Gildan Activewear's Q1 Results Highlight Resilience Amid Tax Headwinds

Gildan Activewear (TSX: GIL)(NYSE: GLD) delivered mixed yet instructive results for the first quarter of 2025, with flat adjusted diluted earnings per share (EPS) of $0.59 and net sales growth driven by its Activewear segment. Despite headwinds from rising tax rates and a strategic exit from certain product lines, the company reaffirmed its full-year 2025 outlook, underscoring its operational discipline and growth strategy.

Key Takeaways:

• Adjusted EPS Flat at $0.59: Tax rate surged to 15% from 3.6% in Q1 2024 due to the Global Minimum Tax (GMT), offsetting gains from share buybacks.
• Activewear Growth: Sales jumped 9% to $647 million, fueled by North American demand and innovation like Soft Cotton Technology.
• Reaffirmed Outlook: Guidance includes mid-single-digit revenue growth, $3.38–$3.58 EPS, and $450+ million in free cash flow.

The Flat Earnings: Tax Headwinds vs. Strategic Gains

Gildan’s adjusted EPS remained unchanged year-over-year, a result of offsetting factors:
1. Tax Rate Increase: The implementation of the GMT in Canada and Barbados pushed the adjusted effective income tax rate to 15%, compared to 3.6% in Q1 2024. This eliminated potential gains from a lower share count due to $62 million in buybacks under its normal course issuer bid (NCIB).
2. Mixed Segment Performance:
- Activewear: Thrived with a 9% sales increase, driven by North American market share gains and new product launches. Fleece and ring-spun products saw strong demand, while National account customers contributed to momentum.
- Hosiery and Underwear: Sales plummeted 38% to $64 million as Gildan phased out its Under Armour business and faced broader market softness.

Why the Outlook Remains Positive: Growth Drivers and Mitigation Strategies

Despite Q1’s flat earnings, Gildan reaffirmed its 2025 outlook, citing several strengths:

1. Activewear as the Growth Engine

Activewear’s 9% Q1 sales growth signals a strategic win. The segment’s expansion into premium categories—like Soft Cotton Technology, which offers superior comfort—aligns with consumer preferences for high-quality basics. Management emphasized that North American customers are adopting these innovations, driving market share gains.

2. Margin Resilience

The adjusted operating margin rose 100 basis points to 19.0%, aided by lower raw material costs and operational efficiency. Gildan aims for an additional 50-basis-point expansion in 2025, supported by cost discipline and the Barbados jobs credit program, which continues to reduce expenses.

3. Trade Policy Mitigation

Gildan’s vertically integrated model—a rarity in apparel manufacturing—positions it as a low-cost producer. This structure helps offset U.S. tariffs and trade volatility. The company has already factored tariff impacts into its guidance, leveraging its Caribbean and Central American facilities to minimize disruptions.

4. Financial Flexibility

With a leverage ratio of 2.2x net debt to EBITDA (within its 1.5x–2.5x target), Gildan maintains a strong balance sheet. Free cash flow is projected to exceed $450 million, enabling shareholder returns: $62 million in buybacks in Q1 and a Q2 dividend of $0.226 per share.

Risks and Challenges Ahead

While Gildan’s outlook is optimistic, risks persist:
- Trade Policy Uncertainty: Escalating U.S.-China trade tensions or new tariffs could disrupt supply chains.
- Under Armour Phase-Out Impact: The Hosiery segment’s decline may linger, though Activewear’s growth is expected to compensate.
- Margin Pressures: The GMT’s full impact may not be fully reflected in 2025, and raw material costs could rebound.

Conclusion: A Steady Hand in a Volatile Market

Gildan’s Q1 results reflect a company navigating macroeconomic headwinds with discipline. While tax increases and strategic exits created near-term turbulence, its Activewear dominance, operational agility, and financial resilience provide a solid foundation for 2025.

The reaffirmed guidance—mid-single-digit revenue growth, 13–19% EPS growth, and $450M+ free cash flow—aligns with its Gildan Sustainable Growth (GSG) strategy, which emphasizes ESG initiatives and innovation. With a robust balance sheet and a product portfolio resonating in key markets, Gildan appears positioned to capitalize on its strengths.

Investors should monitor two key metrics:
1. Activewear Sales Momentum: Continued growth here could offset broader softness in Hosiery and international markets.
2. Tax Rate Stability: If GMT-related costs stabilize, EPS growth could accelerate in 2026.

In a sector challenged by trade risks and shifting consumer preferences, Gildan’s execution of its GSG strategy has earned it a place as a resilient player in the activewear space. For now, the reaffirmed outlook suggests the company is on track to deliver steady returns—provided it can sustain Activewear’s upward trajectory and manage tax pressures effectively.