Gildan Activewear Inc. (PPAI 250187, S13) has shared its financial results for the second quarter of 2019, which ended June 30. The Montreal, Quebec-headquartered supplier reports that sales for the second quarter returned to a growth trajectory registering $801.6 million in the quarter, up approximately five percent over the same quarter last year and putting it on track to deliver its full-year sales target of mid-single-digit growth.
The company reports that its growth drivers continued to perform well, including growth momentum in fashion basics, fleece and global lifestyle brand sales. Underwear sales grew more than 50 percent over the prior year quarter, reflecting the launch of a new private label men’s underwear program with its largest mass retail customer. The company notes that it has received confirmation from the retailer that it will be awarded additional shelf space to expand the program offering in the fourth quarter.
For the second quarter of 2019, Gildan generated GAAP (Generally Accepted Accounting Principles) diluted earnings per share (EPS) of $0.49, and adjusted diluted EPS of $0.56, up eight percent over the prior year quarter, reflecting the benefit of a richer product-mix, higher net-selling prices, and a 50-basis point improvement in SG&A (Selling, General and Administrative) expenses as a percentage of sales. These positive factors more than offset pressure from increases in raw materials and other input costs. During the quarter, Gildan also continued to advance manufacturing optimization initiatives and it remains on track to generate gross margin expansion, which it expects to flow through in the fourth quarter.
Gildan’s second-quarter sales of $801.6 million reflected activewear sales of $665.6 million, up 6.5 percent compared to the second quarter of 2018, although this was partly offset by a 2.2-percent decline in the hosiery and underwear category where the company generated $136 million in overall sales. Activewear sales growth was driven by higher unit sales volumes of fashion basics and fleece, volume growth in global lifestyle brand products, and higher ecommerce sales volumes, as well as more favorable product-mix and higher net-selling prices, partly offset by lower unit sales of basics.
While international sales were up slightly, Gildan reports softness in Europe and slower growth in China, particularly in the first two months of the quarter, which the company believes was largely tied to the pace of broader economic activity in these regions. Growth in international sales was stronger in the month of June and Gildan continues to project double-digit growth in the second half of the year.
Gildan incurred $16.3 million of restructuring and acquisition-related costs in the second quarter, compared to $3 million in the same period last year. Restructuring and acquisition-related costs in the second quarter of 2019 are related primarily to previously announced manufacturing optimization initiatives, including consolidation of textile, hosiery, sewing and yarn operations, as well as warehouse consolidation and sales and marketing initiatives.
Operating income for the second quarter of 2019 totaled $114.1 million, down from $121 million in the second quarter of 2018. After excluding restructuring and acquisition-related costs in both years, adjusted operating income for the quarter amounted to $130.4 million, up $6.4 million, or 5.2 percent higher than the same period last year. As a percentage of sales, adjusted operating income for the second quarter was 16.3 percent, 10 basis points better than the adjusted operating margin of 16.2 percent in the second quarter of 2018. The improvement was due to the benefit of SG&A leverage, which more than offset gross margin pressure primarily from higher raw material and other input costs.
Net earnings for second quarter 2019 amounted to $99.7 million, or $0.49 per share on a diluted basis, compared with net earnings of $109 million, or $0.51 per share on a diluted basis, for the same period last year. Excluding the impact of after-tax restructuring and acquisition-related costs in both years, Gildan reported adjusted net earnings of $115 million, or $0.56 per share on a diluted basis, up from $111.5 million, or $0.52 per share on a diluted basis, in the second quarter of 2018. The 7.7 percent increase in adjusted diluted EPS was mainly due to increased sales and adjusted operating margin, as well as the benefit of a lower share count compared to the prior year, partly offset by higher net financial expenses.
Gildan generated $26 million of free cash flow in the second quarter of 2019 compared to free cash flow of $98 million in the second quarter last year, reflecting higher working capital requirements and higher capital expenditures. During the second quarter of 2019, capital expenditures were $56 million primarily for the acquisition of land in Bangladesh and expenditures related to manufacturing capacity expansion initiatives. During the quarter, the company repurchased 2,617,710 common shares at a total cost of approximately $97.4 million pursuant to its normal course issuer bid (NCIB) program. Gildan ended the second quarter of 2019 with net debt of $989.2 million and a net debt leverage ratio of 1.8 times net debt to trailing 12 months adjusted EBITDA, in line with its target leverage range.
