Gildan Activewear (NYSE: GIL) reported Q2 EPS of ($0.99), $0.61 worse than the analyst estimate of ($0.38). Revenue for the quarter came in at $230 million versus the consensus estimate of $239.34 million.

“Despite the impact of the COVID-19 pandemic, we maintained a strong focus on our key priorities, including the health and safety of our employees and the long term positioning of our business” said Glenn J. Chamandy, President and CEO of Gildan Activewear. “Against the challenging backdrop of the pandemic and the difficult but necessary actions we have taken, we have accelerated efforts under our Back to Basics strategy to further simplify our product portfolios, remove complexity and cost from our business, better support our customers and drive long term market share growth.”

While results for the second quarter were significantly impacted by the COVID-19 pandemic, we were encouraged by certain signs of recovery, particularly as point of sales (POS) trends during the quarter performed better than we expected across all channels. By the end of the second quarter, essentially all imprintables distributor customer warehouses and the majority of retailer brick and mortar store locations had re-opened in the U.S., although many with reduced operating hours. POS related to certain categories in the US imprintables channel, including fleece and fashion basics, started to turn positive in the month of June. In international markets, although POS were down on a year-over year basis, demand declines decelerated with POS in Europe and Latin America performing better than anticipated for the quarter. In the retail channel, while sales were down meaningfully overall, certain categories held up better during the quarter and total sales of our men's underwear products were up 23.5% compared to last year, reflecting strong sell-through and market share gains. We also saw good performance in activewear in certain retailers. While the majority of our manufacturing operations remained closed for the quarter, sell-through of our products were serviced from our inventories and from our customers' inventories, particularly in the imprintables channel, where we saw a significant drawdown of inventories in the channel during the quarter. Finally, in line with improving demand, we have started to resume production at various operating levels across the majority of our facilities.

Despite these improving demand trends and the restart of our production facilities, uncertainty remains with respect to the impact of the virus and the pace at which global economies will recover. Consequently, during the second quarter we took a number of actions to drive market share in this environment, further reduce our cost base, and strengthen our level of financial flexibility. We believe these actions will position us well as we continue to manage through the impact of the pandemic as we head towards 2021 and for longer term growth in 2022. Specifically, the major COVID-related impacts on earnings in the quarter and the key actions which we have taken guided by our Back to Basics strategy are highlighted below:

COVID-related impacts and Back to Basics initiatives

• We continued to manage and align our operations and inventory levels with the demand environment and kept the majority of our production facilities idle or operating at low levels of capacity during the second quarter. Consequently, approximately $86 million of manufacturing labour and overhead costs were expensed as period costs in the quarter. These cash and non-cash costs would have normally been absorbed into inventory if our facilities had been running at normal levels.
• In order to further lower our cost structure, we reduced our overall manufacturing workforce by an additional 6,000 employees, adjusting to the current demand environment. We also reduced our SG&A workforce by approximately 380 employees and announced the closure of a smaller specialty yarn-spinning operation in the U.S. during the quarter. We recorded restructuring charges of $29 million in the quarter primarily related to these cost reduction actions which we currently expect will generate $46 million of cost reduction savings on an annual go forward basis.
• Due to lower projected production requirements for 2020, we unwound excess commodity derivative hedge positions and marked to market excess cotton commitments with merchants resulting in a total charge of $24.6 million reflected in cost of sales.
• We incurred inventory charges of approximately $56 million in total related to imprintables and retail inventory in the quarter. $14 million was due to the decline in the net realizable value of certain retail end-of-line products due to the current market environment. $26 million was related to our imprintables SKU rationalization initiative and $16 million was related to retail product-line inventory management as part of our Back to Basics strategy.
• In June, in order to drive market share in the imprintables channel, the Company announced and implemented certain promotional programs in the US providing discounts to distributors based on their June sell-through of our products to screenprinters. We subsequently announced the extension of these promotional incentives through July and August, and consequently, we recorded a sales discount accrual that reduced sales in the quarter by $24.6 million for the expected discounts to be earned by distributors on the future sell-through of their inventory held at the end of the second quarter.
• Finally, in June, we negotiated a 12-month covenant amendment to our existing credit agreements providing increased financial flexibility through the first quarter of 2021 as the Company continues to navigate through this global pandemic. During the covenant relief period, our leverage covenant will exclude the financial results for the second quarter of 2020 from the ratio calculation. For the purpose of the net leverage ratio covenant, last twelve months (LTM) EBITDA will be based on the last three quarters (excluding the second quarter of 2020) preceding the date at which the ratio is calculated converted to an annualized four quarter number. Further, the net leverage ratio covenant has been increased to various maximum levels ranging from 3.5 to 4.5 for each quarter within the covenant relief period and 3.5 thereafter. Additional information on the covenant amendment can be found in our MD&A and financial statements for the three and six months ended June 28, 2020.

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