GIL: Not Looking Good

Keith shorted GIL in the Hedgeye portfolio today.  “GIL, shorting - Looking for names that are up that our analysts don't like from an intermediate term TREND perspective. Brian McGough is bearish on Gildan's prospective margin outlook.”

Here’s some added color on our fundamental view by duration.



GIL is the kind of name where most people don’t ‘kinda like it’ or ‘kinda dislike it’. This name is either pure love or hatred. I’m more of the latter’s camp. I absolutely buy into several parts of Gildan’s model. They are, without a doubt, the low-cost provider of socks, underwear, and Ts – the staples of most wardrobes. They were the first company to successfully migrate production overseas while maintaining a vertical (as opposed to outsourced) production model.


What did they do with all those cost saves? On one hand, they more than doubled market share in the blank T business to somewhere between 60-70% of the market, and they also took share in Fleece to near 50%.  Those are simply astounding numbers, and should be commended by even the most crotchety of bears.  But while gaining share, that ALSO doubled EBIT margins to 16%. They had a big slice of cake and ate it too.


But then they got to a point where they had to look elsewhere for growth. First it was in mass channels (especially Wal*Mart). Then when that turned out to be a weaker return business than they planned, International growth seemed like a good idea to them (make product in Honduras, and ship to China to compete with local factories than can make it cheaper???). Now they’re back to mass channels in working with companies like Iconix to grow both brands.

Could that work? Maybe. But  the crux of our case is that these are ALL margin and ROIC-dilutive businesses.  GIL’s SG&A ratio is simply too low. It never had to focus on marketing. Now it does. A 10% SG&A ratio is already heading up to 11.5% next year. That comes right out of margin.


The tax rate is sitting at about zero. There’s the American/Honduran/Canadian-domiciled system hard at work. Will it stay low forever. Not sure. But it’s sure as heck not going down.


The offshoring + tax rate + weak competition made the last decade sweet for GIL. But that’s done. Now they can, and will grow units at the rate of new capacity growth (which they need to fund). There’s negative pricing power beyond GIL’s core Blanks business.  And we can’t underestimate the impact of Hanesbrands, which sits today where GIL was 8 years ago in its restructuring. That’s not to be ignored given that HBI is 3.5x the size of GIL and they compete on the fringes more and more each day.


The long-term punchline is that current margins of 16% are a new peak, and there are headwinds coming.



Sometimes lousy long-term stories make great stocks – over shorter durations. Unfortunately for GIL, this is one of those times where a lousy company should = a lousy stock. The model tells it all…


a)      This year (which just ended), GIL will put up about 25% top line growth and about 100% EBIT growth. Starting 1 quarter out, GIL needs to go up against yy revenue comparisons of +20%, then +33%... It’s not pretty, and new capacity is unlikely to support the 20% growth that the consensus thinks will happen AGAIN next year.


b)      $1.28 in cotton. Also not great that GIL has been trying (unsuccessfully) to hire HBI’s head of raw materials sourcing. Lastly, SG&A is headed up by about 150bps next year.


c)       Capex seems fairly controlled, but the $130mm in capex they’re likely to report excludes the $25mm that they bumped into next year 2 quarters ago.


d)      Check out GIL’s SIGMA chart below. Headed in the wrong direction.





a)      EPS report on December 2. We’re at $0.44 vs. the Street at $0.46.


b)      We wouldn’t fall out of our chairs if they do a few pennies higher. That’s driven by 2 factors…

  1. Print a great quarter, make the year, get everyone paid. Then worry about 2011.
  2. On the top line, GIL can pretty print whatever it wants. Instead of pushing revenue through its own pipe, it can outsource last minute. But then that margin goes to the customer and consumer, not to GIL. But if they push the capacity lever hard enough this could still help the quarter.
  3. Lastly, 2001 guidance will not be pretty. We could literally see margins down 300bps – not the paltry 20bps currently in the Street’s numbers.  If there is not a guide down, this name will have a whole lot of hope built into it. With the most favorable sell-side sentiment this name has had in over 2 years -- they need all the hope they can get. Fortunately for us, and hopefully for you, we realize that hope is not an investment process.


GIL: Not Looking Good - gg


GIL: Not Looking Good - dsf



November 17, 2010





  • While traffic remains relatively flat at Saks, the luxury retailer highlighted an uptick in average dollar per transaction in Q3 suggesting improved confidence among consumers. Additionally, sales at the New York store are not yet seeing a disproportionate increase in sales percentage coming from tourism. In fact, management commented that it remains in the typical 20%-25% range.
  • In one of the first major retail campaigns to support Foursquare, the social network/recommendation site, Radio Shack is offering 10% off for every store check-in, 15% off for store "mayors," and 20% off for unlocking the "Holiday Heroes" badge during the holiday season. For those looking to cash in on the 20% offer, a badge only requires checking in at two ‘hero hotspots.’
  • After confirming consumer appetite for Sperry Top-Sider retail locations with an initial 5 store pilot, Collective Brands opened its latest store in Burlington, MA last week and will open its seventh location in the Westchester Mall (NY) this Friday. With new stores in A malls locations and actually within eyeshot of the water, we expect even better results to materialize as the company begins to rollout the concept more aggressively in 2011.



Google's Launches - Google’s new fashion site,, set to launch today, is poised to quickly become one of the biggest fashion sites online — turning the Web giant into an even bigger force in driving sales to retailers and brands. The site is based on the visual search and shopping referral site, which Google acquired earlier this year. Several dozen celebrities are setting up their own shops on, including Anna Paquin, the Olsen twins, Elisabeth Moss, Iman, Kelly Osbourne, Olivia Palermo, Ashlee Simpson-Wentz, Carey Mulligan, Sarah Michelle Gellar and Rashida Jones. More than 30 designers are involved and will have designer boutiques on the site. Some of the celebrities and bloggers were paid for their participation; others did it for the exposure, said Munjal Shah, founder and Google Inc. director of product management. Google will not actually sell clothing on the site, but will charge small fees for directing traffic and purchases to other retailers’ sites. “What we set out to do is rethink the entire process of shopping for soft goods,” said Shah, who compared to Pandora, the music site that plays selections of music based on what others with similar tastes like. “ nicely complements our existing digital strategy, which includes Foursquare and other social media platforms,” said Peter Arnold, president of Cynthia Rowley, which is setting up a shop on the site. “The combination of a behavioral marketing model and Google-sized resources will bring significant change to the way users interact with fashion online.” <WWD>

Hedgeye Retail’s Take: It’s now easier than ever to look like your favorite star – how you afford it is your problem.


Gift Cards Back En Vogue - Gift cards could make a resurgence this year as consumers shift their gaze from heavily discounted merchandize back to America's favorite gift, according to NRF’s 2010 Gift Card Consumer Intentions and Actions survey.  NRF estimates Americans will spend an average of $145.61 on gift cards, up from $139.91 last year. Total gift card spending is expected to reach $24.78 billion. Meanwhile, gift cards have topped consumers’ wish lists for the fourth year in a row. “This holiday season we expect Americans to gravitate toward both sale and non-sale items, including gift cards, which in recent years have been passed up for heavily discounted merchandise,” said NRF President and CEO Matthew Shay.  “With people focusing less on price and more on value this holiday season, Americans may choose to buy gift cards due to their convenience and popularity among gift recipients.” <SportsOneSource>

Hedgeye Retail’s Take: This is consistent with the recent 2010 Morepace Omnibus study results citing the percent of consumers not willing to put holiday purchases on credit is up to 40% from 35% last year.


Wholesale Prices for U.S. Apparel Increase - Wholesale prices for U.S.-made apparel increased 0.7 percent in October compared with September and rose 0.2 percent against a year earlier, the Labor Department reported Tuesday in its Producer Price Index. Women’s apparel prices were up a seasonally adjusted 0.3 percent month-to-month, but fell 0.1 percent compared with October 2009. Men’s domestic apparel prices rose 1.8 percent in October compared with the prior month, but dipped 0.1 percent year-over-year. Prices for all goods and services increased 0.4 percent in October, due primarily to surging oil-based energy prices, according to the Labor Department’s report. Energy prices were up 3.7 percent overall. Core producer prices, which exclude the volatile food and energy sectors, fell 0.6 percent, driven primarily by declining prices for new autos. “There is upward pressure on input costs from rising commodity prices, which was clear in sharp rises in intermediate and crude material costs,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “It is not true to say that no cost increases are filtering through. For example, tire manufacturers have announced price increases to reflect higher rubber costs and grocery-store prices have started to rise to reflect higher food costs. But there’s still so much excess capacity in the economy that core inflation will remain quiet despite higher costs.” <WWD>

Hedgeye Retail’s Take: Just the beginning of escalating PPI results with multiple headwinds starting to flow through the chain.


U.K. Trade Show Demand/Attendance Reflects Optimism - Trade shows in the U.K. are expanding to accommodate more exhibitors as sales are holding up and the future appears promising. “There’s a sense of optimism returning,” said Samantha Bleasby, marketing manager at Pure London. Pure London, a premium high street fashion show, increased its exhibitor numbers by 15 percent this year and its visitors by 23 percent. The company also plans to expand with the launch of a younger upscale show called Pure Spirit, which will take over almost 43,000 square feet in West London’s Earls Court exhibition center in February, in collaboration with men’s show Stitch Menswear. Pure isn’t the only show in expansion mode. This year, the British Bridal Exhibition Harrogate added 19,923 square feet of space and said many exhibitors reported a “record-breaking” year in sales. “We can’t say that the bridal industry has not been affected by the recession, but we do feel lucky,” said Wendy Adams, an organizer at BBEH. “Girls are still spending for that dream dress, even if it means their guests have less Champagne.” Top Drawer, a fashion and gifting show, saw a 15 percent increase in exhibitors and a 23 percent increase in attendance. Bubble London, a boutique children’s show, said footfall was up 21 percent from last year. <WWD>

Hedgeye Retail’s Take: Clearly a sign of optimism after prolonged expense cutbacks for most designers and brands – keep in mind the greatly reduced base these shows are referencing from last year.


Robust Chinese Trade Show Activity Expected - China’s buoyant bounce-back from the global financial meltdown has brought a resurgence of enthusiasm, alongside higher manufacturing and trade numbers, ahead of the spring and summer 2011 trade show seasons. “The scale of our exhibition overall will be 50 percent larger than last year, so we’ll have more companies and visitors,” said Ma Ying, media organizer for Mode Shanghai, which takes place March 16 to 18. Still, there are trouble spots, noted Yang Chunhua, marketing manager for the 2011 Shenzhen International Clothing OEM Expo, set for March 7 to 9. Yang said Chinese companies are still looking for new markets and domestic customers amid fears over changing currency values. Orders have not resumed their fast pace of pre-crisis spending, and Chinese textile and apparel markets are hungry to recommence trade. “The increase in prices of raw materials, possible changes in currency and the labor shortage in the south are still causing problems,” said Yang. “[Manufacturers] have started paying more attention to the domestic market, as the domestic market is comparatively stable.” At the same time, as foreign customers return to China and find the manufacturing glut over, they’ll need to find new sources and companies with which to do business, Yang noted, adding those factors should make for a brisk trade show season. Another trend on the horizon: More clients will be looking for research and development, potential innovation from China, rather than just top-down ordered clothing and textile manufacturing. Chinese companies are aiming to increase their worth on the global value chain, in part by coming up with their own products and ideas. Yang said many companies will bring new ideas and products to apparel and textile fairs this season. <WWD>

Hedgeye Retail’s Take: In addition to comments above related to higher traffic in the UK, many retailers and brands are increasingly focused on establishing more stable relationships with Chinese vendors if they haven’t done so already in an effort to manage costs adding a key dynamic to higher attendance figures in the near-term.  


Turkey Quickly Becoming More Prominent Fashion Exporter - Turkey’s last fashion week, held in August, showed how much hope the country is investing in its fashion industry. Apparel exports rose 10.7 percent to $12 billion in the first 10 months of 2010 from a year earlier, and made up 13 percent of all of Turkey’s exports, the largest category after automobiles. The pace of export growth in general was strong: an 11.4 percent increase in the same period, according to the Turkish Assembly of Exporters. Even more impressive is the overall economic expansion, at a time when many of Turkey’s peers are still barely out of recession. Gross domestic product grew at a pace of about 11 percent in the first half of 2010 from a year earlier, rivaling China and exceeding all other countries in the G-20 group of developed countries. That is likely to slow in the second half of the year owing to base-year effects, the government said, but it is still forecasting growth of close to 7 percent this year and 4.5 percent next year. That doesn’t mean that Turkey is immune from global economic problems, and that’s particularly true in the textile industry, where the troubled European Union is the country’s largest export market. Exports to the EU rose 15 percent from a year earlier in the first nine months of 2010, according to the Turkish Statistics Authority, yet there are doubts about whether that kind of growth can be maintained, given the scale of Europe’s problems. There’s some relief, though, since Germany — one of Europe’s healthier economies — is the leading market for Turkish ready-to-wear, with sales exceeding $3 billion in the first 10 months of 2010, according to the assembly of exporters. <WWD>

Hedgeye Retail’s Take: Given its exposure to Germany, and position as a China-alternative, we expect Turkey’s role as a global exporter to become more prominent over the intermediate-term.


Forecast Calls for Robust e-Commerce Holiday Sales - eMarketer predicts US online holiday season sales, defined as all online sales in November and December, will build on a strong 2009 showing and rise a further 14.3% over the same period last year. “Holiday shopping is ideally suited to the internet,” said Jeffrey Grau, eMarketer principal analyst and author of the new report “Online Holiday Sales Forecast: Optimism Is in the Air.” “Consumers appreciate the convenience and product selection online, as well as the abundance of resources available for finding good deals, especially for cost-conscious shoppers trying to weather the tough economy.” This season’s growth of 14.3% will bring retail ecommerce holiday season sales to $38.5 billion, up from $33.7 billion last year.  Strong online holiday sales will push annual ecommerce sales to $162.4 billion for full-year 2010, up 12.7% over 2009. Online holiday sales will represent 23.7% of online retail sales in 2010, underlining the importance that November and December have on retailers’ annual ecommerce sales. <emarketer>

Hedgeye Retail’s Take: Certainly up against a tough compare for the holidays, but with online spending up the most since 2007 and strides made to greatly improve the shopping experience there may even be room for upside.


R3: SKS, RSH, PSS, GOOG - R3 11 17 10



Brazilian Equities: Broken On TRADE, Bullish on TREND

Conclusion: Signs of inflationary pressures continue to mount as the Bovespa Index has broken its former TRADE line of support (now resistance).


Below we’ve compiled some recent nuggets from our resident Brazilian insider, Moshe Silver:


Inflation Rises in November

Fundacao Getulio Vargas reports the general price index measure of inflation rose 1.16% in November, on top of a 1.15% rise in October, bringing the year to date increase to 9.77% (trailing 12 months cumulative increase is 9.69%).


The three components of the general price index tracked as follows: the broad producer price index rose 1.51% in October and 1.49% in November; industrial products rose 0.21% in October and 0.46% in November; and agricultural products rose 5.54% in October and 4.52% in November.


Congress to Debate Increase in Minimum Salary

Yesterday Congress opened the discussion on an increase in the “minimum salary” from a current R$ 540 to R$ 550.  Opposition politicians and labor unionists are pressing for an increase to R$ 600, a number the planning minister characterized as “foolishness,” saying the government does not yet have numbers for recalibrating its social programs. 


Any increase would be submitted by Congress and would only take effect upon being approved by the executive branch.  A senior budget official confirmed that an increase to R$ 550 would likely receive presidential approval. This morning, labor representatives met with planning ministry officials seeking support for an upward revision to the R$ 560-580 range. 


One of the key factors behind our bullish outlook for Brazilian interest rates is the potential inability of the next regime to contain government spending and the inflationary pressures that accompany it. As recently as 11/3, President-elect Dilma Rousseff said she is seriously considering raising the monthly minimum wage to more than 700 reais ($412) by 2014 for a CAGR of 8.2%, which is greater than the 5.5% increase in 2011 under current President Lula’s budget. Further potential strains to the government’s budget include her commitment to reducing payroll taxes, levies on investment and taxes on prescription drugs, sanitation and electricity.


Market Sees Inflation, Rates Higher in 2011

According to this week’s central bank Focus report, the market expects increases in inflation and in the level of interest rates for 2011.  Inflation, as measured by the broad-based consumer price index, is expected to rise 5.48% in 2011, versus a prior forecast of 5.31%.  This is the ninth consecutive week of increasing estimates and takes the level of inflation forecast for next year from 4.99% to 5.05%.


The SELIC interest rate, which at 10.75% is already among the highest rates in the world in what is deemed a relatively stable economy, is now projected to rise to 12% in 2011.  For the last eight weeks, the projection had held steady at 11.75% for 2011.


The exchange rate is expected to hold at R$ 1.70 to the dollar for 2010 and to be R$ 1.75 next year, slightly changed from last week’s projection of R$ 1.77 to the dollar.


GDP expansion remains forecast at 7.6% for this year, and GDP growth is projected to be 4.5% in 2011, a projection that remains unchanged for the last 49 weeks.


Mercosur Signs Accord to Cut Tariffs

Brazil closes its stint in the rotating Mercosur presidency by obtaining a preferential tariff agreement with seven developing nations: India, Indonesia, South Korea, Egypt, Morocco, and Cuba.  Algeria and Iran also participated in the talks and may yet ratify the treaty as well.  The negotiations were completed last Thursday at the WTO offices in Geneva and the document is to be signed next month at the Mercosur summit to be held at the Iguazu Falls on the Brazil / Argentina border.  The treaty provides for a 20% reduction in tariffs on 70% of trade items between Mercosur and the other signatories.  The Mercosur trade bloc comprises Brazil, Argentina, Uruguay and Paraguay.


India imported US$ 2.775 billion of merchandise from Brazil in the first 9 months of this year.  Exports to South Korea will reach US$ 3 billion this year and are set to increase, and Korean trade continues to climb as the nation sells automobiles in the Brazilian market.


The accord is seen as having wider implications because countries such as Inda and Egypt also have important alliances with other nations in their regions, opening the possibility of downstream expansion of trade relations.  We note that Brazil has pushed back hard against trade policy of their erstwhile BFF, China, accusing the Chinese of unfair trade practices.  This may be part of a broader move to protect Brazilian export growth by diversifying their overseas target markets away from the “one-stop-selling” model.


Moshe Silver

Managing Director/Chief Compliance Officer


Brazilian Equities: Broken On TRADE, Bullish on TREND - 1

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TGT: 1st Mention of Synthetics; It's Not Just Cotton

Very realistic and sobering comment from Target on cost inputs. It's not just cotton when most other commodities have gone ballistic.  If only the rest of the industry was as good as Target... Unfortunately, the unknown here is not what input costs are doing to COGS -- but rather how competitors and supply chain partners react when those that are not prepared; a) have too much inventory, b) are clearing it irrationally, and c) push back on supply chain partners to make margins whole.


TGT Management

"Cotton is up about 80%, synthetic fibers up about 50. So some pretty hefty cost increases. I would say as that translates into the garment, there's a lot of things that we can do to help mitigate that, whether that's where it's produced or efficiencies within manufacturing and how we're cutting the fabric, using different fabrications, so we're going through the motions of making sure right now that we're designing the best apparel but at the same time with our eye on those cost increases and trying to mitigate that. And then I do think some of that will get passed on in higher retails where they're warranted. We don't want to get to the place where we change the garments so much just to hit a price that they're not appealing and so we'll design them appropriate for what the guest wants and make sure that we charge accordingly."

Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation

Conclusion:  We’ve been pretty vocal about our view of Housing Headwinds and the data is now suggesting that the headwinds may actually be worse than our street-low expectations.  While Billy Ackman’s best idea might be to buy U.S. homes, ours certainly isn’t.  Substantial downside remains in the housing sector.


We’ve had both massive pushback and substantial amount of compliments on Hedgeye’s Housing Headwinds call, which was orchestrated by our Financials Sector Head Josh Steiner and his team.  Steiner gave his presentation on June 25th.  In that time period, the SP500 is up 11.2%.  Conversely, we have in the table below highlighted the stocks that Steiner was bearish on:


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 1 


Alpha anyone?


Setting aside my doing a victory lap on Josh’s behalf, the bearish case on housing continues to play out and be validated.  Even if Billy Ackman’s best idea is to buy U.S. Housing, ours still isn’t (email if you are an institutional client that wants to see Steiner’s 101 page presentation on Housing that lays out the bear case). 


Some recent data highlights from Steiner and his team include:


Housing Takes A Dive, but the Worst is Yet to Come ...

Today's two negative housing data points on mortgage applications and housing starts add to yesterday's lackluster housing market index report. Next week we'll get new home sales, which we expect to be anemic as well. The week after that we'll get Case-Shiller, which should show the largest sequential decline we've seen this year. We expect these headwinds will keep a lid on near-term upside in housing-related names.


Bigger picture, we think the trends we're seeing in today's data are consistent with both our cumulative displacement theory under which we expect housing activity to remain heavily subdued for the next decade and our outlook for material further downside in home prices throughout the rest of this year and 2011.


Mortgage Demand Falls Sharply As Rates Rise

MBA Purchase Applications fell 5% versus last week. The MBA's data showed that mortgage rates backed up by 18 bps WoW (4.46% versus 4.28% the previous week).  The effect was more pronounced in the Refinance Index, which plummeted 16.5% WoW in response to the rate move. 


The real takeaway from this series is just how high the elasticity of demand is to even modestly higher interest rates. A backup in rates to 4.46% from 4.28% took refis down 16.5% and purchase activity down 5%. The point is that if we've already seen the lows in rates put in from QE2, then there's no reason to expect to see any improvement going forward.


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 2


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 3


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 4


Housing Starts Plunge to New Lows

Housing Starts fell -11.7% to 519k in October, the lowest level since April of 2009. The September Starts print saw a large downward revision, taking the level down to 588 from 610. Permits inched up slightly in October to 550k from the revised level of 547k.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 5


Starts and Permits are correlated with New Home Sales (better than .90 r-squared over the last ten years), suggesting that this month's New Home Sales number released a week from today will be worse than last month.  Perhaps counterintuitively, there is not a lag in this correlation - Starts and Permits in a given month best predict the New Home Sales number that same month.  This implies that all three series respond to varying degrees of confidence in the housing market.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 6


While it is widely believed that permits lead starts, in fact, the two series move simultaneously.  The chart below shows both series back to 1959.  Clearly, by any historical standard, the current activity level is very low. 


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 7


Housing Market Index Essentially Flat

The National Association of Homebuilders (NAHB) released their monthly Housing Market Index yesterday.  The composite index rose one point to 16, but this was after a downward revision of the prior week. Excluding that revision the series was flat sequentially. Confidence remains extremely low is the bottom line.  The chart below shows the relationship between homebuilder confidence as measured by the HMI and single-family starts.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 8


Daryl G. Jones
Managing Director


Josh Steiner, CFA

Managing Director


Allison Kaptur


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