Gildan Activewear Inc. (GIL) Earnings

Management highlights

- **Hanes Brands Integration Progress** • 8 months post-acquisition, the company is well on track to deliver $100 million in targeted 2026 synergies, with the vast majority of 2026 synergy initiatives already implemented. • An additional $100 million in synergies is targeted for 2027, with a total of $250 million in annual run-rate cost synergies expected over three years, with management actively pursuing additional synergy opportunities beyond the current target. • Optimization of manufacturing, supply chain, distribution, and standardization of core IT processes is ongoing, with efficiency benefits expected to become increasingly visible as 2026 ends. - **Commercial & Market Update** • The proactive sell-in reduction announced in Q4 2025 is now complete; wholesale business continues to deliver share gains with strong brand momentum, and underlying demand improved sequentially through Q2, with particular strength in June. • Retail markets remain soft, but Gildan's brands are outperforming, with ongoing strength in core categories like underwear. - **Tariff Refund Update** • Gildan expects total $220 million in IEPA tariff refunds in 2026: ~$25 million was already recorded in Q2, with most remaining refunds expected in Q3. • Half of the total refund represents a non-recurring benefit tied to pre-2026 tariffs on Asian hub production; this full non-recurring amount will be reinvested in 2026 to elevate the Hanes brand portfolio, with investments focused on brand building, retail marketing, product innovation, and packaging improvements. • The other half of the refund is a permanent structural benefit: updated U.S. tariff policy now allows qualifying CAFTA-DR originating apparel to enter the U.S. tariff-free, creating a lasting margin benefit for the company. - **Hanes Australian Business (HAA) Divestment** • Gildan entered a definitive agreement to sell HAA to BB Fit Investments for an enterprise value of ~$490 million USD. • The transaction is expected to close in H2 2026, and proceeds will be used to pay down debt, accelerating progress to the midpoint of Gildan's 1.5-2.5x target leverage range. • Share repurchases will resume once the leverage midpoint is reached.

Guidance

- **2026 Full Year Guidance Update**: • Revenue is expected to come in at the low end of the prior $6.0-$6.2 billion range, reflecting a cautious market assumption of flat to low single-digit market growth following June softening in retail. • Adjusted operating margin guidance is raised to ~21.8%, up from prior guidance of ~20%. • Adjusted diluted EPS guidance is raised to $4.65-$4.75, up from the prior $4.20-$4.40, representing 32.5%-35% year-over-year growth. • CapEx is expected to be ~3% of net sales, and full year free cash flow guidance is raised to ~$1 billion, up from prior guidance of above $850 million. • The updated 2026 guidance reflects the full structural tariff benefit, and acts as the new base for future growth in 2027 and beyond. • Gildan reaffirms its original 2026-2028 three-year target of low 20% annual adjusted diluted EPS growth off the new 2026 base. - **2026 Q3 Guidance**: • Net sales from continuing operations are expected to be ~$1.65 billion, with both wholesale and retail returning to year-over-year growth on a pro forma basis. • Adjusted operating margin is expected to be ~26%, up from 23.2% in the prior year, driven by tariff refunds, realized synergies, and the Barbados subsidy, partially offset by higher SG&A from reinvestment of non-recurring tariff refunds and purchase accounting depreciation/amortization. • The adjusted effective income tax rate is expected to be ~18.5%.

Segment performance

Continuing operations total net sales for Q2 2026 were $1.58 billion, a 72.3% year-over-year increase driven by the Hanes Brands acquisition. - **Wholesale segment**: Q2 2026 net sales were $769 million, down 1.5% year-over-year, and down 5.8% compared to pro forma combined net sales. The decline stemmed from proactive company-wide inventory reduction, partially offset by pricing initiatives. The wholesale market was down low single digits overall, but Gildan outperformed, growing at the upper end of low single digits, with key brands including Comfort Colors, American Apparel, and Champion delivering double-digit sales growth. - **Retail segment**: Q2 2026 net sales were $813 million, up from $137 million year-over-year, driven entirely by the Hanes Brands acquisition. Compared to pro forma combined net sales of $901 million, retail sales declined, due to cautious retailer inventory management amid softer broader consumer demand, lower seasonal inventory builds at large retail customers, non-recurrence of 2025 pre-buying ahead of price increases, and temporary lower sell-in from integration inventory reduction.

Risks & headwinds

- Broader macroeconomic and consumer demand weakness, particularly in the retail segment, pressured seasonal inventory builds at large retail customers and pressured full year 2026 revenue to the low end of the prior guidance range. - Ongoing geopolitical uncertainty, including the resumed Middle East conflict, increased market caution and made near-term demand trends harder to forecast. - Higher structural SG&A, depreciation, and amortization from the Hanes Brands acquisition (from purchase accounting adjustments) pressured near-term operating margins. - Net tariffs remain a headwind for the business, particularly for production sourced from Bangladesh (10% Section 301 tariff) and Vietnam (12.5% Section 301 tariff). - Elevated working capital levels (including higher day sales outstanding) resulted from strategic market share gains, new brand and category launches, and customer transition during integration, though management expects working capital to decline to sub-30% of net sales by year end 2026.

Analyst Q&A

• Q: The 2026 EPS guidance was raised significantly, leaving the original 3-year low-20% annual growth target intact. Is this year's higher guidance a pull-forward of future earnings, or is the low-20% growth target still achievable off the new higher 2026 base? /

  A: Half of the $220 million total IEPA tariff refund is non-recurring, and the full non-recurring portion is being reinvested into 2026 strategic growth initiatives (retail marketing, promotions, product innovation, and packaging upgrades). The remaining half is a permanent structural benefit from zero tariffs for qualifying CAFTA-DR production. The 2026 adjusted operating margin of 21.8% already reflects this structural benefit, so it is a solid new base for 2027 and beyond. With $100 million in 2026 synergies already implemented, and an additional $100 million in synergies coming in 2027, the original low-20% annual growth target for 2026-2028 remains on track.

• Q: Should investors expect Gildan to lower prices now that it has received tariff refunds, which were a key driver of prior price increases? /

  A: Gildan never passed through 100% of prior tariff costs to consumers. Additionally, broad-based structural inflation remains present across the industry: cotton costs, energy prices, and labor costs are all still elevated. Management does not expect any structural price changes in the near term, and will retain current margin benefits from structural tariff reductions.

• Q: Can you explain why day sales outstanding (DSO) are elevated, and is this a sign of underlying channel weakness? /

  A: Higher DSOs are the result of strategic growth initiatives: Gildan has launched new brands, entered new categories, and supported customers as they transition business to Gildan amid industry consolidation. New distribution and brand expansion naturally increase working capital requirements as distributors build inventory. Sequentially, DSOs have already improved in Q2 compared to Q4 2025 and Q1 2026, and management expects further declines as the year progresses. Working capital is targeted to fall below 30% of net sales by year end, in line with the $1 billion 2026 free cash flow guidance. Elevated working capital reflects growth, not channel health deterioration.

• Q: Will share repurchases resume before Gildan reaches the midpoint of its 1.5-2.5x net leverage target, given the new structural earnings uplift from tariff changes? /

  A: Management remains committed to maintaining an investment-grade balance sheet after the Hanes acquisition, and has consistently stated that share repurchases will resume once net leverage reaches the midpoint of the target range. The HAA divestiture will accelerate debt paydown, and management expects to reach the midpoint of the leverage range in H2 2026 after the transaction closes, at which point share repurchases will be reinitiated.