Gildan Activewear Inc. Q2 2026 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Gildan Activewear. S 2026 Q2 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications. Please go ahead.

Good morning, everyone, and thank you for joining us this morning. Earlier today, we issued a press release announcing our results for the second quarter of 2026. While updating our guidance for 2026 and maintaining our three year objectives for the 2026 2028 period, the company's management, discussion and analysis and consolidated financial statements for the three and six months ended June 28th, 2026 are expected to be filed with the Canadian Securities Regulatory Authorities and the U.S. Securities and Exchange Commission today, and will also be available on our corporate website. Now, joining me on the call today are Glenn Chamandy, president and CEO of Gildan Luca Barile, Executive Vice President, Chief Financial Officer, and Chuck Ward, Executive Vice president, Chief commercial officer This morning, 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 known and unknown 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, including in the case of our full year and Q3 2026 outlook and our three year objectives for the 2026 2028 period, as well as certain risks and assumptions related thereto.

Our earnings press release dated July 30th, 2026. During this 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 DNA. Before I turn it over to Glenn, a few items to note. We may refer to. Hanesbrands as Hanes. Throughout this call and earlier today, we also announced that we entered into a definitive agreement to divest the Hanesbrands Australian business, which we refer to as Ha Remember that Ha had been classified as held for sale and reported as discontinued operations since the fourth quarter of 2025. As such, unless otherwise indicated, the figures we will be discussing today are from continuing operations and therefore exclude the results of the Ha business And now I'll turn it over to Glenn.

Thank you. Jesse. Good morning, everyone, and thank you for joining us on this call. As we highlighted this morning's press release, we delivered strong results in this quarter as our team continued to execute with discipline against our strategic objectives. Our. Third quarter net sales from continuing operations were $1.58 billion, up 72% versus last year, primarily due to the Hanesbrands acquisition. We also delivered second quarter adjusted diluted earnings per share from continuing operations of $1.28, up 32% compared to last year. Furthermore, we updated our 2026 guidance, which Luca will review, and we maintain our three year objectives for the 2026 2028 period. We are very pleased with the excellent progress we are making with our integration of Hanesbrands. Only eight months following the close of this transformational acquisition In fact, we are well on track to generate approximately 100 million of targeted synergies in 2026. With the vast majority of these initiatives planned for this year already implemented. The actions we have taken so far in order to optimize our manufacturing and supply chain network, are making our combined businesses more efficient. As we exit 2026. We expect these benefits to become increasingly visible in our operating performance.

Setting a. Us up favorably to deliver the next 100 million in targeted synergies. We have identified for 2027. Furthermore, we are optimizing our distribution capabilities and standardizing our key. It manufacturing and supply chain processes across the combined business. We continue to expect approximately 250 million of annual run rate cost synergies over the next three years, while. Pursuing additional opportunities beyond our current target as the integration progresses. Now, from a commercial and market backdrop perspective. The proactive reduced sell in. We undertook, which we announced in fourth quarter of 2025, is now complete with our wholesale business is performing well with the continued share gains, strong brand momentum and market trends improved in June in. Retail. The environment was more measured, but. Our brands are performing. So while we are prudently. Planning around a current soft retail backdrop, we are also very focused on the opportunities ahead. We announced this morning that we also expect to receive approximately 220 million of Ipah tariff refunds in 2026, a significant portion of these tariff refunds represent the non-recurring benefit, which is primarily tied to fiscal 2025 and products manufactured in our Asian hub. This. Portion of the refund will be reinvested into new incremental strategic growth initiatives in the second half of 2026.

Mainly to. Elevate the Heinz brand portfolio. Such as improving product quality, investing behind the brand, retail marketing, and accelerating product innovation and packaging enhancement to support stronger growth over time. Chuck will provide more details in a moment. In addition, a sizable portion of the refund reflects the recurring benefit because following recent changes in US tariff policy, tariffs no longer apply to a power qualifying as originating under Cafta-dr, which is a structural benefit for the company going forward. As a. Result. Our updated 2026 guidance reflects the structural tariff benefit and underscores the underlying earnings power of the combined businesses. As we exit 2026 and a foundation for further earnings growth in 27. Lastly, we also announced this morning that we entered into a definitive agreement to sell Har. This step. Further reinforces our focus on significant value creation opportunities with Hanesbrands, and is expected to accelerate our debt reduction towards the mid-point of our targeted leverage framework and supports the resumption of share repurchases. Once this level is reached. So let me conclude by saying our focus could not be clearer control, but we can control execute our strategy, capture the significant opportunity ahead, drive profitable growth and long term shareholder value I look forward to answering your questions.

After formal remarks And now I'll turn it over to Chuck for a commercial review.

Thank you. Glenn, and good morning, everyone. Let me start by reviewing our commercial performance and then provide you with an overview of our exciting brand and marketing initiatives, which are underway. Starting with. Wholesale. Let me be clear. The fundamentals of our business remain healthy. First, inventory across wholesale customers are in balance. Both from a quality and a quantity perspective We also saw underlying demand trends improve sequentially throughout the quarter, with further strengthening in June, which we suspect is connected to major events like FIFA World Cup. The 250th anniversary of the United States and other tourism related events. Q3 started a little softer and it's been tougher to call a trend as the Middle East conflict resumed and cautiousness in the broader market became more pronounced in the second quarter. We continued to gain share in key growth categories such as ring spun and fleece supported by our product innovation We also continued to see strong momentum for comfort, colors, American Apparel and Champion each delivering double digit sales growth in the second quarter All Pro continued to gain traction following last year's launch. The Gildan Soft Style collection continued to outperform the market, and we successfully launched the Hanes Scrubs line.

And for those of you that attended or will be attending a Bruno Mars concert, you'll see that Comfort Colors is now the official apparel partner for the romantic tour in Europe and in the United States. Importantly, we are also seeing favorable competitive dynamics that are creating new opportunities for us to capture additional market share. For example, similar to what we have done with the comfort colors we are making targeted investments in our American Apparel brand to further capitalize on the continued premiumisation that we're seeing in the market. Turning to. Retail during the quarter, we saw softness in the broader market and cautiousness on part of retailers managing their inventories, which resulted in lower seasonal inventory builds at certain large retail customers. Our brand. Has performed generally well, supported by some initial introductions of product innovation. The relevance of our brand portfolio and the quality of our customer relationships. Now, let me give you an overview of some of the initiatives that we have already begun implementing to elevate and further strengthen the Hanes brand portfolio and increase consumer engagement. As Glenn mentioned, we're taking a disciplined approach to reinvesting a portion of the tariff refunds into initiatives that support long term growth, like brand building, retail marketing programs, and accelerating product innovation and packaging enhancements So for the Hanes brand, we are focusing on investments to strengthen brand relevance, increase consumer engagement, and support the innovation that we're introducing in key.

Categories. We have already begun this work with a bold refresh of the brand platform for Hanes, which is now live in the market. And is backed by consumer research. Our objective is to modernize how Hanes shows up with consumers while staying true to its heritage of trusted comfort, quality and everyday value. We will. Bring this to life across key consumer touchpoints, including digital, social, streaming, retail, media, online shopping channels, and select high visibility placements with a clear objective to deepen the engagement. To strengthen the Hanes brand portfolio and to support profitable growth over time. Our accelerated and expanded investment substantially increases the scale of our reach. We expect the campaign ecosystem to deliver about a billion impressions and reach approximately 120 million consumers, allowing Hanes to reconnect with a majority of U.S. households. Further supporting our product placement and demand. And with that, I will turn it over to Luca for the Financial Review.

Thank you. Chuck, and good morning, everyone. Thank you for joining us today to discuss our second quarter results. Let me start with the specifics of the quarter. Then turn to our 2026 outlook and guidance. And finally, the Har sale announcement. First, the quarterly results we reported. Strong second quarter net sales from continuing operations of 1.58 billion, up 72.3% year over year. And in line with guidance of approximately 1.6 billion. The. Increase reflects the Hanesbrands acquisition, partially offset by the impact of integration initiatives announced in the fourth quarter of 2025. To optimize our manufacturing footprint and accelerate synergy capture Compared with pro forma net sales from continuing operations of 1.72 billion. The year over year decline was due to lower volumes stemming from a continuation of our proactive inventory reduction across customer channels. As we integrate Hanesbrands, which temporarily reduced sell in as previously communicated, as well as the non-recurrence of some pre-buying in the second quarter of 2025, ahead of pricing actions primarily in retail. Now. Looking at wholesale net sales were 769 million compared to 781 million in the prior year, down 1.5% and down 5.8% compared to pro forma net sales from continuing operations for wholesale. The decline was mainly due to the proactive inventory reduction across our combined customer channels, partially offset by pricing initiatives.

As for retail. Sale net sales were 813 million compared to $137 million in the prior year, primarily reflecting the acquisition of Hanesbrands. Compared to pro forma net sales from continuing operations of 901 million. The decline was due to cautious retailer inventory management in response to softer consumer demand and softness in the broader market. Partially offset by pricing actions as. As Chuck mentioned earlier, retail sales were also impacted by lower seasonal inventory builds at certain large retail customers, reflecting their tempered optimism in the current soft, broader environment as well as the non-recurrence of some pre-buying activity. In the second quarter of 2025. Ahead of pricing actions. Finally, to a lesser extent, retail sales were also affected by the lower sell in previously detailed shifting. To margins, we generated gross profit of $460 million, or 29.1% of net sales, versus $289 million, or 31.5% of net sales in the same period last year. Adjusting for an inventory fair value step up costs of 86 million recorded as part of the Hanesbrands acquisition Adjusted gross profit was 545 million, or 34.5% of net sales, compared to 31.5% in the prior year. The 300 basis point improvement, mainly reflects the favorable contribution from Hanesbrands lower raw material costs and to a lesser extent, pricing initiatives to partially offset the impact from tariffs, which continued to impact gross margin margins.

Notwithstanding, and approximate 25 million benefit recorded in the quarter from a phase one tariff refund under U.S. Customs and Border Protection's refund process. S expenses were $194 million, compared to $82 million in the prior year adjusted. sG&A expenses were $193 million, or 12.2% of net sales, compared to $81 million, or 8.8% of net sales for the same period last year. The. Increase in adjusted sG&A in the quarter reflects the acquisition of Hanesbrands, including the impact of higher amortization of intangible assets and depreciation of property, plant and equipment resulting from the fair value purchase accounting impacts of the acquisition. This was partially offset by synergies realized from the Hanesbrands integration process and a subsidy recorded as part of the Hanesbrands integration plan under the Barbados Economic Diversification and Growth Fund, which was retroactive to 2025. As we bring all these elements together. And adjusting for restructuring and acquisition related costs and the inventory fair value step up cost as part of the Hanesbrands acquisition adjusted Operator. Income was $352 million, up $144 million year over year. Adjusted. Operating margin was 22.3% of net sales, down 40 basis points versus last year. But 260 basis points ahead of guidance of approximately 19.7%. The year over year decrease in adjusted operating margin reflects Hanesbrands lower operating margins due to historically higher levels of S, G, and a relative to Gildan, and a net headwind from Iipa tariffs, inclusive of tariff refunds partially offset by a favorable contribution from the aforementioned Barbados Fund subsidy.

Lower raw material costs and pricing initiatives implemented to partially offset the impact from tariffs. Net financial expenses were 69 million, up 37 million year over year, primarily due to higher borrowing levels related to the Hanesbrands acquisition. Taking into account all of these factors and a higher outstanding share base as a result of the acquisition. GAAP diluted earnings per share from continuing operations were $0.49 compared to $0.91 in the prior year. Adjusting for restructuring and acquisition related costs, the inventory fair value step up cost and an income tax recovery of $29 million related to restructuring charges and other adjustments Adjusted diluted earnings per share from continuing operations were $1.28, up 32% from $0.97 in the prior year. Adjusted diluted EPS from continuing operations includes the positive impact of $0.11 per share from the Iipa tariff refunds in the second quarter of 2026. Now turning to cash flow and balance sheet items for the first half of 2026. Cash flows from operating activities, which include discontinued operations, were 68 million, compared to 46 million in the prior year. After. Accounting for capital expenditures totaling 51 million. The company generated approximately 17 million of free cash flow, with 326 million recorded in the second quarter as.

And during the first half of 2026, we returned 92 million to shareholders through dividends. We. Did the first half of 2026 with net debt of about 4.69 billion and a leverage ratio of 3.2 times net debt to trailing 12 months. Pro forma adjusted EBITDA. Now, turning to the outlook for. 2026 and with respect to our continuing operations, we are updating our full year guidance as follows. Revenue. Is expected to be at the low end of the previously communicated range of 6 to 6.2 billion. Full year adjusted operating margin of approximately 21.8% compared to previous guidance of approximately 20%. Adjusted diluted EPS in the range of $4.65 to $4.75, an increase of approximately 32.5% to 35% year over year compared to previous guidance of $4.20 to $4.40. CapEx to come in at approximately 3% of net sales and free cash flow to be approximately 1 billion, compared to previous guidance of above 850 million. The assumptions underpinning our updated outlook are detailed in our press release issued earlier today. Notably. Our outlook includes approximately 220 million in expected Iipa tariff refunds under U.S. Customs and Border Protection's refund process, which was initiated in the second quarter of 2026. With most of the refunds anticipated to be recorded during the third quarter and inclusive of approximately 25 million recorded in the second quarter.

Importantly. Our outlook also assumes that a significant portion of these tariff refunds, which is equivalent to the non-recurring refund benefit recorded in 2026, will be reinvested in 2026. Into the strategic growth initiatives, which Chuck detailed earlier. Said differently, we are reinvesting the portion of refunds that relates to Iipa tariffs paid in fiscal 2025, as well as tariffs paid in 2026 on products manufactured in our Asian hub, which was subsequently subject to the section one, 22 and section 301 tariffs. Whereas we have reflected in our 2026 guidance, the positive impact of the refunds tied to the recurring structural benefit for apparel qualifying as originating under Cafta-dr being tariff free. As such, we believe that our updated 2026 guidance for adjusted operating margin of approximately 21.8% and adjusted EPS of $4.65 to $4.75. Reflects. The underlying earnings power of our combined business as we exit 2026. It's a relevant base for future comparison, providing a strong foundation for further growth in 2027. Finally, we have also provided guidance for our third quarter. Net. Sales from continuing operations are expected to be approximately 1.65 billion, with both wholesale and retail returning to growth as compared with proforma net sales from continuing operations in the prior year.

Adjusted operating margin is expected to be approximately 26%, compared to 23.2% in the prior year. Reflecting the significant anticipated tariff refunds positively impacting gross margins. The flow through of realized synergies and the Barbados subsidy partly offset by higher G&A levels due to the reinvestment of some of the aforementioned tariff refunds, as well as higher amortization of intangible assets and depreciation of property, plant and equipment. Resulting from the fair value purchase accounting impacts of the Hanesbrands acquisition and. Lastly, the adjusted Effective income tax rate is expected to be approximately 18.5% in the third quarter of 2026. Finally, earlier today, we also announced that we entered into a definitive agreement to divest the Hanesbrands Australia business, which we refer to as Ha to BB Fit investments for an enterprise valuation of approximately 700 million AUD, or approximately 490 million USD at current exchange rates, subject to customary adjustments Remember that we had communicated our intention to pursue a sale of Ha and announced the launch of a formal sale process in the fourth quarter of 2020. Five. Earnings release, at which time the business was classified as held for sale and reported as discontinued operations. The transaction is expected to close in the second half of 2026, subject to the receipt of required regulatory approvals and customary closing conditions.

Proceeds from the transaction will be used to pay down a portion of outstanding debt, accelerating our return to the midpoint of our target leverage framework of one and a half to two and a half times net debt to trailing 12 months. Pro forma adjusted EBITDA as we previously communicated, we expect to renew our NCIB program when the net debt ratio. Approximates the midpoint of our target leverage framework in some. Theory, we delivered strong second quarter results generated strong free cash flow and continued to advance the Hanesbrands integration with discipline. While the broader operating environment remains dynamic. We remain focused on what we can control, delivering. Product innovation. Maintaining strong customer partnerships. Executing with agility. Improving operational efficiency and driving profitable growth. Our updated guidance reflects the structural benefits in the business. The strength of our cash generation, which is underpinned by our continued focus on working capital management and our confidence in the combined company's earnings power. Thank you. And now I'll turn it over to Jessy.

Thank you. Luca. This concludes our prepared remarks. And now we'll begin taking your questions. Before moving to the 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 Operator you may begin the Q&A session, please Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Jay Sole with UBS. Your line is open.

Great. Thank you so much. My first question is about the guidance raise. So,, nice guidance raised. Now it looks like that the growth in earnings this year will be in the mid 30s range versus before. If we look back at the previous three year guidance, which is based on the midpoint of the fiscal 25 guidance and where fiscal 25 ended, it was only going to be up in the low 20s. Do you feel like the new guidance is sort of like a at the same time, you know, you're you're reiterating your three year outlook for low 20s. You know, low adjusted.