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The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto for the six months ended April 4, 2004, with Management’s Discussion and Analysis of the Financial Position and Results of Operations (“MD&A”) in the fiscal 2003 Annual Report, including the section on the risks and uncertainties.

Gildan Activewear Inc. is a vertically integrated manufacturer and marketer of premium quality branded basic activewear for sale principally in the wholesale imprinted activewear segment of the Canadian, U.S., European, and other international markets. Our Company manufactures and sells premium quality 100% cotton and 50% cotton/50% polyester T-shirts, sport shirts and sweatshirts in a variety of weights, sizes, colours and styles. We sell our products as blanks, which are ultimately decorated with designs and logos for sale to consumers. Gildan’s corporate head office is located in Montreal, Canada, and over 9,300 full-time employees work in our facilities worldwide. Our shares are listed on the New York Stock Exchange (GIL) and the Toronto Stock Exchange (GIL.A).

All financial information contained herein is expressed in U.S. dollars unless otherwise stated. Historically, the financial information of the Company has been measured and reported in Canadian dollars. However, effective October 6, 2003, the Company adopted the U.S. dollar as its functional currency since a significant portion of revenues, expenses, assets and liabilities are denominated in U.S. dollars and the Company’s sales and manufacturing operations are increasingly international in scope. Effective the same date, the U.S. dollar was adopted as the Company’s reporting currency. The Company will continue to report its results in accordance with Canadian GAAP. Historical financial information in U.S. dollars has been provided in the Investor Relations section of the Company’s Web Site, which can be accessed at www.gildan.com.

Sales for the three months ended April 4, 2004 were $141.4 million, up 24.5% from $113.6 million for the three months ended March 30, 2003. Unit sales for the second quarter were 7.6 million dozens, up 24.6% from last year. Sales for the six months ended April 4, 2004 were $219.3 million compared to $178.6 million for the six months ended March 30, 2003, representing an increase of 22.8%. The increase in sales for the three-month and the six-month periods were due to an increase in unit shipments combined with a higher valued product mix, partially offset by lower selling prices.

 

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Quarterly Report to Shareholders Second quarter ended April 4, 2004

to screen-printers increased by 11.6%, sport shirt shipments increased by 1.1%, and fleece shipments increased 13.8% compared with the second quarter last year. Sales of Gildan T-shirts by distributors grew by 30.3%, while sales of Gildan sport shirts and fleece products increased by 34.7% and 39.2% respectively.

The Company continued to expand its European business and maintained its leading market share position in Canada. Gildan’s unit shipments in Europe increased by 38.9% over the second quarter last year, and shipments in Canada were up by 10.2%. Selling prices in the Canadian market were negatively impacted as a result of the lower landed selling prices for U.S. competitors in the Canadian market, due to the decline in the relative value of the U.S. dollar.

Gross margins were 26.6% compared to 29.6% in the second quarter of fiscal 2003. Gross margins for the six months ended April 4, 2004 were $58.6 million or 26.7% compared to $52.7 million or 29.5% for the same period of the prior year. Gross margins decreased by $1.1 million in the quarter and by $3.3 million for the six months ended April 4, 2004 due to the impact of change in functional currency, as opening inventories were consumed. Gross margins, excluding the impact of the adjustments due to the change in functional currency, were 27.3% for the three months ended April 4, 2004 and 28.2% for the six months ended April 4, 2004 versus 29.6% and 29.5% for the same periods last year.

Selling, general and administrative expenses were $15.2 million or 10.7% of sales for the second quarter of fiscal 2004 compared to $13.5 million or 11.9% of sales in the second quarter of fiscal 2003. For the six-month period ended April 4, 2004, selling, general and administrative expenses were $26.5 million or 12.1 % of sales compared to $23.6 million or 13.2% of sales in the same period of fiscal 2003.

Depreciation and amortization expenses were $5.2 million in the second quarter of fiscal 2004 compared to $3.7 million in the second quarter of fiscal 2003. For the six-month period, depreciation and amortization expenses were $10.2 million in fiscal 2004 compared to $7.2 million in fiscal 2003. The increase is the result of the Company’s continued investment in capital expenditures to provide for long-term sales growth. Approximately $0.9 million of the increase for the six months ended April 4, 2004 was caused by the change in functional currency, as a portion of the upward revaluation of opening fixed assets was depreciated during the period.

Interest expense has increased to $1.8 million in the second quarter of fiscal 2004 from $1.7 million in the second quarter of fiscal 2003. For the six-month period, interest expense was $3.3 million in fiscal 2004 compared to $3.2 million in fiscal 2003. The increase is the result of the Company’s share of interest on long-term debt undertaken by the Company’s joint venture.

 

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Quarterly Report to Shareholders Second quarter ended April 4, 2004

Net Earnings

The following table sets forth certain summarized unaudited quarterly financial and other data for the periods presented. The financial data has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such quarterly data. The Company’s revenues and income are subject to seasonal variations. Consequently, the results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.

Fiscal 2004

Quarterly Report to Shareholders Second quarter ended April 4, 2004

Capital expenditures in the second quarter amounted to $10.5 million, primarily for the Dominican Republic and the Rio Nance projects. In the second quarter of fiscal 2003, the Company invested $9.5 million in fixed assets. Year-to-date, the Company invested $26.6 million in fixed assets and it now anticipates that capital expenditures for the full year will be approximately $65 million. The major projects include the new textile facility in the Dominican Republic, to be operational in fiscal 2005, the expansion of the Rio Nance textile facility and the addition of a new sewing facility in Nicaragua.

For the quarter ended April 4, 2004, cash flow from operating activities, including changes in non-cash working capital, was a use of cash of $6.2 million compared with a use of cash of $7.5 million during the same period last year. Year-to-date, use of cash from operating activities was $25.9 million compared with a use of cash of $1.7 million during the same period last year. The increase in use of cash was the result of increases in non-cash working capital items.

Total indebtedness at April 4, 2004 amounted to $76.1 million compared to $73.6 million at October 5, 2003 and $75.3 million at March 30, 2003. At the end of the second quarter, none of the Company’s $150.0 million CAD revolving bank facility was utilized.

Management expects that cash flow from its operating earnings, together with its year-end cash balances and unutilized bank facilities, will be sufficient to meet any foreseeable cash needs for the balance of fiscal 2004.

 

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Quarterly Report to Shareholders Second quarter ended April 4, 2004

OUTLOOK

In the first and second fiscal quarters, the Company has achieved its EPS growth projections by offsetting higher than anticipated promotional activity and resulting lower selling prices with higher than projected unit sales volumes. In the second half of the year, and especially in the third fiscal quarter, the Company will not have sufficient capacity available to continue to exceed its previous projections for unit sales volume growth.

Going forward, the Company expects to achieve its objective of minimum 15% EPS growth beyond 2004, in addition to achieving 15% — 20% EPS growth in the current fiscal year, even if industry pricing continues to decline. Gildan is slightly ahead of schedule with its timetable for construction of its Dominican Republic textile facility. As the Company brings this facility on stream, it expects to continue to lower its manufacturing costs and to have capacity available to further accelerate its market share penetration in the wholesale distributor channel in fiscal 2005, as well as to implement its plans to enter the retail channel.

In November 2003, the Canadian Institute of Chartered Accountants (“CICA”) revised Handbook Section 3870, with respect to the accounting for stock-based compensation and other stock-based payments. The revised recommendations require that beginning January 1, 2004, the fair value-based method be used to account for all transactions whereby goods and services are received in exchange for stock-based compensation and other stock-based payments. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting periods.

In accordance with the transitional options permitted under Section 3870, the Company has elected to early adopt the new recommendations effective the commencement of our 2004 fiscal year and prospectively apply the standard for employee stock awards granted after October 6, 2003. There were no options granted during the three months and six months ended April 4, 2004. Previously, the Company applied the settlement method of accounting to employee stock options.

Quarterly Report to Shareholders Second quarter ended April 4, 2004

In December 2002, the CICA issued Handbook section 3063, “Impairment of Long-Lived Assets”. Section 3063 provides accounting guidance for the determination of a long-lived asset impairment as well as recognition, measurement and disclosure of the impairment. This section was effective for the Company’s 2004 fiscal year and has not had a material impact on its financial statements.

In March 2003, the CICA issued Handbook Section 3110, “Asset Retirement Obligations”. This section requires that the fair value of an asset retirement obligation be recorded as a liability only when there is a legal obligation associated with a removal activity. This section was effective for the Company’s 2004 fiscal year and has not had a material impact on is financial statements.

For a complete discussion of the risks and significant assumptions used in determining the fair value of the Company’s financial instruments, please refer to Note 13 of our 2003 consolidated financial statements in the Annual Report, which is hereby incorporated by reference.

In order to be successful, the Company must continuously be aware of global changes and risks affecting its markets and competitive environment. Risk areas include changes in international trade legislation and taxation, changes in cotton prices and currency fluctuations. For a more detailed discussion on potential business risks, readers should review the risks factors section of the Annual Information Form filed by the Company with the Canadian securities commissions and the Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission which are hereby incorporated by reference.

As of April 30, 2004 there were 29,627,619 Class A subordinate shares issued and outstanding along with 679,635 options outstanding.

Certain statements included in this management discussion and analysis may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer you to the Company’s filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission for a discussion of the various factors that may affect the Company’s future results.

We believe that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Furthermore, the forward-looking statements contained in this report are made as of the date of this report, and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement expressly qualifies the forward-looking statements contained in this report.

SIGNATURE

     Pursuant to the requirements of the Securitiecs Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.