GIL - Gildan Activewear Inc

[Viking]

Being Canadian, I have been looking for years for world class companies located in Canada NOT in the financial or resource industries. They have been hard to find. On my list: good management; profitable; growth; low debt.

 

Gildan recently hit a new 52 week low, which got my interest. Having spent a few hours reading Q and analyst reports I do like what I see. The reason the stock has sold off is cotton prices spiked earlier this year and management has lowered near term guidance (Q4, 1H-2012) as it works its way through higher cost inventory. Growth the next few years will still be very strong.

 

Stock Price = $24.00

2010 EPS = $1.67 (note, GIL fiscal year end is Sept 30)

2011 Est EPS = $2.00; PE = 12 (estimates are from RBC)

2012 Est EPS = $2.40; PE = 10

2013 Est EPS = $2.90

 

Has anyone followed the company for any length of time? Anyone have an opinion?

[beerbaron]

Can you elaborate on Gildan's moat that gives it long term high ROIC?

 

BeerBaron

[longlake95]

This is starting to get interesting again. I'd say down 3 or 4 more points and it's a buy. Dusting of the file.

[Viking]

Longlake95, I have also begun go get back up to speed with Gildan. I don't think it is crazy cheap at these levels but definitely not expensive. I have not followed the company in a couple of years and it is great to read up on all the changes. Bottom line, they look like a very well run company with nice growth prospects. The industry is very fragmented so they have lots of opportunities to make more acquisitions.

 

I like the fact that they have continued to pay down debt as they have made acquisitions. Their largest competitor (Hanesbrands) has much more debt.

 

Fruit of the Loom (owned by Berkshire) is also a large competitor; I like this as I would expect them to be very rational competitors.

[fjm222]

I have started taking a look at the business as well. I am hoping someone can help me better understand their moat. They have tremendous historical results and have beaten well capitalized, established brands (ie Hanes and Fruit of the loom) stealing market share in their printwear division. It is interesting that they now own the printwear segment as Hanes has stopped even trying to compete. They have done something superior to be able to achieve the results they have but I cant quite wrap my head around it.

 

The next leg of growth is international printwear and branded apparel. I am trying to better understand how the competitive dynnamics in printwear and branded differ and if the successful printwear playbook can be applied to branded.

 

Why have Hanes and Fruit of the Loom not invested to the extent Gildan has over the past 5 years? Gildan seems to be the low cost producer due to their more modern factories in more cost effective geographies but cant the other giants replicate that? I realize that even BRK can't write a $1bil cheque tomorrow for Fruit of the Loom but they certainly can invest to fend off competition from the likes of Gildan.

 

Any insights are appreciated. The long term runway certainly is there if mangement continues to execute.

 

[KJP]

I have started taking a look at the business as well. I am hoping someone can help me better understand their moat. They have tremendous historical results and have beaten well capitalized, established brands (ie Hanes and Fruit of the loom) stealing market share in their printwear division. It is interesting that they now own the printwear segment as Hanes has stopped even trying to compete. They have done something superior to be able to achieve the results they have but I cant quite wrap my head around it.

 

The next leg of growth is international printwear and branded apparel. I am trying to better understand how the competitive dynnamics in printwear and branded differ and if the successful printwear playbook can be applied to branded.

 

Why have Hanes and Fruit of the Loom not invested to the extent Gildan has over the past 5 years? Gildan seems to be the low cost producer due to their more modern factories in more cost effective geographies but cant the other giants replicate that? I realize that even BRK can't write a $1bil cheque tomorrow for Fruit of the Loom but they certainly can invest to fend off competition from the likes of Gildan.

 

Any insights are appreciated. The long term runway certainly is there if mangement continues to execute.

 

In case you haven't read it, there is an April 2016 writeup on Gildan on VIC that offers a perspective on the industry and Gildan's place in it.

[Viking]

I think Gildan's moat is they are the low cost producer in what is largely a commodity market. They have invested lots of $ over many, many years to build out their operations. It would take a new competitor many years to duplicate what Gildan has put in place.

 

What is interesting to me is they now appear to be pivoting and growing their branded business (via acquisition) which would allow for margin expansion. There is some brand value in this category; I have been buying the same brand of underwear for 30 years and I am sure I am not the only one. :-)

 

Management also looks to be very good (having grown the company very well over the past 10 years). They also have a long term focus in their decisions (which can lead to lumpy quarterly results and lots of volatility in the stock).

 

One risk is Trump; Gildan is a large importer to the US and no one knows what Trump might do to try and get more local US production. Perhaps this is why the shares have sold off recently.

 

A second risk is the price of cotton. If cotton spikes it will not be good for their business; this is what drove the shares down a few years ago. The price of cotton is not a problem right now.

 

Regarding Fruit of the Loom, my guess is Buffett is milking the company for cash to deploy in other higher margin opportunities in other businesses.

Regarding Hanesbrands, they carry a lot of debt (compared to GIL). They also have been buying lots of brands; perhaps this is where their capital has been going (focussing more on growing their top line versus lowering their cost base by investing lots in new equipment).

 

 

[Viking]

KJP, thanks for the tip; the VIC write up on GIL was very informative. They also have a couple of good articles on Hanesbrands (one long and one short); the comments at the end of each article also have some good content.

[Viking]

Gildan buys Amareican Apparel: Looks like another solid move by Gildan http://finance.yahoo.com/news/canadian-apparel-maker-gildan-wins-122611840.html

 

Gildan will have very good cash flow in 2017 and this will likely result in more aquisitions as it builds out its portfolio of brands. American Apprael was a US manufacturer; it will be interesting to see if Gildan will continue to produce in the US (they are purchasing some equipment from American Apparel).

 

 

 

[Viking]

Sounds like we will have to wait until Fed 14 to get details of Gildans plans for American Apparel including estimates for sales and profitability. Below is a American Apparel's business segments (it is from 2014YE so they will have changed meaningfully over the past 8 quarters - posted just to provide some context). In the first 6 months of 2015 the Wholesale business showed a small decline (down 5%) while the retail business was down 20%. The wholesale business was quite large and appears to have been the profitable part of the business; it looks like massive losses in the retail operations in US, Canada and International is what put the company under. With the purchase, Gildan looks to be after the Wholesale business, American Apparel brand and some inventory and equipment and not the retail locations or manufacturing operations.

 

American Apparel Annual Sales by segment 2014

Wholesale $180

Retail.      $391

Online.      $61

Total.        $633 million

[longlake95]

Just updating my file on GIL. How do you guys think about GIL's value. I thinks it's worth around $30-32USD, that's based on 8% REV growth, 19% operating margins and 11% cost of capital. That assumes their favourable tax rate doesn't change too much or Trump doesn't impose hefty import duties. GIL still isn't super-cheap.

 

LL

[KCLarkin]

I am buying. Earnings are likely to grow significantly for the first time in a couple of years. The company continues to steal market share. They are exceptional capital allocators. They are the low-cost producer.

 

Current sentiment continues to be negative, due to Trump's protectionist policies and the BAT. Also, the market has rotated into domestic-oriented names that will benefit from corporate tax cuts. Also, key Gildan customers such as department stores are losing market share.

 

I think the BAT fears are overstated. It is almost impossible to imagine significant amounts of apparel manufacturing returning to the U.S.A. So all competitors would be equally taxed. Gildan sells a basic T-shirt for $1.50, so a small tax increase is unlikely to impact demand. Plus, the strong dollar largely offsets the tax impact.

 

This is not as cheap as 2009 or 2011 but offers excellent value relative to the market.

 

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Edit:

One of my favourite things about Gildan: Meryl Witmer, the Berkshire director, seems to be a permabull on Gildan. Gildan absolutely killed Fruit of the Loom, a Berkshire subsidiary, in the printwear market:

http://www.beyondproxy.com/how-to-avoid-value-traps/

 

[KJP]

I am buying. Earnings are likely to grow significantly for the first time in a couple of years. The company continues to steal market share. They are exceptional capital allocators. They are the low-cost producer.

 

Current sentiment continues to be negative, due to Trump's protectionist policies and the BAT. Also, the market has rotated into domestic-oriented names that will benefit from corporate tax cuts. Also, key Gildan customers such as department stores are losing market share.

 

I think the BAT fears are overstated. It is almost impossible to imagine significant amounts of apparel manufacturing returning to the U.S.A. So all competitors would be equally taxed. Gildan sells a basic T-shirt for $1.50, so a small tax increase is unlikely to impact demand. Plus, the strong dollar largely offsets the tax impact.

 

This is not as cheap as 2009 or 2011 but offers excellent value relative to the market.

 

--

Edit:

One of my favourite things about Gildan: Meryl Witmer, the Berkshire director, seems to be a permabull on Gildan. Gildan absolutely killed Fruit of the Loom, a Berkshire subsidiary, in the printwear market:

http://www.beyondproxy.com/how-to-avoid-value-traps/

 

If you like Gildan, you may be interested in Texhong Textiles.  It's not as vertically integrated as Gildan, but appears to have significant economies of scale in yarns.

[Viking]

A likely headwind for Gildan will be their retail business; traditional department stores are really struggling. I think Gildan has been hoping their retail division will be their future growth driver so this is disappointing.

 

Any US border tax will also likely be a short term negative. Given they manufacture the yarn in the US Gildan is likely very well positioned (perhaps the tax is lower). However, prices would go up for consumers and this never a good thing in the short run.

 

The company looks to be hitting the ball out of the part in its printwear business (the much larger business). The aquisitions made the past few years in this segment look to have widened the companies moat.

 

Long term there is much to like about this company. 

[Homestead31]

I am doing some work here, and would appreciate any thoughts from the crowd.

 

I understand Gildan's competitive advantages as they stand now (ie low cost producer / have invested more in plant than competitors) and obviously results have been impressive, but at the same time, I feel like this business isn't THAT much different than the original Berkshire Hathaway at the time that Buffett bought it. 

 

Why is this not a race to the bottom?  Is there a reason to think that Gildan has cemented their position and that HBI or Fruit of the Loom will not have an equipment upgrade cycle in the near future that allows them to undercut and/or produce better products than Gildan?

 

or is the thought that one doesn't have to worry about Fruit of the Loom b/c Buffett has better uses for his capital and learned his lesson on textiles many decades ago?

 

and that the marketplace is much more rational than it was 50 years ago b/c there are only a few major players who are not interested in running each other into the ground?  this doesn't seem like solid footing as there could always be a new scale player that pops up over night in (insert country w/ low labor cost here)

 

anyway - all thoughts are appreciated.  there is alot to like here, but at the end of the day i can't shake the feeling that its just a crappy industry.

 

thanks in advance

[KCLarkin]

Why is this not a race to the bottom?  Is there a reason to think that Gildan has cemented their position and that HBI or Fruit of the Loom will not have an equipment upgrade cycle in the near future that allows them to undercut and/or produce better products than Gildan?

 

Morningstar rates Gildan "no moat" and your concerns are certainly justified.

 

On the other hand, Gildan has 70% market share in the printwear market. That clearly wouldn't be possible if Gildan was truly "no moat". As one example, the printers who buy Gildan products are reluctant to switch. Not only does Gildan have a strong brand but different "blanks" react differently to different printing processes. If company B offers you a $0.05 off your blank you would still be reluctant to switch. I don't think Fruit is a worrisome competitor. If Buffett wanted to double-down on this industry, he would have done it earlier when Fruit had the strongest brand.

 

So it would likely be a foreign competitor, say a manufacture who has scale in China and decides to dump product in the U.S.

 

But I've learned to be comfortable investing in companies whose moats are not obvious. Equity investment is risk capital. There are always risks. Gildan is the hunter not the hunted, so I think comparisons with BH are wrong. If Gildan stops gaining market share, then I think you should be concerned.

 

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I will say that the scenario of a "scale player" popping up overnight is not likely. Just look at the history of Gildan. It was a slow methodical process. A bigger short-term concern would be a trade war, cotton shortage, or coup.

[Viking]

The key to Gildan in the near term is its printwear business. Gildan has made a couple of nice aquisitions in printwear the past couple of years that position it very well, with American Apparel being the latest. Printwear provides the profits that Gildan is using to try and grow out its retail business.

 

I do have questions about how successful Gildan will be in retail. Gold Toe looks like a solid retail aquisition. After than I am not so sure (yet). The company's past success is really driven by printwear.

 

Hanes Brands has a mountain of debt and they pay a large dividend; their model is to acquire growth (and fund it with more debt). They have had no interest in spending to be the low cost provider. And It is too late for them to do so now. The company would need to devote all earnings the next couple of years to upgrading manufacturing and this is not in the DNA of this company or the current group of shareholders (who like the growth through acquisition/debt strategy). Earnings are used to pay interest on debt, pay dividend, buy back shares and to purchase more companies (at very high multiples).

[KCLarkin]

Gildan is down a bit after a CIBC downgrade:

 

“Altogether, consolidated operating income growth in the high single digits would be solid, and layering on a generous buyback, we see EPS growth in the low double digits,” he said. “While impressive, this growth pace does not compel us to take our target multiple past 17 times, and with no change to our estimates, our price target stays at $32. For patient investors Gildan may prove to be rewarding, but with shares approaching our target, we downgrade.”

 

In a world of 2.5% treasuries, a company you think will grow earnings >10% per year (plus 1.2% dividend) isn't worth >17x?

[longlake95]

Started a small position in GIL today. It's down the last few days on anticipation of weak earnings, which didn't materialize. Also, down in sympathy with HBI, which lower full year guidance - and the market to them to the wood shed.

 

[KCLarkin]

Started a small position in GIL today. It's down the last few days on anticipation of weak earnings, which didn't materialize. Also, down in sympathy with HBI, which lower full year guidance - and the market to them to the wood shed.

 

They've also bought back 5% of the shares since February and increased FCF guidance. A very nice quarter despite very significant headwinds with their department store clients.

 

I originally bought this for a short-term trade but I am tempted to hold on and hope that they can buy more shares at a lower price. HBI is wounded and GIL will continue to take market share.

[longlake95]

yes, nice to see them increase the NCIB. I like the FCF story...seeing FCF move higher as the capex program over the last few years rolls off. I still struggle a little about the future of the their retail channels and how that plays out - can they keep their margins if people buy socks and underwear via the e-tailers?

 

 

[KCLarkin]

I still struggle a little about the future of the their retail channels and how that plays out - can they keep their margins if people buy socks and underwear via the e-tailers?

 

They only get 15-20% of their operating income from branded products. Even if you assume they lose 100% share of retail sales and all of that lost operating income falls straight to FCF, they are only trading at 18x FCF with limited leverage. And in that environment, they are going to be able to use their FCF to buy many distressed assets.

 

But I think it is more likely that they will continue to take market share in the declining retail market.

[Viking]

Guys, thanks for getting Gildan back on my radar. Bought some today. Like management as they run the business with a long term approach. Free cash flow this year will be about $450 million or about $2.00 per share. Shares are trading at $28.70 so not terribly expensive. All numbers are US$. Their print wear business (t-shirts, fleece etc) is the big driver of profits and it is doing very well with decent growth prospects (and margin improvement). Their retail sock business is hurting and this is why shares have sold off a little; weakness is coming from department store channel and this will not change soon. Cotton prices are not an issue and are currently coming down a little. Gildan is the low cost producer and they have low debt, especially when compared to Hanesbrands their #1 competitor in retail. Hopefully shares keep selling off as I would be happy to buy more. Gildan will be a consolidator and I think management is very shareholder friendly. They bought back 5 % of stock this year and will likely do the same next year. They also are active on the acquisition front (but smart). I like the company as a long term hold. Hard to find well run Canadian companies that are not banks or resource plays. The shares can also be very volatile.

[longlake95]

No problem, always good to read the input from other informed investors. If someone is a bear on GIL, I'd like to hear your thesis too! I've been a long-time admirer of GIL and was too busy sucking my thumb in early 2017 when GIL was really cheap. I've love owner/operator situations like GIL. As KCLarkin pointed out, HBI is wounded right now, and hopefully GIL will continue to grab market share while continuing to improve the gross margins. There's lots to like, and even more to like in the low $30's (CAD).

 

LL

 

[gjangal]

Wanted to bump this up

 

~450-500mn in FCF

Good Roic

Buying back shares upto 5%

Historically good capital allocation

Vertically integrated low cost producer

Revenue growth in low to mid single digits

 

Cotton prices maybe a headwind

 

I think this is cheap relative to the market. It’s a good company. Am i missing anything?