MONTREAL – Apparel manufacturer Gildan Activewear said Thursday a weak economy and high cotton prices are expected to pose challenges over the next two quarters, but that it expects to see growth in its international and retail businesses as it expands production capacity next year.
The slow U.S. economy has constrained demand from wholesale screenprint customers, and high cotton costs are expected to strain its margins.
But construction of a new, modern plant will eliminate capacity restrictions that have prevented Gildan from pursuing its planned customer growth.
“Everywhere we’re looking there’s growth opportunities. It has always been a function of capacity, and as we bring on our capacity, we’ll sell it, and we’re very comfortable and confident about the future,” president and CEO Glenn Chamandy said Thursday on a conference call.
While Gildan is the leading North American screenprint supplier, it has a small share in other global markets.
Asian sales increased significantly from a small base during the third quarter, and should more than double next year, Chamandy told analysts.
Gildan, which reports in U.S. dollars, said sales and earnings reached a record level in the third quarter, despite challenges facing the industry.
It earned $94.1 million, or 77 cents per share during the quarter – well ahead of the average analyst estimate of 70 cents per share, according to Thomson Reuters.
A year earlier, Gildan posted profits of $64.7 million, or 53 cents per share.
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Helped by prior price increases, sales increased 34 per cent to $529.8 million, up from $395.3 million a year ago, but below analyst predictions of $553 million.
Recent wholesale industry shipment data has sparked investor concerns over potential weakening demand. And that has raised questions around whether manufacturers will have to reduce prices. Gildan has offered promotional discounts to spur wholesale demand.
Industry sales decreased by nine per cent in the quarter, compared to Gildan’s (TSX:GIL) May forecast for three-per-cent growth, which would have contained the recovery in demand that began a year earlier.
“The cadence of industry demand appeared to deteriorate in successive months in the quarter, with demand in June falling 12 per cent,” chief financial and administrative officer Laurence Sellyn told analysts.
The company assumes weak economic conditions will continue in the fourth quarter, lowering shipments to wholesalers by five per cent.
Even though cotton costs have fallen by 50 per cent from their peak of $2.20 per pound, Gildan is facing a short-term disadvantage because it is using higher cost materials than its competitors.
But that disadvantage should reverse in the second half of next year as it transitions to cheaper cotton purchased as prices began to fall, Sellyn said.
Brian Yarbrough, an analyst with Edward Jones, said Gildan has strong long-term growth opportunities.
“Unfortunately, the next two quarter are probably going to be a little bit murky and that’s what’s spooking investors right now,” he said in an interview.
Gildan’s shares closed down $1.49, or 5.3 per cent, to C$26.48 Thursday on the Toronto Stock Exchange.
Gildan became the world’s largest sock producer with a US$350 million acquisition of Gold Toe Moretz Holdings Corp. The deal increases Gildan’s U.S. retail market share in socks to about 40 per cent from 28 per cent.
The company said the transaction will immediately increase earnings and should generate up to US$15 million in cost synergies over 24 months.
Gildan’s revenues and profits have soared in recent quarters. The company said it is on track to reach $1.6 billion in sales next year. Construction of a massive new plant in Honduras could lift those sales to $2.5 billion, perhaps within three years.
The company’s growth strategy involves expanding U.S. distributor business to capitalize on the recovery, as well as international growth and retail opportunities.
Headquartered in Montreal, Gildan is a leading manufacturer of T-shirts, sport shirts and fleece. It also supplies socks and underwear to retailers.
It has about 29,000 employees worldwide, primarily at its manufacturing facilities in Central America, the Caribbean and Bangladesh.
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