Gildan (GIL): Removing GIL from Best Idea Long List. GIL is a name where we like TAIL opportunity given the competitive moat as the low cost manufacturer of basic apparel with growth avenues in International, US Mass Retail Private label, and the high margin fashion basics segment of the screenprint channel. However, the trend setup is getting incrementally bearish. Consensus earnings estimates have closed the gap vs our model both near term and over the next couple years. There is still some runway in recovery in end-demand with concerts/sporting events coming back though revenue growth will be moderating in the coming quarters, the company has already signaled that 2H margins are likely to be lower than 1H suggesting further slowing of profit growth.
Recently the focus is on cotton costs spiking. Generally, cotton rising is a good thing for GIL as it has control pricing as the low-cost producer, and gradual inflation drives ASP and margin dollars up. However, the pace at which the price has moved over the last year and our continued macro outlook for inflation over the next 3-6 months gives us some concerns. GIL will undoubtedly have to eat some of the cost pressure in the mass retail channel (~30% of revs) with key partners like WMT and COST. Then in screenprint, GIL is the price setter on entry level product, but the rapid rise could mean either margin pressure since price aren’t instantaneously adjusted, or elasticity of demand concerns on attempted pass through when the costs really start to hit the P&L in 2022. If t-shirt prices are up 50-100% because of persistent cotton inflation, end demand areas like corporate promotional dollars could temporarily shift to other goods. The risks here shouldn’t really be seen in 2H21 numbers given the production lead time, however they could definitely pressure growth/profits into 1H 2022.
Our CEO Keith McCullough has flagged a negative trading signal on this name, as it has turned from bullish to bearish, and we don’t have enough confidence in upside in trend numbers to keep this on the Best Ideas long list. The catalyst that could get us interested again long side is the launch of the new Bangladesh facility currently planned for the end of 2022 and should drive revenue growth in 2023 and beyond, but for now, the risk/reward is too balanced and there’s too little upside to consensus estimates for us to stick with this one as a Best Idea Long.
RENT | Hard Pass On This Week's IPO. Rent The Runway (Ticker: RENT) is set to price its IPO on Wednesday, and simply put, we’d avoid this deal like the plague -- unless pricing comes in well below stated target EV of 1.5bn. This smells like SFIX all over again. SFIX was a broken IPO, and this one should be too.
