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Shrinking T-shirt sales cut into Gildan's earnings

Gildan products displayed at their annual general meeting in Montreal on January 31, 2008.

Christinne Muschi/christinne muschi The Globe and Mail

Even the T-shirt, that staple of every wardrobe, cannot provide reliable profits in today's marketplace.

Gildan Activewear Inc. , which has made more than 5 billion of the garments in its time, warned investors Thursday that high cotton prices and weak demand will cause it to post its first quarterly loss in 10 years this quarter.

News that an expected profit of 30 cents (U.S.) a share would actually be a loss of 40 cents sent investors into a panic. Gildan lost more than 30 per cent of its market value in a hectic trading session.

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"No one is happy when the stock goes down, but this is a reaction to short-term issues," chief financial officer Laurence Sellyn said in an interview. "We're still feeling very good about the business. If we achieve the projections that we gave today for the balance of the year, we'll be back in a good profit trajectory by the end of the year."

Montreal-based Gildan is one of the biggest providers of apparel to North American wholesalers. About two-thirds of its forecasted $1.9-billion in revenue this fiscal year will come from selling T-shirts, sports shirts and fleece tops to distributors, which in turn sell them to screen printers who put customized logos on them.

But screen printers have cut back on orders as they work through extra inventory and wait for lower cotton prices. The net effect is that Gildan expects to ship 40 per cent fewer pieces of clothing for screen printing than it did a year earlier.

In response, the company is lowering the prices it charges U.S. wholesalers. In addition it will shut down its factories over Christmas for an extra 12 days to reduce inventory.

The company is banking on "a significant reduction" in its cotton costs in the second half of the year. Prices surged to a record $2.15 a pound last March and most recently traded near 91 cents a pound, still far above the 60-cent range that the apparel industry regards as historically normal.

Cotton makes up about 40 per cent of Gildan's cost of sales, Mr. Sellyn said. Because the price of the commodity swung so violently this year, Gildan and others in the industry got caught buying high and were forced to reduce prices to work through inventories.

In a conference call on Thursday, Gildan executives told analysts that they would keep investing in the latest production technology and would ramp up marketing for the company's own branded clothing, which it has begun selling to large retailers, including Wal-Mart Stores Inc. and Target Corp.

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The retail business will comprise the other one-third of revenue this fiscal year and include socks and underwear. The division will get a boost from Gildan's $350-million acquisition of U.S.-based Gold Toe Moretz Holdings Corp. last April, executives said.

"We believe that the weak results expected in the first half of [fiscal 2012 are]very much one-time in nature as it reflects the challenges caused by the massive spike in cotton prices in 2010-11 followed by a collapse in mid-2011. This transition does not impact Gildan's earning power beyond the near term," BMO Nesbitt Burns Inc. analyst Claude Proulx wrote in a report. "We expect the stock to be under intense pressure in the near term but would see this as a buying opportunity."

For the three months ended Oct. 2, Gildan said profit slipped 15 per cent to $48.5-million, or 40 cents a share, meeting analysts' expectations. Sales rose 31 per cent to $481.8-million, slightly short of the consensus forecast among analysts of $497-million.

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