Thursday, February 25, 2016

40th AIM student update by Brendan Fanning. Gildan Activewear Inc. (GIL): “Could Their Super Bowl T-Shirt Ad Actually Spur Growth?”

GIL (Gildan Activewear Inc.): “Maintaining a Solid Foothold in a Fierce Industry”
By: Brendan Fanning, student at Marquette University

Image result for gildan activewear logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

·         A Gildan advertisement titled “Getaway” was featured during the third quarter of the Super Bowl on February 7 in front of the third largest TV audience in history.
·         The Q3 earnings report featured a 4% growth in EPS and strong sales numbers.
·         GIL continues to place an emphasis on growing their portfolio of brands and enhancing production capabilities   
·         December personal spending data was flat compared to November while personal income rose 4.5% in 2015.  

Gildan Activewear Inc. (NYSE:GIL): Recent News
On February 7, 2016, Gildan Activewear made its Super Bowl debut with a short ad intended to demonstrate the lengths that a man will go to win back his favorite t-shirt. The spot was scheduled for the third quarter and produced by DeVito/Verdi. According to Gildan’s Retail VP of Marketing & Merchandising, the add was titled "Getaway" and was part of the first campaign for clothing like T-shirts, underwear and hoodies bearing the Gildan brand and being stocked by chains that include Kmart, Kohl’s, Shopko, Target and Walmart. This marketing move provided valuable exposure for Gildan, as the Super Bowl 50 audience was third largest in TV history averaging 111.9 million viewers.

During the Q3 2015 earnings call, CFO Rhodri J. Harries announced adjusted EPS of $0.52 per share, which was up 4% compared to the same quarter in 2014 and was in line with guidance provided at the end of July. Harries also provided guidance for the fourth quarter of 2015 projecting net earnings to be a record for our fourth calendar quarter. 

The growth in earnings was driven both by unit sales volume increases and operating margin expansion. This margin expansion comes after three quarters of margin compression due to the misalignment in the timing of lower print-wear net selling prices. A turnaround in margin trajectory was led by lower manufacturing and cotton costs. Impressively, sales of Gildan-branded products increased 30% during the quarter and print-wear unit sales in the U.S. market grew 6%, while international sales recovered strongly. 

Over the course of the fiscal year 2014, Gildan made several significant investments to continue the development of the company both in the print-wear and retail markets. Namely, in June 2014, Gildan acquired Doris, the third largest marketer and manufacturer of branded ladies legwear in North America and the market leader in Canada. Additionally, the company increased production capabilities with investments in yarn-spinning operations and establishment of two new manufacturing plants.  

Current Economic Environment
December consumer spending data was unimpressive as personal spending, which measures consumption on all goods, was flat in December from a month earlier. Spending increased 0.5% in November and was flat in October. These numbers seem to contradict favorable spending trends such as lower prices for gasoline and food and unseasonably low utility bills in December due to warm weather in much of the country. However, data shows that extra savings were put away or used to pay down debt. The personal saving rate, or the share of income saved, rose to 5.5% from 5.3% a month earlier, matching a three-year high. Despite weak data, some economists expect spending to rise as the labor market firms and savings from low gas prices begin to feel permanent.

In terms of income growth, December data was more promising. Income rose 0.3% after a similar gain in November. Wages and salaries increased 0.2% after shooting up 0.5% in November. An income bump of 4.5% in 2015 was the largest increase since 2012, after rising 4.4% in 2014. Income at the disposal of households after accounting for inflation in 2015 recorded its biggest increase since 2006.

Competitive Environment
Gildan competes with major apparel manufacturers such as Fruit of the Loom and Hanesbrands; and small manufacturers such as Delta Apparel and Alstyle Apparel. Internationally, Gildan also faces competition from various Mexican and Central American manufacturers. Also, in Europe, the company competes with products and supplies sourced from Asia.  

Despite headwinds from the recent appreciation of the US Dollar, Gildan is one of the more favorably positioned to weather these headwinds relative to the industry. The company generates around 90% of its revenues in the US and also reports in US Dollars.

Signs of industry consolidation within the print-wear channel is also becoming a trend. To combat this threat, Gildan has been investing heavily in manufacturing. According to the Q3 earnings call, the company has spent $1 billion in the last three years and is in a great position to be the market leader through this consolidation period. In addition, management has taken steps to implement strategic pricing decisions to maintain market share.   

What has the stock done lately? GIL has bounced around quite a bit YTD with a big run up in May until a peak in late July after an optimistic earnings call. However, news of margin compressions and increasing price competition from HanesBrands caused the price to depreciate throughout the rest of the year. A merger between two distributors (Alphabroder and Bodek & Rhodes) also negatively effected GIL’s price due to the possibility of customer concentration.

Source: FactSet

My Takeaway

Gildan maintains a solid position within the industry as the company’s vertically integrated structure allows management to maintain higher standards of quality while keeping costs down and respond nimbly to rapidly changing consumer trends. Additionally, with high free-cash flow generation, Gildan has always been active in increasing its product range. In the near-term, the company is excited about becoming a major supplier of underwear and undecorated Activewear products in the retail channel. 

Additionally, an acquisition in Comfort Colors in March of 2015 will give Gildan the opportunity to further penetrate into the North American print-wear market. Going forward it will be important to monitor how Gildan can leverage its strengths to benefit from growth in e-Retailing and if consumers begin to spend savings generated at the pump. 

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