Gildan Earnings: Strategic Plans Progressing Despite Soft Start to Year; Shares Fairly Valued

Gildan’s GIL 2023 first-quarter sales and earnings fell slightly short of our estimates, but management attributed this to the timing of orders for (higher-margin) fleece and reiterated its full-year guidance. Thus, we anticipate sales growth and margin improvement as the year progresses and do not expect to make any material changes to our fair value estimates of $31.50/CAD 43.00 per share, both of which are close to market levels at present.

Against a tough comparison due to inventory building by customers last year, sales of Gildan’s activewear (84% of the quarter’s sales) dropped 12% in the quarter, slightly worse than our forecast for an 8% decline. Moreover, the disappointing fleece sales affected the firm’s margins, with adjusted gross and operating margins of 26.2% and 14.6%, respectively, coming in at 60 and 140 basis points below our estimates. However, the firm held its full-year guidance for low-single-digit sales growth and an 18%-20% operating margin as point-of-sale and order trends suggest fleece demand is recovering and the recent declines in cotton and other input prices positively affect cost of goods sold.

Meanwhile, sales of hosiery and underwear (16% of the quarter’s sales) increased 10% on better performance from socks. While this segment has mostly trended downward over the past five years, Gildan anticipates new retail programs to come online later in 2023, providing confidence that innerwear sales are finally poised to stabilize or rise slightly (but likely remaining a small part of the business).

Although we rate Gildan as a no-moat firm given the competitiveness of its markets, we believe its strategic plan—which is based on product innovation, greater production capacity (including its operation in Bangladesh), and sustainability—stabilizes its market-leading position in imprintables. In the long run, we forecast the firm can hold gross and operating margins around 29% and 18%, respectively, on low-single-digit annual sales growth.