Montreal-based Gildan Activewear Inc. (TSX—GIL; NYSE—GIL) earned more in the year to October 5. It expects to earn more in the year ahead. This supplier of branded basic family apparel rewards you with rising dividends. In fact, it has just raised its dividend by a fifth, to 52 U.S. cents a year. It also plans to reward shareholders by buying back its own shares. Gildan remains a buy for further long-term share price gains and modest, but rising, dividends.
In fiscal 2014, Gildan earned $362 million, or $2.94 a share (all figures in U.S. dollars unless preceded by a C). This was up by 9.3 per cent from $330 million, or $2.69 a share, a year earlier. These results exclude one-time restructuring and acquisition costs in both years. It also excludes last year’s one-time charge for unwinding hedges and interest rate swaps. Sales grew faster than costs.
Gildan achieved record adjusted fourth-quarter earnings of $123 million, or a dollar a share. This was up by 20.5 per cent from $102 million, or 83 cents a share, a year earlier.
Gildan is changing its fiscal year end. Its years will now end on the Sunday closest to December 31.
Sales and margins both rising
In fiscal 2014, Gildan’s sales climbed by eight per cent, to $2.36 billion. It credits a “higher unit sales volume and more favourable product-mix in both operating segments” (printwear and branded apparel). The company also raised its printwear prices. And an acquisition added $20 million to its sales.
All Gildan’s regular operating costs as a group rose by 7.8 per cent. Since this was up less than sales, it pre-tax income tax margin rose. The company’s income taxes fell by over a third, to only $7 million. In the upcoming year, it expects its effective income tax rate to come in at only 4.5 per cent.
Gildan operates internationally. It has vertically-integrated, large-scale manufacturing facilities—mostly in low-cost Central America and the Caribbean. The company sells to many retailers across Canada and the U.S. But it also sells its products in Europe, the Asia-Pacific region and Latin America. This diversifies its customer base geographically.
In fiscal 2014, Gildan’s cash flow rose by 5.6 per cent, to $453 million. This confirms its higher profits. The cash flow also exceeded its needs: net capital spending of $288 million; an acquisition for $102 million; and dividend payments of $53.2 million.
Could soon be a ‘dividend aristocrat’
Gildan began to pay dividends in fiscal 2011. In that year, it paid 23 U.S. cents a share. In fiscal 2013, the company paid 30 cents a share. Last year, it paid 43 cents a share. This year Gildan will pay 52 cents a share. We expect it to raise its dividend again next year. At that point, the company will become a ‘dividend aristocrat’. In Canada, that’s a company that has raised its dividend for at least five years in a row.
Gildan is seeking to make new acquisitions. It has the means to do so thanks to its growing cash flow and low net debt. Its net debt-to-cash-flow ratio is only 0.2 times, within our comfort zone of two times.
Gildan expects to lose about 30 cents a share in the three months to January 4, 2015. That’s because it will “significantly” reduce its printwear selling prices. The idea is to strengthen the company’s position in the market. It will pass along some of the savings generated by its capital investments, such as its new yarn-spinning facilities.
Rising sales, lower costs driving up EPS
In calendar 2015, Gildan expects to achieve adjusted earning of $3 to $3.15 a share. That’s up from earnings of $2.94 a share in fiscal 2014. It writes that “the projected growth in EPS [Earnings Per Share] in calendar 2015 is due to projected sales volume growth in both operating segments, lower manufacturing costs resulting from capital investment projects, and declining cotton costs…largely offset by the impact of lower Printwear selling prices, higher SG&A [Selling, General and Administrative] expenses including the impact of increased investment in brand advertising and marketing, inflationary cost increases and higher income taxes.” Gildan expects lower cotton prices to add 35 cents to its 2015 earnings per share. It expects manufacturing efficiency to add 20 cents. But lower printwear prices will erase 70 cents a share.
In fact, Gildan could earn more than its forecast. That’s because it has arranged to buy back up to 6.1 million shares. Buying back shares automatically raises earnings per share.
Gildan expects to earn more in calendar 2016. It expects its sales volume to rise while keeping a lid on its manufacturing costs. The company plans to invest $350 to $400 million by the end of 2015 to expand its operations and cut its costs. This should pay off in 2016.
Gildan remains a buy for further long-term share price gains and modest, but rising, dividends.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •1/12/15 •