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In re Gildan Activewear

July 1, 2009

IN RE GILDAN ACTIVEWEAR, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge

OPINION & ORDER

This Document Relates To: ALL ACTIONS

Plaintiffs, purchasers of the common stock of Gildan Activewear, Inc. ("Gildan" or the "Company") between August 2, 2007 and April 29, 2008 (the "Class Period"), brought this putative class action against Gildan and two of its officers and directors -- Glenn Chamandy ("Chamandy") and Laurence Sellyn ("Sellyn") (collectively, the "Individual Defendants") -- alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934.*fn1 Plaintiffs filed a Consolidated Amended Class Action Complaint (the "Complaint") on November 17, 2008. Defendants moved to dismiss the Complaint pursuant to the Private Securities Litigation Reform Act ("PSLRA") and Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. For the reasons set forth below, Defendants' motion to dismiss is granted.

I. FACTUAL BACKGROUND

Gildan, headquartered in Montreal, Canada, is a leading supplier of activewear for the wholesale imprinted sportswear market in the United States, Canada and Europe. Compl. ¶ 17, 40. The company's core wholesale business consists of the manufacture and distribution of activewear "blanks," namely T-shirts, fleece and sports shirts that are produced and sold in large quantities to wholesalers to be subsequently customized by screen printers with designs and logos.*fn2 Id. Gildan was incorporated as a private company in May 1984 and completed an initial public offering on June 17, 1998. See 2007 Form 40-F (App. 8) at 1. Its common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange. See Compl. ¶ 17.

Problems in the Dominican Republic Manufacturing Facility

Historically, Gildan had manufactured its products primarily in facilities in Canada and the United States; however, in an effort to reduce costs, Gildan opened a textile facility in Honduras in 2002 and a second facility in the Dominican Republic in 2005. Compl. ¶ 44. The Honduras and Dominican Republic facilities initially manufactured relatively simple products, but in March 2007, Gildan transferred its primary manufacturing capacity to the Dominican facility, where it began to manufacture more technically advanced products, such as ring-spun cotton polo shirts. Id. ¶¶ 4, 44. Plaintiffs allege that the Dominican facility encountered regular maintenance issues and problems with production from the time the plant's equipment was first installed in 2005 and 2006. Id. ¶ 55. However, these issues came to a head when Gildan began to transfer additional production to the Dominican facility in 2007. Plaintiffs allege that, unbeknownst to investors, soon after the primary manufacturing business was transferred to the Dominican facility, it began to experience severe production problems and struggled with chronic issues such as layoffs and employee turnover, ineffective management, unrealistic production goals, machine failure and malfunctions and environmental issues. Id. ¶¶ 59-63. By May 2007, Gildan's headquarters began closely to oversee the Dominican facility and sent additional Canadian managers to oversee the management at the plant. Id. ¶ 47. A restructuring of management and staff followed, leading to layoffs and the replacement of certain management. Id. ¶¶ 48-50. The Dominican facility continued to have problems with its equipment, but "management repeatedly misdiagnosed the problems as technical rather than maintenance issues." Id. ¶ 56.

In approximately November 2007, in response to these problems, Gildan instituted a "crisis management restructuring" plan, which led to even closer monitoring of the management and production of the Dominican plant. See id. ¶¶ 57-61, 66-70. Ultimately, Plaintiffs allege the Dominican facility "was not efficient" compared to the Honduras facility and could not "absorb the additional capacity demands resulting from the transfer of North American capacity to the facility." Id. ¶ 64, 72. Plaintiffs do not, however, allege that the facility failed to meet production goals or that Gildan ever failed to meet earnings forecasts prior to the first quarter of 2008. In fact, throughout the period during which the Dominican facility was experiencing these major problems, Gildan posted record profits every quarter and met or exceeded its earnings projections throughout the 2007 fiscal year and the first quarter of fiscal year 2008. See 5/7/08 Trans. (App. 15) at 2, 3.

Integration with Kentucky Derby Hosiery

In the midst of setting up its operations at the Dominican facility, Gildan announced on July 6, 2006 that it had acquired Kentucky Derby Hosiery ("KDH"), a North American specialty hosiery company. Compl. ¶ 74. KDH's business centered largely on the sale of specialized sock products (i.e., socks imprinted with logos, mascots and the like) to major retailers. Id. ¶ 75. Gildan's continued production of only generic sock products after acquiring KDH impaired its relationship with a number of KDH's largest customers. See id. ¶ 77. As a result, Gildan was left holding millions of dollars of inventory that it could no longer sell and that had to be carried at the lower of cost or market value. Id. ¶ 78. Plaintiffs allege that at least by January 30, 2008, Gildan knew that it needed to write-down the inventory it was unable to sell, but that it did not announce the write-down until April 29, 2008. See id.; id. ¶¶ 113, 124. Also, Gildan faced difficulties and incurred costs in relation to the integration of KDH's computer systems with its own, resulting in some missed or improperly entered orders and additional shipping and restocking costs. Id. ¶ 79, 120.

Gildan's Statements Regarding Earnings Projections and Dominican Facility Issues

On August 2, 2007, Gildan issued a press release announcing its fiscal third quarter 2007 results and its initial earnings guidance for fiscal year 2008. Id. ¶ 81. In that announcement, Gildan stated that it had "initiated its [earnings per share] guidance for fiscal 2008 with a range of U.S. $1.80 -- U.S. $1.85 per share . . . up approximately 39-40% from fiscal 2007." Id. The press release added that "[t]he projected growth in [earnings per share] in fiscal 2007 is driven primarily by the impact of relocating the Canadian textile operations and completing the ramp-up of the Company's offshore textile facilities in Honduras and the Dominican Republic, unit volume growth in activewear, and the expected EPS accretion from having completed the integration of [KDH]." Id. Sellyn then held a conference call with analysts, in which he reiterated cost savings the Company would obtain as a result of moving its production offshore and its integration with KDH. Id. ¶ 82. Sellyn also emphasized "improved efficiencies" in the Dominican and Honduran facilities, "where [the Company] experienced some short-term operating issues in the third quarter." Id. On August 7, 2007, Gildan filed its Form 6-K quarterly report for the period ending July 1, 2007, which stated that the Dominican facility was "running at a comparable scale of production to [Gildan's] mature textile facility in Honduras" and that the Company would "continue to maximize production levels and cost efficiencies at the Dominican Republic facility during the balance of fiscal 2007." Id. ¶ 85.

On September 18, 2007, Gildan issued another press release announcing, among other things, an increase in its fiscal year 2008 earnings guidance. Id. ¶ 87. Specifically, Gildan announced that it "now expects to achieve or exceed the high end of its previously announced earnings guidance range for fiscal 2008 of U.S. $1.80-$1.85 per share, representing an increase of over 40% compared with the Company's fiscal 2007 projected EPS of approximately U.S. $1.30 before restructuring charges." Id. After this announcement was made, Gildan's stock rose $4.25 per share, or 13%, to close at $35.92 per share. Id. ¶ 88.

On December 6, 2007, Gildan announced its financial results for fiscal fourth quarter and year-end of 2007, the period ending September 30, 2007. Id. ¶ 90. Among other results, the Company "reconfirmed its previous EPS guidance for fiscal 2008 of U.S. $1.85 per share, up 43% from U.S. $1.29 per share . . . in fiscal 2007." Id. In a conference call the same day, Sellyn noted additional problems with the Dominican facility, but assured investors that the problems had been corrected. Id. ¶ 93. He stated that "[a]lthough [Gildan] achieved [its] projected EPS growth, EBITDA was lower than previously projected for three reasons," one of which was the Company's being "unable to fully capitalize on market demand for high-volume hooded fleece and golf shirts as a result of temporary inventory constraints due to transitioning our Canadian textiles to . . . the Dominican Republic." Id. During the conference call, an analyst asked Sellyn whether the below-expectation EBITDA was "all behind [Gildan] now" or whether the market "could . . . see some of that Canadian production transition still affecting margins going into the next quarter." Id. ¶ 95. Sellyn responded by assuring investors that "everything is running at 100% and that's all behind us" and that the Company believed it was "well positioned to ...


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