Gildan Earnings: Good Execution Despite Market Turbulence; Shares Fully Valued

No-moat Gildan’s GIL efficient supply chain and market positioning allowed it to overcome uneven demand and post results that eclipsed our estimates in the third quarter. While demand trends will negatively affect its full-year results, its outlook is in line with our forecast. Thus, we do not expect to make any material changes to our fair value estimates of $31/CAD 41.50, leaving shares fairly valued.

In the quarter, Gildan achieved 2% sales growth, bettering our estimate of sales down less than 1%. Sales of activewear (86% of total) were flat versus our estimate for a 2% decline. In the long run, we think Gildan can achieve sales growth of 2.5% for this segment based on its dominance in printwear and category growth. Meanwhile, hosiery and underwear sales (14% of total) rose 16% in the quarter, stronger than our 9% estimate, as the firm continues to ramp up new programs. We do not anticipate much growth in this segment in the long run, but it does generate positive cash flow and allow Gildan to optimize its production.

Gildan’s 27.5% gross margin matched our estimate while its 18.1% adjusted operating margin beat our forecast by 60 basis points. We think the company can achieve gross and operating margins of 29% and 18.2% in the long run as it implements its cost optimization, production, and pricing plans. Overall, its $0.74 in adjusted EPS was $0.04 above our forecast. Gildan guided to a low-single-digit sales decline and full-year EPS at the low end of the $2.55-$2.65 range it had previously provided; prior to the report, we had projected a 2% sales drop and $2.57 in adjusted EPS.

We expect to adjust our Morningstar Uncertainty Rating on Gildan to Medium from High based on our quantitative model and the normalizing of inventory and replenishment patterns following the pandemic. We think the firm’s exposure to printwear and basic items makes it less exposed to fashion risk and the health of U.S. retail than many other North American apparel manufacturers.