Gildan Activewear (NYSE:GIL) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Gildan Activewear reported Q3 2026 net sales of $1.47 billion, up 61% year-over-year primarily due to the Hanes brand acquisition, but below guidance of $1.65 billion due to demand softness and unfavorable mix.
Adjusted diluted EPS from continuing operations was $1.54, a 54% increase from last year, supported by strong free cash flow and tariff refunds, despite challenges in product availability and service constraints.
The company completed the sale of HanesBrands’ Australia business for $490 million and used the proceeds to repay debt, while also announcing a new share repurchase program for up to 5% of outstanding shares.
Gildan Activewear adjusted its full-year 2026 guidance due to a rapidly changing macroeconomic environment, now expecting revenue between $5.4 billion and $5.5 billion and adjusted EPS of $3.7 to $3.8.
Strategically, the company remains focused on integrating Hanes, targeting $100 million in synergies for 2026 and $250 million by 2028, while continuing to innovate and optimize its manufacturing and supply chain.
Management highlighted challenges from inflation and consumer demand shifts, emphasizing a K-shaped economy where lower-income consumers are more affected, impacting discretionary apparel spending.
Gildan plans to hold an Investor Day in spring 2027 to update its long-term outlook and continues to focus on strengthening its financial leverage and capital allocation discipline.
Full Transcript
OPERATOR
Good morning, and welcome to the Q3 2026 earnings conference call. Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Jesse Hayham, Senior Vice President, Head of Investor Relations and Global Communications. Please go ahead.
Jesse Hayham (Senior Vice President, Head of Investor Relations and Global Communications)
Good morning everyone and thank you for joining us. Earlier today we issued a press release announcing our results for the third quarter and first nine months of 2026 and updated our full year 2026 guidance. The company’s Management Discussion and Analysis and consolidated financial statements for the three and nine months ended September 27, 2026 are expected to be filed with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission today and will also be available on our corporate website.
Joining me on the call today are Glenn Chamandy, President and CEO of Gildan Activewear, Luca Barile, Executive Vice President, Chief Financial Officer, and Chuck, Executive Vice President, Chief Commercial Officer. This morning we’ll take you through the results for the quarter and then a question and answer session will follow. Before we begin, please take note that certain statements included in this conference call constitute forward-looking statements which involve known and unknown risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company’s filings with the U.S. Securities and Exchange Commission and Canadian securities regulatory authorities, including, in the case of our full year 2026 outlook and the risks and assumptions related thereto, our earnings press release dated November 5, 2026.
During this call we will also discuss certain non-GAAP financial measures; reconciliations to the most directly comparable IFRS measures are provided in today’s earnings release as well as our MD&A. Before I turn it over to Glenn, a few items to note. We may refer to HanesBrands or Hanes throughout this call. As announced on October 26, 2026 we completed the sale of HanesBrands’ Australia business which we refer to as HAA. HAA had been classified as held for sale and reported as discontinued operations since the fourth quarter of 2025. As such, unless otherwise indicated, the figures we will be discussing today are from continuing operations and therefore exclude the results of the business.
And now I’ll turn it over to Glenn.
Glenn Chamandy (President and Chief Executive Officer)
Thank you, Jesse. Good morning everyone and thank you for joining us on this call. As we highlighted in this morning’s press release, our results this quarter did not meet our expectations, reflecting a more subdued demand environment and some near-term challenges. The demand recovery we had anticipated did not materialize as expected. Our third quarter net sales from continuing operations were $1.47 billion, up 61% versus last year, primarily due to the Hanes brand acquisition. Adjusted diluted earnings per share from continuing operations were $1.54, up 54% compared to last year.
Our sales came in below our guidance of approximately $1.65 billion, mainly due to greater-than-anticipated demand softness and unfavorable mix, primarily in wholesale. We also experienced some product availability and service constraints, primarily in retail. Margins and cash flow held up well, supported in part by tariff refunds. Furthermore, we announced on October 26, 2026 that we completed the sale of HAA for approximately $490 million paid in cash at closing and we used the net proceeds from the transaction to repay outstanding debt.
Gildan Activewear continues to generate strong free cash flow and we remain committed to disciplined capital allocation including returning capital to shareholders. Consistent with this approach, we announced this morning that our board approved a new normal course issuer bid to repurchase up to 5% of the issued and outstanding common shares. With respect to our outlook, since we reported our second quarter results, the macroeconomic environment has changed rapidly. This morning we updated our 2026 guidance and we believe it is prudent to withdraw our previously communicated objectives for the 2026 to 2028 period. Let me stress we believe that the underlying strength and long-term prospects of the business remain strong and we expect to provide an updated long-term outlook at an Investor Day which is intended to be held in the spring of 2027.
Now let me take a few minutes to provide an update on the Hanes integration. We remain on track to generate approximately $100 million in targeted synergies for 2026 and we continue to expect approximately $250 million annual run-rate cost synergies by the end of 2028 and we are pursuing additional opportunities beyond our current targets as the integration progresses. Since closing the acquisition on December 1, 2025, we have made tremendous progress bringing the two companies together and building the foundation of the combined company in less than a year.
We have moved decisively across virtually every area of the organization. We rationalized our supply chain footprint, announced nine facility closures, we integrated and combined sock manufacturing supply chain activities, we transitioned most of the Hanes textiles into Gildan Activewear’s network and made great progress on consolidating key systems, and we completed the sale of HAA. As we did this, we also focused on bringing innovation elevation in the manufacturing of Hanes products.
What is particularly encouraging is that we accomplished much of the heavy lifting required to establish the foundation of the combined organization during our first year. Looking to 2027, our focus will increasingly shift towards optimizing our platform, further integrating processes and continuing to embed a one-company culture as we focus on realizing the full potential of the combination. In addition, we intend to bring our product innovation pipeline to market with new enhanced products expected to roll out progressively through 2027.
Lastly, the build-out of our second facility in Bangladesh, phase two, remains a key to our ring-spun and innerwear cost leadership and innovation. It should significantly enhance the company’s positioning to support key sales growth drivers and the production of the second phase is expected to start in 2028. In closing, we recognize that this quarter fell short of what we expected to deliver and our updated outlook is not where we want it to be. We are acting decisively on several key aspects of our business, addressing the product availability and service constraints in retail, sharpening execution across our channels, capturing the full value of the Hanes integration and investing behind our brands.
In the current environment, our priorities remain clear: stay focused on what we control, including leveraging the scale of our business, our manufacturing network, our commercial capabilities and strengthening the foundation of the combined platform, and continue to invest strategically in innovation and growth. I look forward to answering your questions after our formal remarks. And now I’ll turn it over to Chuck for a commercial review.
Chuck (Executive Vice President, Chief Commercial Officer)
Thank you, Glenn, and good morning, everyone. From a commercial and market backdrop perspective, macroeconomic conditions changed rapidly after we reported our second quarter results. Rising interest rates and persistent inflation in household essentials weighed on consumer demand for apparel in general. More broadly, the consumer remains challenged. We are operating in an increasingly K-shaped economy where higher-income households continue to spend while lower- and middle-income consumers, who are feeling the cumulative impact of higher prices for everyday essentials and higher borrowing costs, are becoming more selective with discretionary purchases, including apparel. In this environment, consumers are prioritizing value. Retailers appear to be managing inventories and replenishment more selectively, adjusting future orders where sell-through or category performance is softer while continuing to replenish categories that are performing well.
Retailers are also responding by emphasizing opening price points and smaller pack sizes to maintain affordability, and consumers have shown limited willingness to absorb higher prices. While this backdrop is weighing on unit volumes, in the near term, we believe our low-cost, vertically integrated manufacturing model and our portfolio of brands, spanning value to premium, position us well to serve consumers across income levels. So, looking at our third quarter net sales from continuing operations of $1.47 billion versus our guidance of approximately $1.65 billion, there were two main factors behind the shortfall. First, approximately $100 million reflected greater-than-anticipated demand softness, with the demand recovery assumed in the company’s previous outlook not materializing as expected, and unfavorable mix, primarily in wholesale, against this softer market. Our share gains in some channels were also lower than we anticipated.
That said, Comfort Colors, American Apparel, and Champion continued to perform well with our customers. Second, approximately $60 million reflected product availability and service constraints and were associated with evolving demand and order patterns, primarily in retail. The balance of the shortfall pertains to lower net selling prices. Weather was also a factor in the quarter. We experienced exceptionally warm temperatures, including record or near-record heat in several markets in the U.S. and in Europe, which contributed to an unusually warm start to the fall season. This weighed on fleece demand, which softened meaningfully in September, declining to mid- to high-teens. Because fleece carries a higher average selling price than our basic T-shirt offering, this created an unfavorable impact to our sales mix, and some of that softness carries into Q4, whereas we had expected strong fleece sales during this period.
Now let me update you on the strategic growth initiatives we talked about last quarter, which were already underway and are focused on further strengthening the Hanes brand portfolio and increasing consumer engagement. As the environment evolved during the quarter, we continued to take a disciplined approach to reinvesting a portion of the tariff refunds. The key pillars of our strategy remain brand elevation, retail marketing programs, and accelerating innovation and packaging enhancements.
However, we shifted some of the spending initially planned for the third quarter into the fourth quarter while keeping the overall envelope largely the same. Within that, we increased our investment in brand building in the third quarter where we believe it can deliver the greatest value in the current environment, and we intend to maintain that higher level into the fourth quarter. As we move into 2027, we have a compelling pipeline of product innovation coming to the market with a steady flow of new and enhanced offerings throughout the year. The rollout will begin across men’s underwear and socks before broadening into women’s and kids’ categories, bringing improved comfort, fit, and performance alongside refreshed packaging and merchandising. We believe these innovations will further elevate our core brands and strengthen our offering with consumers and retail partners.
And with that, I will turn it over to Luca for a financial review.
Luca Barile, CPA (EVP, CFO)
Thank you, Chuck, and thank you all for joining us today to discuss our third quarter results. Let me start with the specifics of the quarter, then turn to cash flow and balance sheet items and our updated 2026 outlook. First, the quarterly results. We reported third quarter net sales from continuing operations of $1.47 billion, up 61.1% year over year, compared to our guidance of approximately $1.65 billion. The year-over-year increase reflects the Hanes Brands acquisition, partially offset by lower volumes reflecting the difficult macroeconomic conditions since we reported our second quarter results and lower net selling prices. Compared with pro forma net sales from continuing operations of $1.61 billion, the decline was primarily due to lower volumes reflecting softer-than-anticipated demand trends across both wholesale and retail.
Looking at wholesale, net sales were $735 million compared to $789 million in the prior year, down 6.8% and down 10.8% compared to pro forma net sales from continuing operations for wholesale of $823 million in the prior year. The decline in wholesale sales versus pro forma net sales from continuing operations is mainly due to softer demand trends amid the difficult macroeconomic environment, the positive impact of sales in the prior year in anticipation of announced price increases, and, to a lesser extent, product mix.
As for retail, net sales were $732 million compared to $122 million in the prior year, primarily reflecting the acquisition of HanesBrands. Compared to pro forma net sales from continuing operations of $787 million, retail sales were down 7%, mainly due to softer demand trends amid the difficult macroeconomic environment as well as product availability and service constraints associated with evolving demand and order patterns. These factors were partially offset by the wraparound effect of pricing initiatives implemented after the third quarter of 2025.
Shifting to margins, we generated gross profit of $625 million, or 42.6% of net sales, versus $307 million, or 33.7% of net sales, in the same period last year. Adjusting for an inventory fair value step-up cost of $10 million recorded as part of the Hanes Brands acquisition, adjusted gross profit was $635 million, or 43.3% of net sales, compared to 33.7% in the prior year. The year-over-year improvement mainly reflects a benefit of approximately $177 million in IPA tariff refunds and lower manufacturing and raw material costs.
These factors were partly offset by unfavorable mix and the flow-through of tariff costs in inventory. Excluding the positive impact of IIPA refunds on gross profit and the offsetting tariffs embedded in our cost of inventory, as well as the reinvestment in strategic initiatives, adjusted gross margin would have been approximately 37% for the third quarter. SG&A expenses were $240 million compared to $95 million in the prior year. Adjusted SG&A expenses were $238 million, or 16.3% of net sales, compared to $95 million, or 10.4% of net sales, for the same period last year. The increase in adjusted SG&A in the quarter primarily reflects the acquisition of Hanes Brands, including the impact of higher amortization of intangible assets and depreciation of property, plant, and equipment resulting from the fair value purchase accounting impacts of the acquisition.
In addition, the higher SG&A includes expenditures related to the strategic reinvestments utilizing a portion of IEEPA refunds. This was partially offset by synergies realized from the Hanes Brands integration process and lower variable compensation. As we bring these elements together, and adjusting for restructuring and acquisition-related costs and the inventory fair value step-up cost as part of the Hanes Brands acquisition, adjusted operating income was $396 million, up $185 million year over year. Adjusted operating margin was 27% of net sales, up 380 basis points versus last year and 100 basis points ahead of our guidance of approximately 26%.
The year-over-year increase reflects higher gross margins and the favorable impact from synergies realized as part of the HanesBrands integration process, partly offset by Hanes Brands’ lower operating margins due to historically higher levels of SG&A relative to Gildan. Versus guidance, the outperformance mainly reflects a benefit of about 200 basis points from shifting some of the reinvestments of IIPA tariff refunds into strategic initiatives from the third quarter to the fourth quarter, partly offset by about 100 basis points of greater-than-anticipated SG&A deleverage on lower-than-expected third quarter sales.
Net financial expenses were $61 million, up $17 million year over year, primarily due to higher borrowing levels related to the Hanes Brands acquisition. Taking into account these factors and a higher outstanding share base as a result of the acquisition, GAAP diluted earnings per share from continuing operations were $1.37 compared to $0.80 in the prior year. Adjusting for restructuring and acquisition-related costs, the inventory fair value step-up cost, and an income tax recovery of $11 million related to restructuring charges and other adjustments, adjusted diluted earnings per share from continuing operations were $1.54, up 54% from $1 in the prior year.
Now turning to cash flow and balance sheet items. For the first nine months of 2026, cash flows from operating activities, which include discontinued operations, were $701 million compared to $270 million in the prior year. After accounting for capital expenditures of $78 million, we generated approximately $622 million of free cash flow during the first nine months of 2026. We returned $139 million to shareholders through dividends. We ended the third quarter with long-term debt, including the current portion, of $3.98 billion, net debt of $4.14 billion, and a leverage ratio of 2.7 times net debt to trailing twelve months pro forma adjusted EBITDA.
Now turning to the outlook for 2026, and with respect to our continuing operations, we are updating our full-year guidance as follows. Amid a macroeconomic environment that has changed rapidly since we reported our second quarter results, revenue is expected to be in the range of $5.4 billion to $5.5 billion, compared to previous guidance of the low end of $6.0 billion to $6.2 billion. Full-year adjusted operating margin of approximately 20%, compared to previous guidance of approximately 21.8%.
Adjusted diluted EPS in the range of $3.7 to $3.8, compared to previous guidance of $4.65 to $4.75. CapEx to come in at approximately 3% of net sales, and free cash flow to be $700 million to $750 million, compared to previous guidance of approximately $1 billion. Our updated guidance reflects the third quarter sales shortfall and our expectation that these softer demand conditions will persist into the fourth quarter. As such, the reduction in full-year 2026 revenue guidance compared with our previous guidance reflects both the impacts realized in the third quarter and our updated expectations for the fourth quarter, and is attributable to several factors: approximately $300 million, with $240 million in wholesale and $60 million in retail, reflecting softer-than-anticipated demand by end consumers, with the demand recovery assumed in the company’s previous outlook not materializing as expected, as well as unfavorable product mix, primarily due to lower-than-anticipated fleece shipments; approximately $145 million, with $45 million in wholesale and $100 million in retail, reflecting lower-than-anticipated customer replenishment as customers manage working capital levels; approximately $75 million reflecting product availability and service constraints associated with evolving demand and order patterns, primarily in retail; and approximately $30 million reflecting lower-than-anticipated net selling prices across customers and channels.
Given the current macroeconomic environment and the update to our full-year 2026 guidance, we believe it is prudent to withdraw our previously communicated objectives for the 2026 to 2028 period, initially provided in our August 13, 2025 news release and outlined in our Q4 earnings release issued on February 26, 2026. As Glenn mentioned, the underlying strength and long-term prospects of the business remain strong, and we expect to provide an updated long-term outlook at our Investor Day, which we intend to hold in the spring of 2027.
The assumptions underpinning our updated outlook are detailed in our press release issued earlier today. Notably, our outlook includes approximately $220 million in expected IPA tariff refunds, of which approximately $202 million was received in the first nine months of 2026. It also assumes that a significant portion of tariff refunds equivalent to the non-recurring refund benefit recorded in 2026 will be reinvested into further strategic growth initiatives in 2026, including investments in brand building, retail marketing programs, and accelerating product innovation and packaging enhancements.
Our outlook assumes that the softer consumer demand experienced since the reporting of our second quarter results persists in the fourth quarter, with no further meaningful deterioration in the macroeconomic, pricing, and inflationary environment, and the absence of a significant shift in labor conditions or the competitive environment. The adjusted effective income tax rate for 2026 is expected to be approximately 16%. The lower tax rate versus our previous expectation of 18% is the result of earlier-than-anticipated tax benefits resulting from the integration and the recognition of tax attributes that were not previously expected to be utilized.
In addition, as Glenn mentioned, we used the proceeds from the sale of HAA to repay outstanding debt, and our board approved a new NCIB to repurchase up to 5% of issued and outstanding common shares. As such, with a renewed NCIB and an expected strong free cash flow, we believe that share repurchases are an appropriate use of capital. Importantly, our capital allocation discipline has not changed. While our leverage may temporarily exceed our target framework of 1.5 to 2.5 times net debt to trailing 12 months pro forma adjusted EBITDA, we remain focused on maintaining an investment-grade credit rating, and we expect to return to within our net leverage target framework by the end of 2027.
In summary, recognizing that our sales and guidance fell short of expectations, we generated $622 million of free cash flow through the first nine months, and we expect $700 million to $750 million for the full year. Our updated guidance takes a prudent view of the fourth quarter, and we remain focused on maintaining a strong financial position while returning capital to shareholders through our dividend and our new NCIB. Thank you, and now I’ll turn it over to Jesse.
Jesse Hayham (Senior Vice President, Head of Investor Relations and Global Communications)
Thank you, Luca. This concludes our prepared remarks and now we’ll begin taking your questions. Before moving to the Q&A session, I’d like to remind you to limit your questions to two, and we’ll circle back for a second round if time permits. Jeanne, you may begin the Q&A session, please.
OPERATOR
If you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. And your first question comes from the line of Chris Lee with Desjardins.
Chris Lee (Analyst)
Hi, good morning, everyone. I know it’s a tough question to answer right now with all the macro uncertainties. Your revised guidance for this year implies Q4 sales will be down around, I think, 16%. How should we think about the first half of next year? Understanding that there will be more macro pressure, but at the same time, you’ll be lapping the proactive destocking from a year ago. So any sort of touch points or guidance on that would be great.
Thank you.
Luca Barile, CPA (EVP, CFO)
Hi, Chris. Good morning, and thank you for your question. So, a few elements. I think in order to understand the underlying strength of the business, one really has to understand what has taken place in the third quarter, given that our third quarter net sales came in below our guidance, but also below last year. So I do want to make sure I give you an informed view of the third quarter, explain how those trends have translated to the fourth quarter, and then touch upon some of the underpinning elements that one can think of as you move forward.
At this juncture, we aren’t providing guidance for 2027. Typically, we do so for every fiscal year when we report our Q4 earnings. But let’s focus on the third quarter first, and I’ll get to your question. So when you take a look at the third quarter, right, the revenue was 1.47 billion versus our pro forma, that was down about 8.9%. All right, so there was a delta of about 143 million. And you need to look at that through the lens of wholesale and retail. So when you take a look at wholesale, 735 million, that was down 10.8% versus pro forma of 823. The contributing factors, first and foremost, right, the softer demand trends that were experienced amid the macroeconomic environment contributed to that difference, as well as, and very important, is the unfavorable mix, which was driven by lower fleece sales than anticipated.
Okay. Third, there was a positive impact on prior year sales ahead of announced price increases in Q3 of 2025. Okay. But when you take a look at the wholesale market, you have to take a look also at the market performance itself. And in Q2 the market was down low single digit, but was strong in June. Right. And what we see now in Q3, and we projected to Q4, is a market that is down mid single digit, and our previous guidance was flat to down low single digit. But we had, in our estimates previously, assumed that, you know, the Q2 fleece tightness that we experienced was going to sell in closer to the season, and those sales have not come through.
Historically, fleece has been a very strong category for us, but in the face of the warmer weather that we’ve experienced, we’ve seen the category. In September alone, the POS was down, as Chuck was mentioning, mid to high teens. And we’ve carried that forward, right, in terms of the expectation for the fourth quarter. So when you take a look at the elements in the wholesale market, right, the two elements that contributed really are the softer demand trends and the unfavorable mix, which was impacted by fleece.
When you look at retail, retail, 732 million, right, down 7% versus the pro forma of 787. The contributing factor there, year over year, right, we had softer demand trends amid the micro environment. That was partially offset by the wraparound of price. But we did experience availability and service constraints that impacted the quarter. So when you take a look at Q4, you’re right, because we’ve given a view on the full year, Q4 is implied to be down.
It’ll be down in both wholesale and it’ll be down in retail. But the elements are the macro environment and, on the retail side, really the availability and service constraints in Q3, which are at this point largely behind us, and an element that we can tackle. The other element in the full year guidance, which you have to take into consideration, which is important, is amid the softer demand trends in the macro environment I outlined, we are projecting that in the fourth quarter we will see lower-than-anticipated customer replenishment as customers manage their working capital. And that’s about 145 million, about 45 million of that in wholesale, but primarily it’s 100 million in retail. And you have to think about that categorization as effectively customers curtailing their weeks of supply amid, you know, the environment.
So once we understand the drawdown and the guidance this year and the performance, you say, well, what’s the underlying business like? Right. Comfort Colors, American Apparel, Champion — these categories performed well. From a share perspective, we gained a little bit less share than anticipated, right, but the underlying strength of our product portfolio, the innovation that we’re putting into our products, our view into 2027 positions the underlying strength of the business well.
But it’s important to understand the current scenario, and we’ve taken the cautious approach to the fourth quarter given what we know, and we’ve drawn down the guidance accordingly. So can’t provide more guidance on 2027, but did want to share the more the current conditions are understood and the underlying strength is understood to give us a view on going forward.
Chris Lee (Analyst)
Okay, that’s very helpful, thank you. And maybe a follow-up question is, when you mentioned that you do expect to return to your financial leverage framework by the end of 2027, just curious, what are some of the key building blocks that need to happen for that to be achieved?
Luca Barile, CPA (EVP, CFO)
Well, it’s a good question. So, Chris, I would say that as a company, and that’s evidenced this year so far, right, we’ve generated 622 million of free cash flow, and we’re anticipating 700 to 750 for the year. In terms of our capital allocation strategy, we really do balance two key elements. One is remaining investment grade from a balance sheet perspective is very important to us and also important to our stakeholders and our customers. So our target range of 1.5 to 2.5 times has not changed.
We may temporarily operate slightly higher than that range, but we balance that against also use of capital. A really good use of capital presently, we believe, is, you know, we’ve renewed our 5%, 5% NCIB program and, through that and our dividend, returning capital to shareholders. So strong free cash flow and our balance sheet strength really underpins our view of returning to framework by the end of ’27.
Chris Lee (Analyst)
Thank you and all the best.
Luca Barile, CPA (EVP, CFO)
Thank you, Chris.
OPERATOR
Your next question comes from the line of Jay Sowell with UBS. Please go ahead.
Jay Sowell (Analyst)
Great. Thank you so much, Glenn. I want to just ask you about, you know, your three-year outlook. Obviously we’re not getting any three-year outlook today, but given this change in the environment and, you know, the opportunity to rethink the guide or to change the guide, what are you going to rethink about the strategy? What might you do different? Like what can you do to drive sales growth? You know, do you need to reinvest more? Can you just talk to us about, you know, what this is going to cause you to do based on this being the change in the environment over the last few months?
Glenn Chamandy (President and Chief Executive Officer)
Well, yeah. Well, thank you. Look, we’re disappointed, obviously, with the market, but I would say to you that has not changed our positioning. I mean the consumer is basically under pressure. We think that will turn itself out. I mean, obviously higher interest rates, higher oil costs, higher food costs, et cetera — those are things that are not in our control. What’s in our control is really the things that we’ve been able to do in building a strong brand portfolio, leveraging our low-cost manufacturing.
And we believe that we’re well positioned to execute on really innovating and reinvigorating the Hanes portfolio brand. So we have a lot of momentum. I would say it’s hard to sort of comprehend that based on where we are today, but we’ve had a great reception from our retail partners basically in terms of, you know, what things that we’re doing on the innovation side, the packaging, the advertising. And we believe that that’s going to, you know, it’s going to benefit us as we move into the next three years.
And that’s why we, obviously from where we are today, from a revenue perspective, we had no choice but to relook at the revenue number. But we still think, and we’re very positive, that the company is in a very good position other than the consumer and the things that we, you know, we don’t control. The things we do control is I think we did a great job on the integration. We’ve got our $100 million of synergies. We have very good sight and line of sight of the 100 million that we’re going to capture for 2027. We feel comfortable on the 250 million, and we think that obviously there is more room for upside which we’ll continue to communicate as we go forward. But look, we’ve done a great job on the integration so far. The heavy lifting is behind us.
We closed down all of Hanes textile production. We consolidated our sock factory into their sock factory in El Salvador, creating probably one of the world’s largest sock factories by machines that are actually fully running. We completed the full order-to-cash — in the process of that integration — and basically consolidated the distribution centers among socks. You know, we’ve done a lot of consolidation in the sewing network between Central America and Asia.
We optimized distribution capacities and reduced facilities this year. And look, we’re focused on 2027 for the complete full integration from all of our systems, order to cash, for the balance of the product. So, you know, we’re working light speed in terms of the integration and combining that. We’ve completely reinvigorated every single one of Hanes products that they’re producing. I mean we’re — that’s why we were so excited originally about our investor day. But, you know, we’re pushing that off a little bit because we just want to make sure that when we recommunicate, obviously, our long-term visions, that we’re well prepared.
And look, we’re getting the integration behind us, we have good visibility and, look, we’re disappointed with the market, the consumer, obviously the position we’re in, and we’re really disappointed in letting down our shareholders, obviously, from what we guided to. But when you look at the positive sides of the integration, we’re still generating positive EPS growth year over year. Our cash flow is still good — 700 to 750 million. We executed on the HA sell that we committed to.
We bring our debt down within our range basically by the end of the year after a major acquisition, and we’re on road to leverage all these synergies that we’ve outlined. So there are moving pieces. But I would say to you that the business is not broken. We’re very, very comfortable with our positioning and, look, we’re still looking very forward to re-issuing longer-term guidance and meeting with our shareholders and explaining to them exactly where we are and the opportunities ahead of us.
Luca Barile, CPA (EVP, CFO)
Yeah, and I would say, just as mentioned earlier, right, we intend to hold that investor day in the spring of 2027. And as I had mentioned in one of my previous remarks, really the strength of our balance sheet is something that we are very focused on, and in terms of our deleveraging story, really, you know, coming back within our framework by the end of 2027 is what we’re focused on.
Jay Sowell (Analyst)
Maybe Luca, if I could just follow up on that. I mean, given the, you know, the softer demand conditions you talked about, the possibility that lasts into next year is, you know, some of the effects, you know, they don’t lap it until you get into the back half of next year. If the change in long-term guide sort of signal that like look, there’s just going to be a lower base effect given what’s gone on this year and. Or is it that you no longer really see the growth potential like whatever the base is this year going forward after you adjust for the consumer environment, do you still see growth potential or, you know, can you just maybe frame like is this change about not being able to do the growth or is it just like having to really adjust the base and wanting to.
Luca Barile, CPA (EVP, CFO)
Yeah, Jay, it’s the former. Right. It’s, you know, you have to readjust the base. Right. And as Glenn was articulating. Right. We had, you know, the prudent thing to do is withdraw the previously communicated guidance because of where we are today. So it’s the base and as we move forward the fundamentals of the business are there. And maybe one aspect to think of is when you take a look at our margin profile for the year, we’ve guided to an operating margin of 20% and the previous guidance was 21.8%.
Effectively within the guide of 20% now you still have the consideration of the 100 million of synergies but you’re impacted by SG&A deleverage. The shift in the top line has made its way through the numbers which effectively governs the change in guidance on the adjusted earnings perspective. So it is a new base and that is effectively the catalyst for withdrawing the previously communicated three-year guide.
Jay Sowell (Analyst)
Got it. Thank you so much.
OPERATOR
Your next question comes from the line of Vishal Sridhar with National Bank. Please go ahead.
Vishal Sridhar (Analyst)
Hi, thanks for taking my questions. Glenn, Gildan has been taking up prices in wholesale for its apparel for several years now. And my understanding after speaking with some of your customers is that this is creating pressure in sales and you’ve seen this pressure persist for years and it gets more acute in some quarters. And you’re calling macro, which is understandable, but can you just comment on this? Taking up prices is in contrast to Gildan’s long-term history of taking prices down which has driven growth in this industry.
But now this industry has been stagnant for years and you’re commenting on the macro and it persisting, this weakness persisting. Want to get your perspective on if this is the right thing for Gildan to do and if in the future we should anticipate Gildan to revert back to its old strategy of taking down prices or are there more price increases expected?
Glenn Chamandy (President and Chief Executive Officer)
Well, that’s a tale of two stories I think I would say is that because look, the number one fastest growing product in our line today is Comfort Colors and Comfort Colors has growing at 20 plus percent a year. Let’s say, for example, and that shirt’s selling for $5. We sell a basic shirt still relatively priced. I know that, you know, prices have gone up but our basic shirts are still wholesaling at the 2.30 to 2.50 range basically. So they’re still very, very attractive in today’s environment.
And also, you know, one of the big drivers of our growth over the last, you know, probably four years has been fleece. We significantly have grown our fleece business and, you know, fleece is a $10 item. So and that’s really what has impacted us this year is because, you know, where we had seen, you know, growth year over year over year, that business has really declined beginning we’re in the, you know, in the third quarter and what we’re anticipating for the balance of this year.
So and that affects not just obviously, you know, the top line, but also the mix as well. So, you know, I don’t think that price is really a factor because where you see the market growing I think are these are all higher priced garments. You know, our All Pro is growing, our Champion is growing. So, you know, I think it’s really, you know, what’s affecting the demand in the industry is really the consumer spending, you know, things. Inflation is hurting. You go to a rock concert, you can’t even afford a ticket, you don’t buy the T-shirt because it’s a last resort.
I mean there’s things like that, I would say, that are affecting demand in the industry. So what we need to see is we need to see inflation obviously come down. Inflation is a factor. And when you look at price, just to sort of maybe look at that from a different angle, inflation is still very relevant as we move forward. Where we are today now that may change in the next couple of months. But, you know, cotton, polyester prices, dyes, chemical, energy, transportation, labor are all going up and interest rates as well. So, you know, if anything I would say that, you know, there’s probably room for more price increases for people to be able to, not just us, but the whole world to absorb these higher costs.
I mean, freight costs from Asia have been going up, you know, by $1,000 every tranche, basically. I mean, they’re back up to close to COVID levels. When you look at the price of diesel, even though oil was trading at $100 a barrel, diesel’s trading in the equivalent of $200 a barrel. So there are underlining inflationary factors that I think will continue to pull up price unless there’s a reversal of oil and underlining interest rates as we go forward.
Vishal Sridhar (Analyst)
Okay, thank you for that. And given that some of your customers in the wholesale channel are private equity owned and the industry is weakening and we’re already seeing them destock, how long do you anticipate this destocking in the wholesale channel to persist? Do you think this is kind of a two-quarter thing or should we just expect it to continue through the course of the year until we anniversary?
Luca Barile, CPA (EVP, CFO)
Okay, well look at, I mean destocking is not really, when you look at the inventory that we called out, the 145 million, 45 million of that was wholesale and 100 of it was retail. So retailers, not just one, across the board are bringing down their weeks of coverage basically of products they have on their floor. In wholesale, we’re calling out a reduction of inventory in the fourth quarter of about 45 million. But that’s in line with the negative POS and I think that that’s the point.
They’re keeping up their weeks of supply. So unfortunately when the POS goes down you’re only keeping inventory on weeks of supply. So you bring down those weeks of supply in conjunction and that’s what really is a reflect and it’s not on that one customer you mentioned, that’s somewhat across the board on our distributor. So it’s more of a reduction in inventory in the channel but more related around a POS phenomenon than it is reduction. So we feel comfortable with the inventory in the channel where we’re going to end up at the end of ’26 and it will be a function of really the growth. If revenues grow, inventories go up and if revenue goes down in unit volume, that inventory will dissipate. So it’s a function of where it is. But we’re pretty much balanced, I would say, at the end of ’26.
Thank you.
OPERATOR
Your next question comes from the line of Brian Morrison with TD Cowen. Please go ahead.
Brian Morrison (Analyst)
Thanks very much. Maybe Glenn, can I follow up on that question? So back in 2019 Gildan ran into a similar backdrop of a strong Q2, change in macro, need to revise guidance. My question is do you view today’s release as comparable in that the rapid change in macro, or is there anything you may view as structural with the recent industry M&A? And then back then you also said that prior cycles typically take two to three quarters to revert back to normal.
Would you still hold by that?
Glenn Chamandy (President and Chief Executive Officer)
Well, I would say that, look, I think in 2019 we fell off against a big cotton bubble basically that sort of translated into demand destruction and, you know, we reset I think the and rent try to energize our business and take market share by passing through that higher cost cotton sooner than we needed to in order to take market share which was very successful and put us on a trajectory of long-term growth as we went forward. It’s hard to say. I would say today things are a little bit different because the market is like what Chuck said is in a K shape basically where the lower end consumer is really feeling the pinch and that’s a function of higher interest rates, higher gas prices, food prices, and those things are really affecting the low-end consumer. So I would say we need to see really to get back on a trajectory. The question is that are we at the bottom of the market? I don’t know.
But to get back on, I think, a growth trajectory, we need to see inflation subside as we go forward. So we know we have a lot of inflation, which I just mentioned, we probably are going to be in a position that prices need to even move up in 2027 from where we’re at today. But it’s hard to say exactly where the market would be and where that consumer will be as we go forward. The one thing I would leave you with is that we feel very good about our innovation pipeline and the opportunity to continue growing market share in retail. And that’s again, you know, a lot of things that we did this year in terms of the Hanes integration.
You know, we’re not feeling the effects of them. I mean, and that’s just the reality of the situation. Because in retail, you know, the time from resetting the floor and all these new packaging and products will flow through in 2027 and really give us the ability to, I think, continue to take share. And we’re well positioned by, supported by our brand advertising and all the things we’re doing. So there’s moving pieces and, you know, hopefully we’ll see the market bring some stability as we move into 2027.
Brian Morrison (Analyst)
Okay, and then thank you. And my follow up, Chuck, can you just please just detail within the wholesale, what segments were most impacted? Like was it corporate spend, was it tourism? Were there other products other than fleece that you called out that would be helpful?
Chuck (Executive Vice President, Chief Commercial Officer)
Thank you, Brian. Well, I think we saw it across the channel really. Overall the biggest impact was what you just mentioned was fleece and Glenn mentioned it. Well, if you look back over the last three to four years, fleece was growing at 10% plus a year. It’s been a continuing growing category. It’s become a big part of our business. And so the biggest impact for us was really the change in fleece. And again, I think it has a lot to do with the warm weather.
You had record temperatures in parts of the U.S. and Europe that even warm still through October. It just gave us a really slow start to fleece. And it just has an oversized impact because of the high sales price per unit compared to the other business. But I think the softness overall in seeing the channel down mid-single versus where, as Luca said, where we thought it would be, was impacted by fleece and then outside of fleece was spread across all categories.
Brian Morrison (Analyst)
Good luck. Thank you.
Glenn Chamandy (President and Chief Executive Officer)
Thank you, Brian.
OPERATOR
Your next question comes from the line of Martin Landry with Stifel. Please go ahead.
Martin Landry (Analyst)
Hi, good morning. I’m trying to understand a little bit your target market. Now with the two combined companies, you’re citing, you know, weakness in the low-income consumer. I know this is not an easy question to answer, but what is your exposure to the low-income consumer right now? You know, I don’t know if you can talk about it per channel, like what proportion you think the low-income consumer represents of your total sales.
Chuck (Executive Vice President, Chief Commercial Officer)
Well, look at, if you look at the—obviously we have two different businesses catering ultimately to different consumers. But overall I would say that the bulk of the innerwear revenues are coming from mass-market customers. And obviously the mass-market customer is more oriented to servicing the low-end consumer. So I think that puts that in perspective, and one of the, I guess, things that we just really need to evaluate is when that consumer will come back.
Alan Greenspan once came out and said the way he measures a recession is monitoring POS when it goes negative. Technically the United States was going into a recession. So this K-shaped situation we have is we have, you know, obviously POS not performing and yet the higher-end affluent consumer obviously, you know, investing in the stock market is doing really well. So, you know, we’re really, I think, you know, in a unique position because, you know, the bulk of our products are going to mass, particularly in retail, and in wholesale I think we’re more of a discretionary-type event.
I mean, you know, you go to a rock concert, you can’t afford a ticket, you still go to the show, do you not buy your T-shirt? You go buy pizza, you go to the pizza shop, you don’t buy a T-shirt. I mean, so these are obviously discretionary items that people can avoid purchasing. And, you know, that’s one of the reasons why I think we’ve seen a cyclical decline on a year-over-year basis worse than we anticipated, from the low to the mid-single digits.
And I think what you’re seeing on top of that is as you see Comfort Colors doing well, American Apparel, All Pro—you know, the premium products, as Glenn mentioned in his comments earlier, are doing quite well. And that shows some of the diversification within that channel, the wholesale channel as well.
Martin Landry (Analyst)
Okay, that’s helpful. And maybe just looking at—I would assume, you know, at retail with mass retailers, the planogram discussions are happening now or have happened already for the resets in the spring. I’d love to hear a little bit how these discussions have gone, what shelf space looks like for you guys next year versus this year.
Chuck (Executive Vice President, Chief Commercial Officer)
Yeah, Martin, I mean, we’re constantly in conversations with the retailers, as you mentioned. Now, we don’t have exact floor sets for next year. What I’ll tell you is reiterate something Glenn said earlier. As we showed them our new innovation and new product, there was a lot of excitement because what we’re doing, we’re really raising that product quality. Everything in men’s bottoms, for example—the waistband’s changed, the fabric’s changed. Then not only do we do that, we put it in better packaging.
And then across the line we put in packaging that makes it shoppable from our base core all the way to our trade-up, where it’s more shoppable, better merchandised. And then, on top of that, if you throw on the media campaigns and what we’ve done on the brand campaign so far in Q3 and what we’re going to do in Q4—hopefully you’ve gotten to see some of our commercials that have been on Thursday Night Football, been on different programs—and so we’re really amplifying the brand conversation right now. And then what we’re going to follow that with as we go into 2027 is really product-specific messaging around our innovation, because once you amplify the brand, you come behind that with product messages.
And as we’ve shown that to the retailers, that creates excitement to them because it drives traffic to their store. And that’s what they’re after—is can they drive additional ring and traffic in their store. So what I can tell you, I don’t have space numbers yet for 2027, but I can tell you the conversations are going well and the retailers are definitely excited about what we’re doing with our products and our brands.
Martin Landry (Analyst)
Okay, thank you for all the color and best of luck.
OPERATOR
Your next question comes from the line of John Zamparo with Scotiabank. Please go ahead.
John Zamparo (Analyst)
Thank you. Good morning. I wonder if you could share performance by month on a POS basis through Q3 and also for October.
Luca Barile, CPA (EVP, CFO)
Hi, John. We don’t provide that information, right, in terms of a monthly breakdown and POS by category. But what we can say is, look, we were surprised, obviously, with the rapidity of the impact within the third quarter. We were impacted by softer demand trends amid the macro environment. As we did mention, going into September, which is really the beginning of the fleece season, the most notable was really the fleece category, where POS was down mid- to high-teens.
Right. And that, comparative to fleece growing year over year for, you know, the past few years, was a differential which was fueled really by the weather and other factors. So, you know, we don’t provide that amount of detail, but that was a category that was clearly indicative. Chuck, you want to add anything there?
Chuck (Executive Vice President, Chief Commercial Officer)
Yeah. You know, what I would say, John, is, you know, if you go back and listen to our last call, we mentioned that, you know, we had seen in wholesale, for example, we saw a good June and then we saw softening in July. What I’ll just call you to is then it decelerated further, more than expected, in August and September. That gives you the trend of the quarter. Similarly, we had said in retail last quarter that we had saw the start of Q3 a little softer and then deceleration.
That gives you a little bit of color. Then what I would tell you about October is we’re trending as we’ve expected in our new guidance. So I would tell you we’re similar trend, and we’re in trend with the guidance we’ve given.
John Zamparo (Analyst)
Okay, thanks for that. And more broadly, I wonder why you think your industry is disproportionately impacted by the low-income consumer. Is it as simple as it’s a discretionary category? Because there are many retailers and brands out there that have significant exposure to low income, but the organic sales declines are maybe not as material as what Gildan Activewear is facing and seemingly what the industry is facing. So I wonder how you think about the industry, why it’s disproportionately impacted, particularly as many of us consider Gildan Activewear a share winner from trade down.
Thank you.
Chuck (Executive Vice President, Chief Commercial Officer)
Sure. And specifically when you’re talking about it from a retail perspective, I think when you think about the economy overall, you see that the $150,000-plus consumer is doing pretty well because they’re not as impacted by the fuel prices and food prices and so forth. But when you look at the consumer that’s $100,000 and under, they’re having to make some tough choices right now. They’re having to decide, you know, can I afford my gas to get to work and take the kids to school?
What can I spend on food? Now, do I think that underwear recovers, and innerwear recovers? Yes, I do. I think it’s a category that it’s replenishable. People are going to want and need. But when they’re making a tough decision at a point in time, can they put off that replenishment of their innerwear for a few more quarters or months or whatever it is? That’s a decision they make so that they can fuel their car and provide food. I think that’s the way we see it and the way we’re hearing in the market.
Again, I think it will come back, but it’s a tough decision people are making right now at a lower income level.
John Zamparo (Analyst)
Understood, thank you very much.
OPERATOR
Your next question comes from the line of Nevin Yocum with BMO Capital Markets. Please go ahead.
Nevin Yocum (Analyst)
Yeah, thank you. Good morning. You have Nevin on for Steve today. I was just hoping you can expand upon the product availability and service constraints you’re facing in retail. Was this related to a few large customers, or would you view it as broader based? And then do you expect the full impact to be isolated to 2026?
Chuck (Executive Vice President, Chief Commercial Officer)
Sure. Thank you. And again, I think if you look at the availability constraints, they were across categories, so it wasn’t retailer-specific or category-specific. But I’ll give you a little more color on that. I mean, you had several factors. One, we had the fact that we were impacted by shift cadence and kind of mix, and you could see things like changing lower pack sizes—things that are forecast came in a little bit different from what we’d forecast and planned for.
So you had a little bit of that. We had some minor production tightness as we went through some integration of the facilities that Glenn went through, but that went well; we just had some tightness through that. Then one of the bigger impacts, I would say, is the longer-than-expected lead times on certain sourced products and freight and transit times out of Asia—that’s really been impacted by the Middle East conflict and what we’re seeing move around there.
And one of the drivers there is, you think about our wholesale business; before, we have backorders, we just fill them. Once we get the goods in, the retailers—we get an order in—if you can’t fill it, it cancels. So it’s a larger impact when you think about it from a retail perspective. Now, one of the things—we have a plan and a clear set of actions underway to address this, and that’s what we want to assure you. One of those is looking at, for example, Gildan Activewear historically had lower inventory targets on some of these longer lead-time items, and we’re actually going to slightly increase those so that we can carry a little more supply onshore, invest a little working capital to make sure that we can service that retail demand and have product available.
So we’ve implemented that; we’re in the process of building that up. And what I would tell you is—and I think we put in our release—for the most part these inventory constraints are behind us. And so I would say they’re largely behind us, and you shouldn’t see that impact as we go into 2027.
Nevin Yocum (Analyst)
Great, that’s helpful, thanks. And then just lastly, Luca, are you able to unpack your margin guide for 2026 relative to the prior expectations? Would you view the pressure as more coming from gross margin or SG&A? And then any goalposts that you’re able to provide as we head into 2027.
Luca Barile, CPA (EVP, CFO)
Thank you for your, for your question. So when we take a look at the, at the gross margin and the SG&A and really the operating margin. Right. Let’s start with the third quarter. So the operating margin in the third quarter was 27%, which was ahead of guidance of 26. Two main factors there, 200 basis points approximately because of the timing of our reinvestment that were planned between the third and the fourth quarter and then offset by about 100 basis points of, of SG&A deleverage.
Right. So still, you know, a strong margin within the quarter. When you take a look at the full year, we’re guiding to an adjusted operating margin of approximately 20% that is underpinned by, it considers the 100 million of synergies and as I mentioned the, the, you know the previous guidance was 21.8%. Obviously with the call down in terms of the top line, it’s impacted by SG&A deleverage. But if you take a look at what really underpins our margin as we move forward in gross margin, let’s not forget this year we had lower year over year fiber costs.
We had the synergy realizations, we had tariff refunds net of some reinvestments that were through the gross margin. We’re managing inflationary puts and takes. Right. And we do have good visibility at this juncture given our vertical integration and the way that our costs flow through inventory and cost of sales. So we’ve mentioned on previous calls our advantage in terms of our network operating in Bangladesh, our network optimization in Central America and the investments that we made in our yarn optimization have beared fruit.
So the underlying gross margin is strong. And with respect to SG&A, when you take a look at our SG&A percentage, synergy realization is coming through. We have line of sight on the next 100 million for 2027 that’s going into our operating margin as well. And so we had some elements this year such as the Barbados subsidy that has come through. We do have lower variable compensation this year but we also had some one time integration costs in our SG&A that will not recur.
So when you take a look at the 20%, it was really impacted by SG&A deleverage. But as we move forward we will see those synergies continue to come through and the underlying strength of the margin is there for the business.
Nevin Yocum (Analyst)
Understood. Thanks for taking the questions.
Luca Barile, CPA (EVP, CFO)
Thank you.
OPERATOR
That concludes the question and answer session. I will now turn the call back to Jesse Hayham for closing remarks.
Jesse Hayham (Senior Vice President, Head of Investor Relations and Global Communications)
Thank you once again. Thank you for joining us today and we look forward to speaking with you soon. Have a great day.
OPERATOR
This concludes today’s conference call. Thank you all for joining. You may now disconnect.
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