Gildan Activewear‘s first-quarter legal and advisory fees just on the proxy battle hit $15.4 million, plus another $2.5 million spent on expenses connected to a possible sale of the company.
Putting the potential sale aside, which might have occurred even without the publicity of activist involvement, Gildan spent $15.4 million in the first quarter ended March 31 and $1.7 million in the fourth quarter of 2023 on advisory and legal fees. That brings the total spent thus far just on its proxy battle with activist Browning West to $17.1 million. That total grew in April and will continue to do so until May 28 when Gildan holds its annual shareholders meeting.
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Gildan made the disclosure on Wednesday after the equity markets ended their trading session when it posted first-quarter results. Browning West hasn’t been shy about detailing the pre-refreshed Gildan board’s list of failures, which it charged included a botched succession process, a reactive and misguided sale process and a subsequent “desperate and defensive Board refreshment.” The refreshed Board was disclosed on April 22.
Browning West executives could not be reached for comment. A source familiar with the bad blood between Gildan and the activist sided with Browning West, noting that in the first quarter, the $17.9 million Gildan spent on legal and advisory fees—$15.4 million on the proxy battle and $2.5 million related to the sale process—represented a “shocking 18 percent” of the first quarter’s adjusted net earnings of $99.2 million.
The activist investor and eight other institutional investors are seeking to oust Gildan’s entire board with a slate of its own, with the ultimate goal of firing Tyra and reinstating former CEO and founder Glenn Chamandy.
Gildan said net earnings for the quarter fell 19.4 percent to $78.7 million, or 47 cents a diluted share, from $97.6 million, or 54 cents, a year ago. On an adjusted basis, net earnings rose 21.6 percent, or 59 cents a diluted basis, from $81.6 million, or 45 cents, in the same year-ago period.
Net sales in the quarter fell 1 percent to $695.8 million from $702.9 million. By category, activewear sales rose 0.7 percent to $592.1 million, while hosiery and underwear sales fell 9.9 percent to $103.7 million. By geographic area, sales in the U.S. were down 1.1 percent to $618 million and in Canada fell 1.6 percent to $25.3 million. International sales inched up 0.8 percent to $52.5 million.
For anyone wanting to hear an update from CEO Vince Tyra, his prepared remarks were about 3 minutes long. He said first-quarter performance was in-line with company expectations, noting “continued market momentum in ring spun and fleece products.”
“We saw good momentum in activewear overall, which was offset by some softness in hosiery and underwear,” Tyra said, noting that the category performance was expected due in part to a broader market weakness. He also noted his investor update on April 15, and summarized the five pillars for driving sustainable growth that included a focus on supply chain, Bangladesh, and serving retail partners to be the supplier of choice.
There was no change to the company’s 2024 full year guidance disclosed in February, which was reconfirmed at Tyra’s investor update last month. Revenue growth is expected to be flat to up low-single digits and adjusted diluted earnings per share guided in the range of $2.92 to $3.07.
For the second quarter, Gildan on Wednesday forecasted net sales at flat to up low single digits year-over-year.
“We continue to feel cautiously optimistic about the industry landscape for the remainder of 2024. We are mindful of the general concerns over a softening and more value focused consumer and potentially moderating consumer spending,” Gildan executive vice president and chief financial and administrative officer Rhodri J. Harries said on the call. “Nonetheless, we believe our industry continues to benefit from some recovery, and the ongoing shift the wallet share towards experiences, events, and travel.”
Tyra said that while the company has seen some competitive action in pricing, Gildan has chosen not to follow and is currently not anticipating any price decreases. He also said he interviewed some of the board candidates, but did not participate in the decision-making process on board refreshment. Tyra’s not expecting anything material to change in terms of governance, and that the board is not privy to discussions among Special Committee members, such as the potential sale of the company.
Harries spoke about strength in the activewear business, with new product innovation flowing through in basics. As for the broader market weakness in underwear, Harries said: “What’s interesting is sooner or later, people are going to replenish and that’s going to turn into a tailwind.”
And Chuck Ward, president of sales, marketing and distribution, said from an inventory perspective, the company is “in balance overall.” But he also said that retailers have been bringing down inventory post-COVID, and that they remain cautious and are “monitoring inventory closely and staying more just-in-time.”
Ward also noted that the company started seeing some trade down from consumers, but couldn’t say whether it was due to economics or from a fashion perspective. He said some of that trade down has been a shift in fleece from hoods to crews last year, but that has since eased to where it’s closer to a 50-50 split between crews and hoods. And he said there’s also been a shift from long sleeves to more T-shirts.
UBS softlines analyst Jay Sole maintained his “Neutral” rating on shares of Gildan. “We continue to believe Gildan’s low cost manufacturing advantage will allow it to take share from competitors,” he wrote in a research note. But the analyst also said uncertainty over Gildan’s long-term growth potential and doubt over the apparel manufacturer’s ability to raise full year 2024 guidance keeps the stock rating at “Neutral.”
He also expects that while the May 28 annual shareholders’ meeting will determine board membership and who will be Gildan’s CEO for the foreseeable future, the event likely won’t be a big catalyst for the firm. “The reason is we doubt the vote changes [the] market’s view of Gildan’s long-term earning potential that much,” Sole concluded.
