A great quarter for GIL coming in at $0.68 vs consensus at $0.52 and 8 cents ahead of our bullish estimates. 2021 EPS tracking to 40-50% ahead of 2019 with demand still running well below 2019 levels in the core imprintables business. NA imprintables are down about single digits, International still down 30%. Lots of room for recovery in a business that carries huge incremental margins leveraging manufacturing costs. The company is tempering expectations some via comments around inflationary costs pressures, though just steering consensus to the 18% operating margins that is the long term target. GIL has exceeded that margin level each Q, and we expect it to be slightly ahead in 2H. One of the specific pressures being noted is a labor shortage in US yarn spinning, limiting the ability to build up inventories higher (the remedy likely being higher labor costs). The channel destocked from this headwind, demand was met, but inventories trimmed (to about 45% below 2019 levels), which presents a re-stocking demand opportunity on top of the POS recovery when we see a full “re-opening”. The other cost items are raw materials (cotton/oil) inflation and rising transportation costs. As the low cost producer, GIL has the ability to increase prices to protect margins without really risking share, so perhaps there is some pricing opportunity as we head into 2021, though rising in line with COGS.
The business trends are strong and the balance sheet keeps getting better leading the company to reinstate its buyback program of up to 5% of shares outstanding to be potentially repurchased. The Trend and Tail here remains bullish with continued global demand recovery in the coming quarters, the opportunity for long term growth in private label basics in the mass retail channel, and a mix shift in screen print shirts to higher ASP and higher margin fashion basics. We see 2021 EPS at $2.36 and Tail earnings power in the $3.50 range. Gildan is a high quality business with a strong competitive moat around its low cost advantage. Street estimates are low by 25%. We think its deserving of a high teens to 20x multiple at least. That puts fair value on this at $40-$50. Tail upside to $60+.
