Gildan Activewear Inc

Gildan Activewear Inc. (TSX: GIL) is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. The company’s primary market belongs to the sale of blank T-shirts to wholesalers and printers (printwear). The group also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. 

Key Highlights:

• Stable Financial Growth: The company reported a decent top-line and operating performance over the past several years, which looks impressive. Over the past five years revenue grew at a CAGR of 4% during FY14 to FY19 while adjusted EBITDA, during the period grew at a CAGR of 7%. Further, the company reported a CAGR of 8% in its adjusted EPS during FY14 to FY19.

Source: Company Presentation)

• Long-term Fundamentals remains healthy: The company is a leader in its own segment and enjoys manufacturing excellence and low-cost structure. Further, the company has a strong brand positioning, coupled with long-standing customer relationships, which augers well for stable demand-dynamics for its products. The company

Q3FY20 Financial Highlights:

• GIL posted its third quarter FY20 sales at USD 602.3 million, reflecting a slide of 18.6% on y-o-y basis. The decline was primarily attributable to a lower unit sales volume, unfavourable product-mix, and higher imprintables promotional discounting. Furthermore, imprintables sales volumes were plunged 21% in North America and 25% in Canada due to the ongoing impact from the COVID-19 pandemic.
• Gross profit and Adjusted EBITDA were down by 33.2% and 34%respectively, on y-o-y basis, to USD 135.5 million and USD 106.9 million.
• Net earnings stood significantly lower at USD 56.4 million, as compared to USD 104.9 million in Q3FY19.

Risks: Weaker economic outlook, along with lower consumer spendings, may weigh on the sales volume. Furthermore, a weak product mix might hamper the margins as well.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations:

The Group has track-record of proven resiliency and adaptability to changing environments through its innovative offerings. The business has solid competitive advantages, which is inhibitable from its strong business model and financial position. The quarter was marked by a 21% q-o-q increase in the hosiery and underwear sales,  driven by strong traction from the company’s private and Gildan® branded underwear products. We expect, with the gradual improvements in the economic activities, the business is likely to report improved sales volume, driven by higher consumer-spending’s in the coming days. We have valued the stock using Price to Earnings value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Consumer Cyclicals) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 28.13 on November 02, 2020.

1-Year Price Chart (as on November 02, 2020). Source: Refinitiv (Thomson Reuters)

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