Gildan Activewear Inc. Q2 FY2025 Earnings Call

Thank you, Jeanine. Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our results for the second quarter while updating our full year guidance for 2025. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today, and they'll also be available on our corporate website. Joining me today on the call are Glenn Chamandy, President and CEO of Gildan; Luca Barile, Executive Vice President, Chief Financial Officer; and Chuck Ward, Executive Vice President, Chief Operating Officer. This morning, as usual, we'll take you through the results for the quarter, and then 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 the 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. Now I'll turn it over to Glenn.

Thank you, Jessy, and good morning, everyone. Our Gildan sustainable growth strategy is on track. We're executing the plan that we have laid out, especially in this fluid environment. Our priority is to control the controllables with discipline and agility. We reported record second quarter sales of $919 million, which were up 6.5% versus last year, driven by strong Activewear sales growth of 12%. We also reported record adjusted diluted EPS of $0.97 a share, an increase of 31% year-over-year, reflecting our focus on profitable growth, and we are very pleased to deliver the strong performance. We continue to demonstrate consistent execution of our Gildan sustainable growth strategy from our Bangladesh facility being ramped up to the continued pipeline of new innovation and finally, ESG with the publication of our 21st ESG report in May. We continue to gain market share in key growth categories. Our sales and distributor channel were further supported by strong demand for our existing brands like Gildan Soft Cotton Technology, Comfort Colors, American Apparel, and from the contribution of new brand offerings under the AllPro brand and Champion. Furthermore, we see solid momentum in our national accounts. Remember, about three-quarters of our expected sales growth in 2025 is expected to come from new programs. We're set to continue to launch additional industry-leading innovation, and we'll continue to focus on operating our global vertically integrated low-cost manufacturing facilities, which will allow us to be flexible and agile in this operating environment with the current tariffs in place. Remember, we have significant U.S. cotton and yarn content in our products. And this allows for significant tariff savings since tariffs do not apply to the value of U.S. content on imported products, which is a clear competitive advantage for us. To mitigate the impact we do have from tariffs, we have implemented pricing action. So with that in mind, we are reaffirming our previously provided 2025 full year guidance, and we are narrowing our adjusted diluted EPS range, all of which are supported by many drivers that should allow us to deliver on our objectives for the full year. In conclusion, despite the prevailing uncertainty, I am confident in our ability to continue delivering as we remain on track to deliver on our three-year objectives for the 2025 to 2027 period, thanks to our solid foundation, our focus on GSG strategy, our strong industry positioning, and our experience in operating in dynamic environments, all with the focus of executing to deliver long-term shareholder value. I'm looking forward to answering your questions after our formal remarks. And now I will turn it over to Luca for the financial review.

Thank you, Glenn. Good morning, everyone, and thank you for joining us today to discuss our second quarter results. Let me begin by covering the specifics of the quarter, and then I will comment on our outlook and guidance for 2025. We reported record second quarter sales of $919 million, up 6.5% year-over-year, in line with guidance provided. This reflected strong performance in Activewear with sales up 12%, driven by higher sales volumes and, to a lesser extent, favorable product mix and higher net prices. We continue to experience strong market response to our recently introduced products, which feature key innovations, including our Soft Cotton Technology. Strong sales to North American distributors were complemented by continued momentum with national account customers, driven by our competitive positioning and the ongoing benefits from recent changes in the industry landscape. During the quarter, we benefited from a slight tailwind from orders being placed in advance of our announced pricing actions. Turning to international markets, sales were down by 14% year-over-year as demand moderated in Europe and softness persisted in Asia due to the macroeconomic backdrop. Furthermore, contributing to a softer quarter for international, we faced a tough comparative period in Latin America, as last year's quarter included large election-related purchases. Moving on to hosiery and underwear, as we expected, sales in this category were down in the quarter. We reported a 23% decrease versus the prior year, stemming from broad-based market demand softness, unfavorable mix, and as previously communicated, some program resets towards the second half of the year. Our gross margin was 31.5%, a 110 basis point improvement over the prior year, primarily due to lower raw material costs, lower manufacturing costs, as well as favorable pricing. SG&A expenses were down year-over-year at $82 million versus $124 million last year, which included significant proxy contest and leadership changes and related matters. As we bring all these elements together, adjusting for restructuring and acquisition-related items in both years and costs related to proxy contest and leadership changes, which were primarily incurred in the prior year, we generated adjusted operating income of $209 million, up $13 million or 22.7% of net sales, flat year-over-year and in line with guidance provided. The company's adjusted effective income tax rate for the quarter was 17.4% compared to 27.2% last year, reflecting the impact of the enactment of global minimum tax in Canada and Barbados with retroactive effect to January 1, 2024. After reflecting higher net financial expenses and a lower outstanding share base, we reported record adjusted diluted EPS of $0.97, up 31.1% year-over-year. Now turning to cash flow and balance sheet items for the first half of 2025. Operating cash flow was $46 million compared to $113 million in the first half of 2024, primarily reflecting higher working capital investments. After accounting for CapEx of $58 million, the company consumed approximately $12 million in free cash flow in the first six months of 2025, while generating $154 million of free cash flow in the second quarter. In line with our strong commitment to return capital to shareholders, during the first six months of the year, we repurchased about 2.9 million shares, returning $206 million in capital to shareholders, including $68 million in dividends. Finally, we ended the first half of 2025 with net debt of about $1.85 billion and a leverage ratio of 2.2 times net debt to trailing 12 months adjusted EBITDA, within our targeted range of 1.5 times to 2.5 times. Now turning to our strategy and outlook. As Glenn highlighted earlier, we are pleased with our execution and the progress made on the three pillars of our GSG strategy. Our new manufacturing complex in Bangladesh is now fully ramped up and performing as expected. Moreover, on the innovation front, we continue to tap into the largest innovation pipeline in the company's history with more product launches to come in 2025 and into 2026. Lastly, touching briefly on ESG, we have released our 21st ESG report in May, which highlights our progress against our next-generation objectives. In addition, Gildan was recognized as one of Canada's Best 50 Corporate Citizens by Corporate Knights for a fourth consecutive year and was once again featured among TIME's World's Most Sustainable Companies, which we believe is a testament to our strong commitment to sustainable practices. For 2025, we are reaffirming our full year guidance while narrowing the range of adjusted diluted EPS. We expect revenue growth for the full year to be up mid-single digits; full year adjusted operating margin to increase approximately 50 basis points; CapEx to come in at approximately 5% of sales; adjusted diluted EPS to be in the range of $3.40 to $3.56, up between approximately 13% and 19% year-over-year compared to our previous guidance of $3.38 to $3.58; and free cash flow is still expected to come in above $450 million. The outlook is underpinned by key assumptions, including the following: Firstly, we have considered the impact of tariffs currently in place in conjunction with mitigation initiatives available to us, including pricing and our ability to leverage our flexible business model as a low-cost, vertically integrated manufacturer. Furthermore, the outlook continues to reflect growth in key product categories driven by recently introduced innovation, the favorable impact from new program launches and market share gains, the expected ongoing benefits from the Barbados jobs credit as well as continued share repurchases under our NCIB program while remaining within our leverage framework. We also anticipate that our adjusted effective tax rate for 2025 will remain at a similar level to what we saw for the full year in 2024. Finally, we have provided guidance for our third quarter with net sales expected to be up low single digits year-over-year, reflecting a timing shift of orders from the third quarter into the second quarter and partly into the fourth quarter. We expect our adjusted operating margin to be in the same range as the second quarter of 2025. We also expect our adjusted effective income tax rate in the third quarter of 2025 to be at a similar level to that of the full year 2024. In summary, we are very pleased with the quarter, and we remain confident in our ability to deliver continued strong financial performance amid the dynamic macroeconomic environment.

Thank you, Luca. This concludes our prepared remarks, and now we'll begin taking your questions. As usual, before we move into Q&A session, I'd like to remind you to limit your questions to two, and we'll circle back for a second round if time permits. Jeanine, you may begin the Q&A session.

Our first question comes from the line of Mr. Paul from Citi.

This is Brandon Cheatham on for Paul. I was hoping that you could help quantify the shifts that occurred in 2Q. How much was taken from 3Q and how much shifts from 3Q into 4Q? And then I just have a follow-up on the underwear and hosiery business. If you could parse out what was the impact from the Nike sock pause versus the core business? And how are you thinking about that segment for the rest of the year? And anything you can share on backfilling the Under Armour business that you previously exited? Like what are you doing with that capacity now?

Okay. Well, thank you for your question. So with respect to the second quarter, it was a very strong quarter. Activewear sales were $822 million. They're up 12% year-over-year. Like we provided on our formal remarks, some of that was aided by a tailwind of orders ahead of pricing action. When you take a look at the second and third quarter really in conjunction, that would yield growth of mid-single digits. We did guide the third quarter to being revenue up low single digits, again, with a very strong performance in Q2 and some of those sales shifting to the fourth quarter. But as a reminder, the revenue was up mid-single digits for the full year. The way to interpret the guidance across the second quarter and the guidance for the remainder of the year is to start with the market assumption. In Q1, the market was down. We had informed the market of that. In Q2, the market was still down but improving. That improvement is expected to continue. The market assumption for the guide is that the market will be down low single digits for the full year. We're reaffirmed our top line and we are really happy with the way sales are progressing, with revenue up mid-single digits. We have also narrowed the range when it comes to EPS by $0.02 on the low and $0.02 on the high, reflecting some of the conservatism that is or uncertainty that's in the market. From a growth perspective, we continue to take market share, with strong Activewear performance even though the market is down. That was the first part of your question. Moving to the second part.

Thank you, Luca. Yes, regarding the other part of your question, as Luca said, we're very happy with our activewear and our new programs delivered during the quarter, but we did have some headwinds, as we discussed a little in the Innerwear area, including delayed store sets and a little market softness. But yes, we do have customers doing some program and product resets that will continue to happen and ramp up throughout the year.

It's not structural. This just will work itself out and will be on, I think, on a better pace as we go into the second half.

Does that imply your second half is positive in the hosiery and underwear business? Anything you can quantify and just how to think about that?

Yes. We've provided the guide for Q3, but sequential improvement is expected in the underwear and hosiery category as we move through the rest of the year.

Our next question comes from the line of Mr. Chris from Desjardins.

It looks like he dropped off, Jeanine. Can we move on to the next one?

Yes, we'll do. Our next question comes from the line of Mr. Jay from UBS.

This is Jay Sole on from UBS. My question is about the comment in the press release, you mentioned that the Activewear business is seeing continued momentum from national accounts, and that's driven in part by continued benefit from recent changes in the industry landscape. Can you just expand on that a little bit and tell us what kind of changes you're seeing and what the opportunity is going forward?

Yes, Jay, it's Chuck. We're continuing to see things move around. Obviously, there's a lot of change going on in the industry also with tariffs and other things in the economic backdrop. As we do that, customers continue to look to different suppliers. One thing we provide, with our globally vertically integrated manufacturing, is stability in an uncertain environment. We're seeing benefits from that. As we see our strong Activewear POS for North America specifically, it is driven by our GLB customers, our retail and large screen printers. The vectors are that we continue to take share, and we're growing specifically in ringspun. Comfort Colors is continuing to do quite well, and we're growing in that.

To add to that, we're well positioned because of our U.S. cotton and U.S. yarn content. We have a lesser impact on the tariffs from Central America. When we look at our manufacturing capacity, we said we're currently running around 90% of our capacity. We have enough installed capacity today to handle the three-year period from 2025 to 2027. We are actually incrementally adding additional capacity in Central America because we believe there will be potential opportunity as we move forward.

Our next question comes from the line of Brian Morrison from TD Cowen.

Glenn, I want to follow up on your comment that you're making, specifically nearshoring national accounts and GLB tariff relocation opportunities. How much can you actually increase the throughput in Honduras? And with the uncertainty that's out there, can you give us some timing and magnitude potentially of the opportunity?

We're adding extra capacity within our existing facilities. We run five operating plants in this hemisphere. We will add a little bit in each plant. I would say that we will be able to yield a good 10% more additional capacity overall in our system, and that will be installed as we go through this year.

So 10% on $550 million per plant, call it, $250 million, is that what we're saying?

I would say probably maybe just a little bit more than that.

My second question is about the Bangladesh facility. I believe you've visited it now. Is it operating at peak efficiency? When will the inefficiencies be cleared from inventory? Also, regarding cash cost savings, I understand it's 25% compared to Honduras. How do you assess this in different tariff scenarios?

We're already seeing the benefit of Bangladesh because we're projecting to have operating margin expansion as we move through the year. A lot of that expansion is coming from our Bangladesh facility. Bangladesh services about half of the volume for international markets like Europe, Canada, Japan, and Australia. We're using U.S. cotton in Bangladesh to offset tariff impacts.

Our next question comes from the line of Mark from CIBC.

I wanted to actually just follow up, Glenn, on your comment regarding price. If you could just expand a little bit on the magnitude of that, the timing, and then what you've seen more broadly from competitors and how they've responded to the tariff pressures?

Pricing is all over the place a little bit because we have different customers with different lead times, and we have also different product categories that have a little bit higher tariffs than others. The pricing is sequentially being rolled out in a very uniformed way. But it's not substantial; I mean, when you look at the price impact, we've mitigated a lot of the tariff costs.

Yes. Okay. Fair enough. Maybe just a slightly different angle then on the pricing side. Maybe first, just if you could clarify if the price actions were consistent across your different channels and segments. And then, if you were to look back, call it six months ago to a free-tariff or unaffected pricing environment, would the price gaps to peers or competitors today be about the same?

Pricing is rolling in the same direction across product lines. There's been really no change because everybody has got the same impact. We have different markets and products with different contributions, and we have been consistent within the market across all categories in which we sell.

Our next question comes from the line of Mr. Martin from Stifel.

I would like to talk, Glenn, about the U.S. distributor landscape. It's been almost a year since two large distributors merged. I was wondering what's been the impact for Gildan? Have they closed warehouses? Have they reduced inventory in the channel? Any color would be great.

We haven't had an impact because our Activewear sales were up 12%. It's a good reflection of the positioning in the market, and we're continuing to take market share. The acquisition integration was finished in Q2. We continue to see positive impacts because there is continuing reduction in brands in the market. We're leveraging our footprint and launching new brands.

And just on the outlook in the market, we're seeing a rebound in consumer confidence, and it looks like concerns about a U.S. recession are abating. So I'm wondering if you're seeing that with your clients, especially regarding corporate promotional activity. Do you expect corporate spending to rebound in H2?

We don't have a crystal ball, but we believe that consumers will come back. Interest rates still haven't moved yet, and when they do come down, it will create consumer confidence again. We're cautiously optimistic and believe that we control what we can control. We're positioned well to deliver strong sales, good earnings, good visibility with all the programs.

Our next question comes from the line of Stephen from BMO Capital Markets.

Just wondering if you can give a little bit of color around the activewear growth components in the quarter. Can you specify what POS growth was by fashion basics, fleece basics, and what you saw in terms of industry growth in Q2?

Our growth is driven by our brand strategies. Our Gildan Soft Cotton Technology is continuing to work well. Comfort Colors brand is on fire, and we have good growth. Our American Apparel brand is gaining traction. We launched AllPro this year, which is a performance-based brand, and our Champion brand is on track to be about a $100 million business over the next three years. Our diverse portfolio and products are continuing to drive and take market share.

We see products launching across each of the categories and channels. We launched new brands and have additional programs with large retailers as well. Meaningful contributions are coming from these new programs.

Our next question comes from the line of Mr. Luke from Canaccord.

I wanted to follow up regarding the outlook for the year, specifically on operating margin perspective. Q4 sounds favorable for sales program wins. How should we frame that relative to raw materials outlook when it comes to cotton cost?

We're guiding operating margin for the year to be up approximately 50 basis points versus 2024. In the second quarter, we had strong gross margins and sub-10% SG&A. The drivers of the operating margin guide for the full year include the ramp-up of our Bangladesh facility and the optimization of our Central American mix and network. These elements are expected to contribute positively to margins.

Is that true for 2026 as well?

We have very good visibility for 2026.

Our next question comes from the line of Mr. Vishal from National Bank.

With respect to market weakness, how do you foresee that evolving in the year ahead?

Right now, we're taking share in the market, which is more advantageous than buying share. We are leveraging our positioning, our low-cost manufacturing, and the consolidation of brands allows us to drive on existing brands. Comfort Colors is the fastest-growing fashion brand in the industry.

Are there indications regarding a new exclusive distribution agreement between Hanes and S&S in North America?

You're going to have to ask them that because I don't want to comment on their strategy. We are growing our Activewear sales; we're well-positioned with our brand strategy and innovation. Our innovation pipeline is strong, and we’re taking share.

Our last question comes from the line of Mr. John from Scotiabank.

Can you give a sense of what the capacity increases in Central America might cost?

We're going to live within our CapEx guide for sure. There’s no big infrastructure to put in. We're expanding in the existing facilities that already have the infrastructure in place. It's a minimal investment for a good return, allowing incremental revenue stream with a more advantaged cost structure.

And on international markets, I wonder if you could add some color here on the macro picture.

Our international businesses are relatively smaller in size due to market dynamics. Our international revenue should be around 10% of our Activewear sales. We expect to have the same positioning in those markets as we do in North America. The market dynamics aren't the same across regions.

In Q3, POS has significantly improved in the first part. We're very comfortable with our target for international sales represented as 10% of Activewear sales.

Our last question comes from the line of Mr. Chris from Desjardins.

If tariffs in Bangladesh revert to a higher rate of 35%, what is the plan to shift the production of ringspun back to Central America, and how quickly will you fill out the unused capacity?

Half of the capacity that we're currently producing is in Bangladesh. If tariffs go up, we have flexibility in our operations. We are using U.S. cotton in Bangladesh to offset tariff impacts.

Even though you narrowed your EPS guidance range, it's still fairly wide. Can you clarify the key differences between the low end and the high end of your EPS guidance?

When looking at the guide, there's some puts and takes. If we see more share gains, that could be accretive. On the risk end, more slowdown in general demand could impact the low end of the range. We're cautiously optimistic about the guide.

This concludes our question-and-answer session. I will now turn the call over to Jessy for closing remarks.

Thank you. We just would like to thank everyone for joining us and attending our call today, and we do look forward to speaking with you soon. Have a great day.

This concludes today's conference call. You may now disconnect.