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Gildan Activewear's CEO Discusses Q4 2011 Results - Earnings Call Transcript

We maintained our market share in the U.S. distributor channel at 62.3%, essentially the same as last year. The lower unit sales volumes for activewear were due to a 6.3% reduction in shipments from U.S. distributors to U.S. screenprinters and inventory destocking.

These negative factors were partially offset by the impact of income tax recoveries in the fourth quarter of fiscal 2011, growth in international screenprint shipments, more favorable activewear product mix and the earnings accretion from the acquisition of Gold Toe Moretz.

Compared to the assumptions in our August guidance, the unfavorable impact of weaker screenprint demand and increased promotional discounting in the wholesale distributor channel at the end of the quarter and lower-than-forecast sock manufacturing efficiency was more than offset by the later than anticipated timing of destocking of manufacturer inventories by wholesale distributors, which is now occurring in the first quarter of fiscal 2012 and the benefit of income tax recoveries.

Weak demand and increasing competitive pricing pressure in the screenprint markets have continued into the first quarter of fiscal 2012. Shipments from U.S. distributors to U.S. screenprinters declined by 6.2% in October.

Distributors have been anticipating a reduction in gross selling prices and have been uncertain whether the benefit of any such price decrease will be applied to previously purchased inventories. Consequently, they have not replenished inventories, which have been reduced in the first quarter in order to supply screenprinter demand. The significant destocking of distributor inventories in the first quarter has resulted in excess inventories building up at the manufacturer level and to further discounting in order to try to maintain capacity utilization and capital intensive-producing mills.

This promotional discounting is taking place at the same time that all manufacturers are now consuming inventories produced with high-cost cotton.

Although Gildan is no longer constrained by lack of capacity and is maintaining a high market share, the combination of weak end-use demand and distributor destocking is projected to result in an approximate 40% decline in Gildan's unit sales volumes in the screenprint market in the first quarter compared to the first quarter of fiscal 2011.

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