Gildan Activewear Earnings Call: Growth Amid Strain

Gildan Activewear ((TSE:GIL)) has held its Q1 earnings call. Read on for the main highlights of the call.

Gildan Activewear’s latest earnings call painted a picture of strong commercial momentum overshadowed by near‑term profit and cash‑flow strain. Management stressed record sales, improving underlying margins and clear integration progress with Hanes, but investors must weigh these gains against lower EPS, compressed operating margins, higher leverage and a quarter of negative free cash flow.

Record Q1 Sales Signal Strong Top‑Line Momentum

Gildan posted record first‑quarter net sales from continuing operations of $1.17 billion, up 63.8% year over year and essentially matching guidance. The surge reflects both the contribution from newly acquired businesses and resilient demand across key categories, showing the enlarged portfolio is gaining traction even as some channels remain soft.

Retail Boost from Hanes Acquisition Reshapes Mix

Retail net sales jumped to $614 million from just $85 million a year ago, driven largely by the acquisition of Hanes Brands’ businesses and higher net selling prices. The company noted that Hanes Australia is now classified as held for sale and excluded from continuing operations, underscoring an active portfolio‑shaping strategy alongside growth.

Integration Advances and Synergy Targets Reinforced

Management reported steady progress integrating Hanes, including shifting production into Gildan facilities and standardizing IT, supply chain and manufacturing processes. The team reiterated a run‑rate cost synergy goal of roughly $250 million over three years, including about $100 million in 2026, and said it is already pursuing additional efficiencies beyond that horizon.

Adjusted Gross Margin Improves After Fair‑Value Impact

On an adjusted basis that strips out a $106 million inventory fair‑value step‑up tied to the acquisition, gross profit reached $385 million, or 33.0% of net sales. That marks an improvement of roughly 180 basis points from last year’s 31.2%, suggesting underlying pricing, mix and efficiency trends are moving in the right direction despite headline margin noise.

Operating Income Growth and Long‑Term Targets Intact

Adjusted operating income climbed to $167 million, up $31 million year over year, even with the integration drag. Crucially, Gildan reaffirmed its 2026 framework of $6.0–$6.2 billion in revenue, about 20% adjusted operating margin, CapEx near 3% of sales, adjusted EPS of $4.20–$4.40 and more than $850 million in free cash flow, implying robust earnings growth ahead.

Market Share Gains Highlight Brand and Product Strength

The company said it outperformed its end markets, gaining share even as wholesale demand fell low single digits and retail was roughly flat while Gildan grew low single digits in both. Management highlighted particularly strong momentum in Comfort Colors, licensed Champion products, underwear and newer brands and programs, pointing to healthy consumer interest.

Adjusted EPS Decline Underscores Near‑Term Dilution

Despite the solid sales and income trends, adjusted diluted EPS from continuing operations fell to $0.43, a 27.1% drop from $0.59 a year earlier. The decline reflects acquisition‑related dilution, higher interest and integration costs, reminding investors that the Hanes deal is still in the investment phase before full synergy benefits materialize.

Q1 Operating Margin Compressed but Beat Expectations

Adjusted operating margin came in at 14.3% of net sales, down about 470 basis points year over year as integration, mix and cost pressures weighed on profitability. Even so, the result exceeded the company’s own quarterly guidance of roughly 12.9%, suggesting execution is slightly ahead of plan on the path toward the mid‑teens and eventually 20% margin goal.

Higher SG&A and Purchase Accounting Weigh on Earnings

GAAP SG&A nearly tripled to $219 million from $87 million, while adjusted SG&A of $218 million reached 18.7% of sales versus 12.1% a year ago. The step‑up was driven by the Hanes acquisition, charges linked to proxy and leadership changes, and higher amortization and depreciation from purchase price accounting, all of which are pressuring near‑term profitability.

Cash Flow Turns Negative as Working Capital Swells

Cash used in operating activities totaled $279 million, almost doubling last year’s outflow as the company absorbed integration and inventory effects. After roughly $30 million of CapEx, free cash flow was about negative $310 million for the quarter, underscoring that the business is currently consuming, not generating, cash during this transition phase.

Leverage Rises on Deal Financing and Higher Interest Costs

Net debt ended the quarter at $4.868 billion, putting leverage at 3.3 times trailing 12‑month pro forma adjusted EBITDA and lifting financial risk. Net financial expenses jumped to $67 million, up $37 million year over year, and management emphasized plans to use proceeds from the HAA sale to reduce debt and steer leverage back toward a 1.5–2.5 times range.

Inventory Actions and Timing Shifts Cloud Near‑Term Volumes

Management pointed to proactive inventory reduction across customer channels and the absence of last year’s pre‑buys ahead of tariffs as factors temporarily reducing sell‑in and wholesale volumes. The company expects residual impacts to weigh on the second quarter, with shipment timing shifting more meaningfully into the back half of 2026 as channel inventories normalize.

Guidance Reinforces Confidence Despite Transition Pressures

Looking ahead, Gildan maintained its 2026 outlook of $6.0–$6.2 billion in revenue, around 20% adjusted operating margin, CapEx near 3% of sales, adjusted EPS of $4.20–$4.40 and free cash flow above $850 million. For the second quarter, management guided to about $1.6 billion in sales and a roughly 19.7% adjusted operating margin, expecting sequential margin recovery as synergies build and costs normalize.

Gildan’s earnings call showcased a company leaning into scale and integration to drive future value while absorbing short‑term hits to EPS, margins, cash flow and leverage. For investors, the story now hinges on execution: delivering on promised synergies, deleveraging the balance sheet and converting record sales and share gains into sustainably higher profitability over the next two years.