Great analysis here by my top Lieutenant, Casey Flavin, on some implications of the hurricanes on Gildan. We’re clearly running ahead of the ’06 and ’07 pace for storm activity. Gildan’s overseas operations import the majority of cotton (35% of COGS) from the US. Texas, Arkansas and Georgia are the top three cotton-producing states, and we’re starting to see gulf port cities evacuate in advance of Ike. Gildan is already facing macro, industry, and company pressures that I think will intensify and pressure margins that can't support valuation – that’s the real long term call. But after being hit with issues at its Dominican Republic ops last quarter, any form of import disruption to Honduras plants would not be a welcome development.
- We are in the midst of peak hurricane season and with Ike bearing down on Texas, it was announced this morning that Galveston and parts of Houston will begin evacuating at noon today. With the memory of Gustov only days old it might seem as if hurricane activity is high this year, well it is. Pressure readings in the tropical Atlantic in August among the lowest on record, an El Nino event that decreases storm activity unlikely this season, and above average water temperatures conditions are prime for an active hurricane season. As a result, forecasters have raised their outlook for major storms this season.
We are not in the habit of making weather related call outs; however with above average activity so far, we believe there are points to consider.
- Cotton: According to the latest USDA projections for 2008/09, world cotton production is expected to be down 6% from 2007/08 and U.S. production to be at its lowest in nearly 20 years. Given that Texas, Arkansas, and Georgia are the top three cotton producing states, severe storms in the southeast could further reduce supply and ultimately drive prices higher (note the projected path for Ike). Definitely a consideration for Gildan (GIL) given that cotton is about 35% of COGS, and the majority is imported from the US into its plants in Honduras. Also, given GIL’s Dominican Republic issues in its latest quarter, the last thing it needs now is any Mother Nature-induced supply chain disruption.
- Shipping: A growing net export position and shift in grain demand for container ships have lead to equipment shortages in the Gulf. This makes it more challenging to catch up when disruptions occur, which have already happened due to Gustov. If more ports are forced to close over the next several weeks, shipment delays could impact companies that export goods or produce offshore.
Most named storms form between the second week in august and the third week in October. Halfway through the 2008 season, we are almost on par with prior season totals (per NOAA).