company, I witnessed firsthand the incredible talent and dedication of the Gildan team.
I've been a participant in this industry for several decades as an operating executive and in other capacities, and Gildan's powerful manufacturing engine is truly a key differentiator. I look forward to leveraging Gildan's strengths, our incredible team and my experience to drive this organization's long-term growth and create value for shareholders. And I'm working closely with the leadership team and the Board to find opportunities to further leverage our strong foundation and drive strong and durable growth in the future. Finally, as I've been onboarding with our great company, I've had the opportunity to visit with 100 of employees in Montreal and Honduras and have recently met with many of our key customers during the recent Industry Trade Shows in Las Vegas, Nevada and Long Beach, California, which is fueling my excitement for the future.
It was great to reconnect with many familiar faces in the industry as well and gain their perspective on our company as well as the industry. And I'm personally looking forward to sharing my views with you in the months ahead as we leverage our strong capabilities and innovation to create further opportunities going forward. I look forward to taking your questions a little later during the Q&A session. And with that, I will turn it over to Rhod.
Rhodri Harries: Thank you, Vince. Good morning to all and thank you for joining us today. I'd like to start the call by thanking the entire Gildan team for everyone's excellent work and dedication through 2023 leading us to a strong finish to the year. We delivered sales growth of 9% in the fourth quarter, adjusted operating margin at the high-end of the company's target range, double-digit EPS growth and we generated robust cash flow allowing us to execute on our capital allocation priorities. We are now two years into the Gildan Sustainable Growth Strategy or GSG Strategy and we are pleased with the progress made across our three key strategic pillars, but also excited to capitalize and further enhance all of the work that has been done in 2023 as we enter 2024.
I will expand on this shortly along with our outlook for 2024, but for now let's shift our focus to the fourth quarter results. Net sales for the fourth quarter came in at $783 million, up 9% with activewear sales at $644 million, up 8% and hosiery and underwear sales at $139 million, up 11%. The increase in activewear sales was fueled by higher volumes driven by POS as well as higher levels of customer replenishment than the prior year. We specifically benefited from healthy POS levels and continued strong performance in key growth categories such as fleece and ring spun T shirts, which translated into favorable mix versus last year. Finally, our international sales were down 24% in the quarter despite some POS recovery as difficult macroeconomic conditions in these markets led to lack of inventory replenishment compared to the prior year.
Turning to the hosiery and underwear category. The sales increase was fueled by higher volumes driven by a combination of POS with pockets of strength notably in global lifestyle brands, as well as the continued rollout of programs in the mass retail channel. So despite continued industry weak demand for men's underwear and socks, we continue to achieve a solid performance in this category. Wrapping up on sales, overall we are very pleased with the performance that we delivered in the quarter in the context of what continues to be an uncertain environment for consumer spending as we move from 2023 to 2024. Turning to the margins for the quarter, adjusted gross margin came in at 30.2%, up 110 basis points year-over-year, primarily due to lower raw material costs slightly offset by lower net selling prices.
As fully expected, we saw a sequential improvement of 270 basis points in our adjusted gross margin as pressure from the flow through of peak cotton costs subsided significantly in the fourth quarter, and as we previously called out, this will continue to be a tailwind as we move through 2024. Moving on to SG&A. Expenses were $88 million or 11.3% of sales, including CEO separation costs and related advisory fees on shareholder matters. On an adjusted basis, as a percentage of sales, SG&A was up 30 basis points to 10.5% as the impact of higher year-over-year expenses more than offset the benefit of sales leverage. Looking at our overall SG&A performance in 2023, we continue to be pleased with how the team managed SG&A in this inflationary environment and we expect this performance to continue as we move forward.
So summing up these elements in the quarter, we generated an operating margin of 22.8% of sales. Now as part of an annual impairment testing requirements and given improved profitability projections related to our hosiery sales, we recorded a $41 million reversal of prior hosiery related impairment charges. Adjusting for this, as well as for restructuring costs in both years and an insurance accounting gain in 2022, we generated adjusted operating margin of 19.7%, up 90 basis points over last year at the high end of our target range of 18% to 20% and in line with our expectations. Further, after reflecting net financial expenses of $21 million and factoring in continued share repurchases, we reported GAAP diluted EPS and adjusted diluted EPS of $0.89 and $0.75 respectively.
Turning to cash flow and balance sheet items. Cash flow from operating activities totaled $239 million with free cash flow coming in at $203 million driven by higher adjusted net earnings together with lower working capital investments and lower CapEx. The strong finish yielded full-year cash flow from operating activities of $547 million and free cash flow of $392 million. The significant increase in free cash flow in 2023 which albeit came in a little lower than previously anticipated, reflected lower capital expenditures as well as lower working capital investments versus the prior year when we were working higher to bring inventories to higher and more optimal levels during the pandemic. The progressive ramp up of our new large scale Bangladesh facility is underway, which will continue through 2024 and as planned, we exited 2023 at a capacity run rate of around 25% and continue to expect an exit rate of about 75% at the end of 2024.
Finally, and importantly, we ended the year with very satisfactory inventory levels and in a strong position to service our customers as we move through 2024. Moving on to our NCIB, our robust buyback activity this quarter underscores our strong cash flow generation and commitment to delivering value to our shareholders. In fact, in 2023, we repurchased approximately 11.5 million shares under our NCIB program or close to 7% of our public float, returning a total of $492 million of capital to shareholders for the year including dividend payments. And given the strength of our free cash flow, even with the significant return of capital during 2023, our net debt finished at $993 million at year end with a net debt leverage ratio of 1.5 well within our 1x to 2x targeted debt levels.
This brings me to a few thoughts on our GSG strategy and our outlook for the year ahead. We've made strong progress on our three key strategic pillars, optimizing our capacity, fostering innovation and implementing our next generation ESG strategy. We've also successfully executed on several components of the financial framework we laid out. While our revenue growth during 2023 was hindered by an industry wide soft demand environment, driven by the challenging macroeconomic backdrop, we have nonetheless continued to drive market share gains in key product categories and this positions us well as we move forward, leveraging our strong capabilities in the target markets that we serve. So for 2024, we expect the following: Revenue growth for the full-year to be flat to up low single-digits.
Adjusted operating margins slightly above the high end of our 18% to 20% annual target range, CapEx to come in at approximately 5% of sales, adjusted diluted EPS in the range of $2.92 to $3.07 up significantly between 13.5% and 19.5% year-over-year. Free cash flow above 2023 levels driven by increased profitability, lower working capital investments and lower capital expenditures than in 2023. Further, the outlook that I just laid out is underpinned by some key assumptions including the following. Our outlook assumes that POS trends continue to improve compared to 2023, reflecting potential for recovery in various markets as well as overall growth opportunities. Our sock license agreement with Under Armour is expiring late March, which is expected to have a minimal impact on our profitability.
Excluding the impact of this agreement and on a comparable basis, our outlook implies full-year revenue growth in 2024 would be more in the low to mid-single-digit range. We also assume continued share repurchases in 2024, further demonstrating our belief in the strength of our business and our commitment to optimizing capital allocation, and we expect to maintain our debt leverage ratio within our target range of 1x to 2x. Finally, as discussed last quarter, the timing of the potential enactment of legislation related to Global Minimum Tax or GMT in Canada remains uncertain. We have nonetheless incorporated into our guidance the estimated impact of the implementation of draft GMT in Canada and Barbados retroactive to January 1, 2024 as well as certain expected refundable tax credits which will reduce our SG&A.
I also want to provide you with an update on the current quarter. While we expect positive POS trends across the board in 2024, POS has been somewhat mixed so far in Q1 with good strength in certain important activewear areas such as in fleece and ring spun products, but with more variability in other areas such as with underwear in the hosiery and underwear category. Moreover, and more importantly with respect to Q1, we expect the higher levels of customer replenishment that we saw in Q4 will impact the level of restocking that will take place in Q1. As such, we currently expect Q1 net sales to be down low single-digits and expect Q1 adjusted operating margin to come in around the low end of our 18% to 20% target range. So in conclusion, I'd like to leave you with a few thoughts.
Following the multi-year volatility related to the pandemic, we saw normalizing inventory and replenishment patterns as we move through 2023. But it was a challenging year overall given the impact of the macroeconomic environment and we are pleased with the progress we achieved. As we begin 2024, we feel that Gildan is well positioned to continue to win in our markets regardless of the macroeconomic backdrop. While we expect continued momentum in the imprintables market, end user behavior continues to be affected by inflationary pressures weighing on buying patterns, still leading some of our customers to place orders closer to their needs and managing their inventory and replenishment levels more tightly. That said, we expect demand for replenishment type products to continue to normalize as we move through the year given the nature of the products we sell.
Furthermore, our in stock levels are in great shape and we have significant flexibility in our manufacturing system and a healthy balance sheet. We also remain encouraged by market share gains in key growth categories such as fleece and ring spun and are incredibly excited with our recent product innovation. As introduced at the Impressions Trade Show in January 2024, these products feature softer fabric and enhanced printability based on our new proprietary soft cotton technology, which is expected to further enhance our competitive positioning. Consequently, you can see we're continuing to leverage the GSG strategy to drive organic growth and remain confident in our ability to drive shareholder value into the future. We thank you for your interest and support in our company.
This concludes my formal remarks. And with that I'll turn back over to Jessy.
Jessy Hayem: Thank you, Rhod. Before moving to the Q&A session, I'd ask you to limit the number of questions to two and we'll circle back for a second round of questions if time permits. Finally, please note as the purpose of today's call is to discuss Gildan's results for the fourth quarter and year ended December 31, 2023, we will only address questions relating to our financial results and guidance and related operational matters. Jeanie, you may begin the Q&A session.
See also 11 Best Semiconductor Stocks To Invest In for the AI Boom and Goldman Sachs Penny Stocks: Top 12 Stock Picks.
To continue reading the Q&A session, please click here.
