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Gildan Activewear’s GIL CEO Glenn Chamandy on Q3 2014 Results

Welcome to the Q3 2014 Gildan Activewear Earnings Conference Call. My name is Angela, and I’ll be your operator for today’s call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn your call over to Ms. Sophie Argiriou. Sophie, you may begin.

Thank you, Angela. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the third quarter of fiscal 2014 and our Interim Shareholder Report containing management’s discussion and analysis and consolidated financial statements. Our call today will begin with Laurence taking you through our third quarter performance and our business outlook for the fiscal year and will be followed by a question and answer session, during which Glenn and Laurence will respond to your questions. Private Securities Litigation Reform Act of 1995. Such forward looking statements 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.

And with that, I’ll turn the call over to Laurence.

Thank you, Sophie, and good morning. Today, we announced our results for our third quarter and provided sales and earnings guidance for our fourth quarter. Our Q3 results were as projected in May, and our projected quarterly sales and earnings for the fourth quarter would be a record for any fiscal quarter in the company’s history, even though the third quarter is the peak selling season for T shirts.

Consolidated sales revenues increased by approximately 13% in the third quarter, compared to the third quarter of last year, driven by strong unit volume growth in all our target markets in both operating segments. Our brands continue to achieve market penetration in retail, in spite of production constraints, which limited our ability to maximize our sales growth opportunities.

Branded Apparel sales were up by 16% over a strong Q3 comparative from last year, which included the initial stocking of our national underwear program. NPD data shows that the Gildan brand achieved a 6.5% share in men’s underwear in the June quarter in less than one year since the start of our first major national Gildan branded underwear program and is now the number three underwear brand in market share.

We generated double digit growth in all product categories and continue to de emphasize private label programs. In addition, we began the ramp up of major new programs for global lifestyle brands in both activewear and socks. International sales in Printwear also grew strongly. Sales through international markets in Europe and Asia Pacific region were up over 40% compared to the third quarter of last year.

Growth in these geographical markets was partially offset by lower sales through Mexico, where overall market conditions were weaker than last year. Sales growth in the third quarter benefited from the extra week, which we take every sixth year to maintain the alignment of our 52 week fiscal year with the calendar year. The benefit of the extra week this year was mitigated as it included the extended the extended July 4 holiday.

In spite of the strong growth in sales revenues, EPS was the same as the third quarter of last year. The positive impact of the strong growth in unit sales volumes, together with higher Printwear selling prices, including the non recurrence of a distributor inventory devaluation charge in the third quarter of last year and a higher value product mix was fully offset by higher cost cotton, which negatively impacted results in Q3 by close to $0.10 per share and a $0.17 per share impact of inflationary cost increases and manufacturing inefficiencies, which primarily impacted results for Branded Apparel. These inefficiencies were largely anticipated and were discussed on our Q2 call.

As a reminder, the result primarily from the short term impact on production of installing new sock manufacturing equipment, new equipment to the former Anvil textile facility, a new underwear knitting equipment to Rio Nance 1, as well as the impact of the training of new operators to support the doubling of underwear manufacturing capacity in fiscal 2015.

In addition, we incurred unanticipated rework and repackaging costs in Branded Apparel in the quarter to service key retail programs and mitigate the impact of production constraints. These manufacturing inefficiencies and inflationary cost increases negatively impacted consolidated gross margins in the third quarter by over 300 basis points, resulting in a decline in consolidated gross margins to 28%, compared to 31.5% in the third quarter of last year. The impact on gross margins for Branded Apparel in the third quarter was approximately 700 basis points, which was partially offset by volume leverage on SG expenses as a percentage of sales.

Selling prices for Branded Apparel have not been increased at this point, in order to drive market share penetration as we build our initial brand platform in retail. EPS for the fourth quarter are projected at $1.06 to $1.09 on sales revenues in excess of $700 million. Although, fourth quarter EPS are projected to be a record for the company, up 28% to 31% compared with the fourth quarter of last year.

Our full year guidance is now projected to be at the low end of our previous range. The reduction in projected EPS for the fourth quarter and full year compared to our prior guidance is primarily due to $0.02 per share dilution from acquisition of Doris due to the accounting requirement to include the concept of a manufacturing margin in opening inventories, continuing manufacturing inefficiencies and slightly more unfavorable product mix.

Excluding the impact of Doris, which is projected to add $20 million to sales revenues in the fourth quarter, sales revenues for Branded Apparel are projected to increase by approximately 30% Rio, 30% compared to the fourth quarter of last year. Underwear sales in the fourth quarter are forecast to more than double, compared to the fourth quarter of last year. Overall sales of Gildan branded programs are projected to increase by approximately 70% and sales of Gold Toe branded programs are expected to increase by over 20%.

The projected growth in EPS in the fourth quarter, compared to Q4 of fiscal 2013 is primarily due to sales volume growth. Manufacturing efficiencies in the fourth quarter, including the initial benefit of new capital investment projects are projected to be slightly positive in spite of the continuing transitional manufacturing inefficiencies and inflationary cost increases.

Cotton costs and cost of sales in the fourth quarter are expected to be comparable to the fourth quarter of last year. Cotton costs in the first half of fiscal 2015 will be higher than the fourth quarter as we consume higher cost cotton purchased during the recent spike in the price of cotton. Cotton costs in the second half of fiscal 2015 are expected to be lower than both the first half of fiscal 2015 and the second half of fiscal 2014.

We have maintained our guidance for capital expenditures in fiscal 2014 at close to $350 million. About half of the fiscal 2014 capital spending is for our three new yarn spinning facilities, including the ramp up of the Salisbury ring spun yarn facility, which began operations in the second quarter and is ramping up according to plan. The balance is primarily for our textile and sock manufacturing operations in Honduras and a new Honduran distribution center, as well as the initial investment to purchase land, and initial project planning and preparation for our new textile facility in Costa Rica.

In order to alleviate capacity constraints and bridge capacity requirements to the construction and ramp up of the new Costa Rica facility, we have today announced that we have begun site development for another new textile facility, which will be located at Rio Nance and be used to support our strategy to introduce more high value products.

This facility is planned to have similar production capacity as Rio Nance 1, but will be larger in size in order to accommodate sophisticated equipment and technologies to produce high value products. It is expected to begin production in time to support our sales growth in fiscal 2016. The Costa Rica facility will now begin production in 2017. The two new facilities, when completed, will provide an increase in textile capacity of approximately 40% compared to our current footprint today as we exit fiscal 2014.

In summary, our results and outlook provided today reinforce our continuing progress in successfully implementing our growth strategies and executing on the growth and value drivers that we have communicated. We are achieving strong top line growth in sales revenues through developing our portfolio of consumer brands and retail, and continuing to build on our industry leadership position in Printwear.

The success of our initial Gildan, Gildan Platinum and Gildan Smart Basics branded programs is continuing to result in new branded programs, increased shelf space and better placement within retailers, as both retailers and consumers recognize our value proposition of better quality and design features for basic family apparel and innovation combined with lower prices.

We’ve been continuing to build on our leading market share for Gold Toe men’s socks and have had great success in leveraging the Gold Toe brand and brand extensions, in particular G by Gold Toe into other markets and other product categories.

In addition, we will begin to ship the new Mossy Oak underwear program in the current quarter and have obtained other new programs for the Mossy Oak brand in all product categories for fiscal 2015. The Mossy Oak brand is continuing to generate high interest in multiple channels of distribution.

We are continuing to support our brands with major capital investments in our vertically integrated manufacturing to further differentiate our product technology and product quality and widen our cost competitive advantage, including our two new textile facilities and our three new yarn spinning facilities. While the rapid pace of change is resulting in some short term stress in our manufacturing operations to support our growth, we are confident in achieving the significant manufacturing cost savings, which we have projected.

Finally, we are excited about the revenue synergies, which we project to achieve from the acquisition of Doris, which closed early in the fourth quarter. Doris is the third largest marketer of branded ladies legwear in North America and the market leader in Canada. Its company owned brands include Secret, one of the most recognized sheer pantyhose brands and a growing brand for shapewear in Canada, the Silks brand and Therapy Plus, which provides therapeutic legwear solutions for medical conditions and everyday activities.

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