Gildan Activewear’s CEO Discusses Q2 2012 Results
Good day, ladies and gentlemen, and welcome to the Q2 2012 Gildan Activewear Earnings Conference Call. My name is Valerie, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investment Communications. Please proceed.
Thank you, Valerie. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our earnings results for the second quarter of fiscal 2012. Concurrently, we issued a press release to announce the acquisition of Anvil Holdings. We also issued our interim shareholder report containing management’s discussion and analysis and consolidated financial statements. Securities Commission.
On the call with me today, I’m joined by Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Laurence will first be providing an overview of our second quarter financial results and our business outlook, after which Glenn and Laurence will be taking 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.
I would now like to turn the call over to Laurence Sellyn.
Thank you, Sophie. Good morning. This morning we announced our results for the second fiscal quarter, which were slightly ahead of our previous guidance, and reconfirmed our sales and EPS guidance for the full year. Also, we announced the acquisition of Anvil, which further solidifies our leadership position in the printwear market; creates potential new growth opportunities to build in relationships with consumer brands supplied by Anvil; and provides attractive returns and capital and EPS accretion. We also announced plans to proceed with the modernization and refurbishment of Rio Nance I, which will begin in the third quarter of fiscal 2012 and be completed by the end of fiscal 2013.
Adjusted EPS of $0.23 for the quarter were down from $0.53 per share in the second quarter last year, as the results continue to be significantly impacted by the consumption of inventories previously manufactured with high cost cotton. The average cost of cotton in cost of goods sold in the second quarter was approximately $1.60 per pound compared with approximately $0.85 per pound a year ago, which negatively impacted year over year EPS by close to $0.70 per share and impacted gross margins by close to 2,000 basis points.
Selling prices in Printwear were reduced in the first fiscal quarter to align with current cotton futures and were close to the same level in the second quarter last year. The higher cost of cotton resulted in significantly reduced margins and operating income for the Printwear division, which has historically been highly profitable and a significant cash flow generator for Gildan.
The reduction in printwear industry selling prices in the first fiscal quarter has helped to stimulate a recovery in industry demand in the second quarter. CREST data for the second quarter showed 4.9% growth in demand in the distributor channel compared to the second quarter of last year.
Also, after being capacity constrained throughout most of fiscal 2011, we have regained our market share momentum and strongly reinforced our leadership position in the printwear market. This strong trend in demand for Gildan brand in the channel has continued into the month of April. wholesale distributors had confidence to rebuild inventories during the second quarter. Distributors restocked inventories during the quarter to normal seasonal levels.
We are also increasing our penetration in all of our international screenprint markets, where unit sales volumes in the second quarter were up strongly compared to the second quarter of last year.
Shipments to national accounts were flat during the second quarter compared to the second quarter of last year. We did not achieve our forecasted growth in national accounts due to weak market conditions, in which our national account customers and the retailers which they service were delaying replenishment of inventories.
Despite of the high cotton cost, our Branded Apparel division generated a profit of $1 million during the second quarter compared with a loss of $6 million in the second quarter of fiscal 2011.
Our EPS guidance for the full year remains unchanged at approximately $1.30 per share. distributor channel subsequent to the acquisition of Anvil; selling prices for the Printwear business for the balance of the fiscal year are assumed to be slightly lower than in the second quarter; selling price increases implemented in the retail channel in the fourth quarter of fiscal 2011 are projected to be maintained during fiscal 2012, as Gildan’s selling price increases to retailers did not reflect the full pass through of high cost cotton; cotton costs in the third quarter are assumed to be comparable to the third quarter of 2011. Cotton costs in the fourth quarter of the fiscal year are expected to be significantly lower than the fourth quarter of fiscal 2011, when the cost of cotton was approximately $1.60 per pound; results in the third quarter include a non cash charge of approximately $0.03 per share to write off obsolete manufacturing equipment at Rio Nance I, which is now being modernized and refurbished.
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