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