Free Lunches

This note was originally published at 8am on November 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”

-Frédéric Bastiat


In Frédéric Bastiat’s 1950 essay, “That Which Is Seen and That Which Is Unseen”, he describes the impact of opportunity costs on economic activity.   In his essay, a small boy breaks a window in a store.  The glazier comes to repair the window and is paid six francs for the job.  Some observers would suggest this is a positive economic event as it increases the money circulating in the community.


There is, of course, no free lunch.  In the case of Bastiat’s essay, the unintended consequence is that the store owner with the broken window must pay for the repair of the window.  In using six francs to pay for the repair of the window, the shopkeeper no longer has six francs to expand his inventory, advertise for the shop, or purchase personal goods.  In effect, the transaction has two sides and it is not even certain to be a zero sum transaction, especially if the glazier does not spend his incremental six francs within the local community.


In modern economic theory, the key current debate relates to the role of the government in transactions.  The Allowance Rebate System (more commonly known as Cash for Clunkers) program is a prime example of this dilemma.   Under this program, car buyers were incentivized to purchase new cars by being given a $4,500 rebate for their old cars, which then had to be scrapped.  Practically, this was a transfer of money from tax payers to car buyers.  In the short term, new car sales skyrocketed. Meanwhile, older vehicles, which admittedly produced more pollution, were taken out of the national car population.


Akin to Bastiat’s essay, the question in the case of Cash for Clunkers Car is whether destroying an otherwise productive asset, such as a working car, actually benefits the economy.   In looking at some key results of Cash for Clunkers, the implication is at best inconclusive.  Specifically,

  • The program led to market share gains for Japanese and Korean car manufacturers at the expense of U.S. manufacturers. (Incidentally, the equivalent Japanese program did not include U.S. produced cars.);
  • A study by the University of Delaware concluded that for each vehicle trade, the net cost was $2,000, with total costs exceeding benefits by $1.4 billion; and
  • A study by economists Atif Mian and Amir Sufi indicated that the 360,000 additional purchases in July and August 2009 were pull forwards that were completely reversed by March 2010.

So, once again, no free lunch.


On the back of rumors of an IMF bailout of Italy, global equity markets rallied in a big way yesterday.  Not surprisingly, the Italian equity market was one of the global leaders yesterday up an impressive +4.6%.  While we would suggest this was more of a short squeeze than anything, there is perhaps a fundamental case to be made if the IMF rumors finally come to fruition . . . or is there?


Our trusty research intern Josefine Allain pulled together some detail around the rumored IMF plan.  According to the rumors, the IMF would provide €400-€600B to Italy at a rate of 4-5%, which would allow Italy up to 18-months to implement reforms without having to refinance. 


Setting aside the fact that the IMF denied it is in discussions with Italy, the plan has two main issues.  First, the IMF only has $285 billion currently available.  Second, an expansion of the IMF, or an explicit Italian bailout fund, would require a substantial contribution from the United States (likely more than $100 billion).  Clearly, given the current political environment in D.C. and on the back of another tacit U.S. debt downgrade this morning from Fitch, the likelihood of the United States stepping up to bailout out Italy is slim to none, absent a global financial crisis.


Indeed, European credit markets continue to signal that no free lunch from either the ECB or IMF is imminent.  Specifically, the Italians “successfully” sold €7.5 billion of bonds this morning versus a maximum target of €8.0 billion.  The 3-year yield was 7.89% versus 4.93% on October 28thand the 10-year average yield was 7.56% versus 6.06% on October 28th.  Success is a relative term.


In the Chart of the Day today, we’ve highlighted the Euribor-OIS 3-month spread, which measures the spread between what banks charge each other for an overnight loan of their excess reserves versus what they could earn by lending it risk free to the central bank.  The key take away is simply that risk, not surprisingly, has accelerated dramatically in the last three months in the European banking system.   In early July this spread was less than 0.20 and it is now at 0.94.  No free lunch there, to be sure.


This afternoon Keith and I are going to take a much needed break from the grind and go across the street to play a quick game of hockey at Yale’s Ingalls Rink.   Ironically, it will cost us $10 each, so there isn’t even free lunch time hockey.

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Free Lunches - Chart of the Day


Free Lunches - Virtual Portfolio

Merkel's Marathon

“I thought about running a marathon a long time ago, but I’m just not a runner.”

-Shannon Miller


I’ve woken up to some pretty ambitious central plans this week, but this morning’s caught my attention most – Angela Merkel is going to become a marathon runner.


“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers…”

-Angela Merkel (speech to the lower house of German parliament)


While she doesn’t appear physically prepared to reach 35k on her own, looks (when gravity is being banned) can be deceiving. Central planners can try just about anything and have people who are paid by short-term stock and commodity inflations cheer them on.


Preparing for marathon, of course, requires some form of a diet, discipline, and sacrifice.


“The lives of a lot of French people are even harder after three years. Everybody has had to make an effort; everybody has had to make a sacrifice… it’s been a genuine revolution that’s begun.”

-Nicholas Sarkozy (speech yesterday in France)


Never mind the last 3 years of French hardship. French and German bankers have been sacrificing 3 hour lunches for conference calls with La Bernank for the last 3 weeks. Convincing the Great Depressionista that we should melt The People’s Savings again must be hard a hard life.


Back to the Global Macro Grind


Life for real-time Risk Managers is hard too. God forbid none of us were born to this earth to constantly beat beta. But “god’s work” might have a different outlook than the 2 and 20 plan.


This, of course, like most things in human history, has happened before. The inability for asset managers to beat beta that is …


After Japan tried their 3rdand 4thquantitative and coordinated easing (and their stock market continued to make lower-long-term highs), beta was all that was left. What do you pay a manager to earn you beta?


Volatility kills returns, fund flows, and economic growth. Right now, all 3 of these factors are as clear as the sun rising in the East to anyone who manages money or a business.


But… we, as an industry, continue to beg for the very thing that perpetuates economic and market volatility – Big Government Interventions. Be careful what you beg for. In the long-run, we might all still have to live with its unintended consequences.


This morning, across the board in Global Macro, we’re seeing the Correlation Risk ramp as the US Dollar falls. Correlation Risk, if you are long and short, works both ways. It’s always on.


Looking across the asset classes in my model and across my core 3 durations (TRADE, TREND, and TAIL) here’s what I see:

  1. SP500 moves to bullish TRADE (1233 support); bearish TAIL (1270 resistance)
  2. US Equity Volatility (VIX) moves to bearish TRADE (31.02 resistance); bullish TAIL (23.07 support)
  3. Global Equity Volume remains in a Bearish Formation (bearish TRADE,  TREND, and TAIL)
  4. Chinese Equities remain in a Bearish Formation (closing down another -1.1% overnight and down -0.8% on the wk)
  5. Japanese Equities move to bullish TRADE (8344 support); bearish TREND (8706)
  6. Indian Equities remain in a Bearish Formation (BSE Sensex bearish on all 3 durations)
  7. Germany Equities move to bullish TRADE (5895 support); bearish TREND (6279 resistance)
  8. French Equities move to bullish TRADE (3074 support); bearish TREND (3274 resistance)
  9. Italian Equities remain in a Bearish Formation (predictable divergence versus German stocks)
  10. Brazilian Equities move to bullish TRADE and TREND after cutting interest rates
  11. Commodities (CRB Index) remains in a Bearish Formation with TREND resistance = 321
  12. Oil (Brent and WTI) are now back into a Bullish Formation (inflationary, big time)
  13. Gold scales back into a Bullish Formation with TREND line support (was resistance) = $1743/oz
  14. Copper moves to bullish TRADE ($3.47 support); bearish TREND ($3.72 resistance)
  15. US Bond Yields are testing a TRADE line breakout (2.12% is the TRADE resistance for 10-year yields); bearish TAIL

All the while, the driver of all this Correlation and Duration Risk remains the US Dollar Index. With the US Dollar being debauched by Bernanke this week (down -1.8% on the week to $78.21), that’s why you see all these immediate-term TRADE breakouts in the aforementioned market prices.


But, Cher Bernank, a TRADE does not a sustainable economic TREND or TAIL make. Neither does an overweight and overleveraged economy sprinting out of the money printing blocks for the 1st three miles of what will be a deleveraging and deflationary marathon.


My immediate-term support and resistance range for the SP500 is now 1. If this morning’s full employment report inspires you to chase beta, run like the wind.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Merkel's Marathon - Chart of the Day


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TODAY’S S&P 500 SET-UP - December 2, 2011


US Futures spike as short sellers are now in Pain Trade mode while the “long-onlys” chase beta. Always a powerful combo in the immediate-term – also the biggest downside risk after the immediate-term squeeze makes a lower-high.   As we look at today’s set up for the S&P 500, the range is 25 points or -0.93% downside to 1233 and 1.08% upside to 1258. 












  • ADVANCE/DECLINE LINE:  -610 (-2916) 
  • VOLUME: NYSE 855.83 (-48.67%)
  • VIX:  27.41 -1.40% YTD PERFORMANCE: +54.42%
  • SPX PUT/CALL RATIO: 1.54 from 2.33 (-33.69%)




TREASURIES: the most important quote today into/out of jobs rpt = 10yr yields; big TRADE line resistance at 2.12%

  • TED SPREAD: 53.74
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.11 from 2.08   
  • YIELD CURVE: 1.84 from 1.83


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in nonfarm payrolls: est. 125k (prior 80k)
  • 8:30am: Unemployment rate: est. 9.0% (prior 9.0%)
  • 9am: Fed’s Fisher speaks in Dallas
  • 10am: Fed’s Plosser speaks in Philadelphia
  • 12:30pm: ECB’s Stark gives speech in NY
  • 1pm: Baker Hughes rig count
  • 1:30pm: Fed’s Rosengren speaks on economy in Boston



  • Germany’s Merkel rejected joint euro-area bonds, central bank action while pushing for closer economic ties and tougher budget enforcement
  • U.K. judge ordered Apple to disclose to HTC Corp. which features of its competing mobile phones may infringe Apple’s European patents by today
  • Dallas Fed President Richard Fisher, St. Louis Fed President James Bullard say central bank doesn’t need to lower discount rate: WSJ
  • Market no longer thinks major US banks are too big to fail - WSJ




COPPER – The Doctor looks exactly like European Stoxx because they have the same correlation to the USD. Copper climbs back above its immediate-term TRADE line of resistance this week of 3.47/lb and remains under TREND line resistance of 3.72/lb. Pick your European stock market and the TRADE/TREND setup is the same. Trade the new ranges.



  • Oil Margins Falling as U.S. Fuel Import Era Ends: Energy Markets
  • Copper Traders Bullish for First Time in Six Weeks: Commodities
  • Commodities to Rally on ‘Cheap Money,’ Renaissance Predicts
  • Crude Oil Rises Amid Middle East Tension, Heads for Weekly Gain
  • U.S. Stocks Retreat After Rally as Spanish, French Bonds Advance
  • Palladium Set for 12% Weekly Gain, Most in Year; Beats Gold
  • Monsanto Corn May Be Failing to Kill Bugs in 4 States, EPA Says
  • Bank of Korea Boosts Gold Reserves for Second Time This Year
  • Gold Gains in London, Heads for Weekly Jump After Bank Purchase
  • Citigroup’s Base-Metal Research Head Thurtell Said to Leave
  • Copper Extends Weekly Gain After U.S. Manufacturing Data
  • Copper Stockpiles Drop to Lowest in 28 Months in Shanghai
  • Palm Oil to Surge as Production Growth Decelerates, Mistry Says
  • GFMS More Bullish on Palladium in 2012 on ‘Structural Deficit’
  • Rio Tinto to Invest $2.7 Billion in Aluminum Smelter Upgrade
  • Wheat Trims Biggest Weekly Gain Since August on Rising Supply
  • Oil Falls First Time in Five Days as U.S. Jobless Claims Rise
  • ICAP Names MF’s Pettit Global Head of Financial Futures, Options
  • Cocoa Futures Fall as Goldman Cuts Forecast; Sugar, Coffee Drop











EUROPE: Every market has taken out our immediate-term TRADE line of resist - TAILS remain bearish, but this insulates some downside, for now






CHINA – Unfortunately, the Chinese economy doesn’t like the commodity inflation – this only compounds the already accelerating deceleration in sequential (Q4 vs Q3) Asian and European growth. China closed down another -1.1% overnight, right back to where it was pre the rate cut.








  • Oil Margins Falling as U.S. Fuel Import Era Ends: Energy Markets
  • ‘Dubai’ Lands in Karachi as Pakistanis Flock to 60-Store Complex
  • EU Widens Iran Sanctions, Remains Split on Halt to Oil Purchases
  • Islamists Electoral Rise Due to Failed Secularism: Pankaj Mishra
  • EU Wimps Out on Oil Sanctions to Halt Iran’s Nuclear Drive: View
  • Sukuk Borrowing Costs Rise Most Since May 2010: Islamic Finance
  • U.S. Senate Approves Sanctions Aimed at Crippling Iran Oil Sales
  • Saudi Arabia Poised for Record Heavy-Crude Premiums on Fuel Oil
  • Lukoil May Buy Remaining 40% of Italy’s ISAB Refinery From ERG
  • U.S. Senate Backs Sanctions Intended to Cripple Iran Oil Exports
  • Emaar Said to Raise $800 Million Loan at a Discount to Its Sukuk
  • MSCI to Say Whether U.A.E., Qatar Upgraded on Dec. 14
  • OPEC to Boost Crude Exports on Asian Demand, Oil Movements Says
  • Citigroup Deal Haunts Pandit as Saudis Claim $383 Million
  • South Europe Wants Saudi Oil to Cover Iran Ban, Petromatrix Says
  • Biden Seeks Turkey’s Help to Keep Up Pressure on Syria and Iran




The Hedgeye Macro Team

Howard Penney

Managing Director



As much as this is a great opportunity to lay into a company that we’ve loved to hate, we’re not going to go there (that much). The fact of the matter is that with the stock down 30.9% in a single session, we need to consider a) what its worth, b) if there’s more downside, and c) when it’s time to step in and (gasp) buy the stock.


The bottom line is that even with a 31% sell-off, it’s simply not cheap, and there are zero identifiable catalysts.


A few considerations.

  1. This is all part of the grand master story. GIL is (was) maxed out in its core t-shirt business, so it grew into fleece, then private label with US mass retailers, Asia, and capped it all off with an acquisition. Organic sales slowing, and increased capital on the balance sheet necessary to grow into lower margin businesses. Classic value destruction.
  2. Why don’t they just stick with what they’re good at? This company can manufacture a shirt like no other. It has new and efficient factories that workers actually want to show up for. This is a business that is all about capacity utilization. That’s why GIL, unlike fully outsourced companies like VFC, PVH, RL, NKE, LIZ, etc… faces such extreme fluctuations in Gross Margin. They’ve tried and tried to fill excess capacity. They’re probably not considering whether they have too much capacity, but they should be.
  3. They said that they’re sticking with their $0.20 per share accretion estimate for the Gold Toe acquisition.  Ok…but is there really any way we can check that? Looking at old copies of our model, we were 2012 EBIT of $173mm and $1.33 in EPS. Then GIL spent $350mm for a $280mm business that generated about $45mm in EBIT. Six months later, we’re at $150mm in EBIT, and $1.25 in EPS. I guess we have to trust them that the new growth engine is perfectly intact.
  4. The core screenprint channel is still a mess. In 3Q we started to see a decline (-9%) in distributor shipments. GIL lowered 4Q shipment expectations to -5%. They ended up coming in -7.6% due to more aggressive destocking than they expected. Then the haircut for the upcoming quarter is expected to be -40%. Even if they sandbagged and it’s really down just 30%, this is roughly 60% of sales, and their track record in forecasting it is just flat-out poor. Our sense here is that GIL made the same mistake HBI did – they underestimated the extent to which core distribution channels pre-bought in advance of price increases.
  5. On the Gross Margin line, GIL is going to be realizing the impact of a 13% reduction in selling prices to distributors in basic T-shirts on higher priced cotton, a special distributor inventory devaluation that will impact EPS by $0.16, and extended downtime of manufacturing facilities on lower sales volume in what is already the lightest seasonal sales quarter. The result is implied gross margins of ~2% in order to back into GIL’s earnings outlook of -$0.40 assuming SG&A dollars remain flat (that is not a typo, 2% GMs).

Here are some changes to our model, including how we get to $1.25 next year.

  • First off, our $1.25 gets us within spitting distance of the Street for the first time in 2-years. Their $1.30 guidance is in the realm of doable.
  • On the top-line, we are looking at approximately ~$160-$180mm in incremental revs from Gold Toe less ~$40-$50mm in unprofitable sock revs as the company de-emphasizes its private label business. In addition, we have Activewear sales essentially flat for the year after a decline in 1H revenues by -30% and -16% in Q1 and Q2 respectively reflecting unit shipment declines and lower selling prices.
  • In 2H, we are coming in below the company’s outlook which calls for industry shipments to be on par with last year’s levels after MSD declines in the 1H. We aren’t convinced that GIL will be able to maintain its 65% market share after an environment like the screenprint industry is going to see in the 1H where more aggressive smaller players are forced to move stock. As a result, not only is GIL’s share at risk, but so too is pricing. Having competitors on the ropes is a double edged sword.
  • With higher cost cotton shifting into Q3 due to deferred inventory purchases in the channel and more competitive pricing, we don’t expect gross margin expansion until Q4.
  • With a largely fixed cost structure, we expect SG&A to be up ~$30mm next year to support international growth and the integration of Gold Toe resulting in operating margins 500bps below F11 levels.

So, the question here is what GIL is worth, and what do you do with it?  Let’s look at it a few different ways. It’s trading at…

  • 13x $1.25 in earnings power. That’s fairish.
  • 8.2x EBITDA. This is high, but it’s also skewed by Gildan’s tax-free status. In doing our best to normalize, it is at about 6.9x EBITDA. Translation = high.
  • $4.8% FCF Yield. Nothing to write home about.
  • Tangible book value of around $8.75. I’ll rarely use this metric, but this is an unbranded, commodity-based business. Aside from the raw asset value, you need to believe in some other value proposition to account for the remaining $7.50, and presumably much greater intrinsic value to take it meaningfully higher.
    • It’s sheer domination in the screenprinting business. It’s terrible now, but it is cyclical and will bounce.
    • With Gold Toe, it owns some goodwill associated with the Gold Toe brand, and UnderArmour sock license.
    • The fact is that it remains the low-cost competitor. It’s having a tough time filling capacity now. But if the current management team can’t manage it appropriately, someone else can.

The bottom line for us is that there is absolutely not a single catalyst we can see to call the bottom in the stock. Even if the company has set lowball targets, we won’t find that out for another 3-months. That’s a long time in this tape. Also, on the call, this clearly did not seem like a management team that knows its numbers and strategically picked a safe target. Those people who will use valuation as a reason to buy GIL will not be happy with their decision over any near-term duration.








Notes from the call:


Forecasting a loss of $0.40 per share in the first quarter, second loss in the history of the company while public


2012 EPS: $1.30 as a result of the Q1 loss

Reduction is primarily due to:

  • Higher cotton costs in 1H
  • Lower selling prices for active wear
  • Special distributor  devaluation discount
  • Non recurrence of income tax recoveries in 2011

4Q YoY decline of $0.42 vs $0.48 due mainly to

  • significant increase in cotton costs which is not full recovered through price increases
  • lower unit volume for active wear and
  • the non reoccurrence of insurance proceeds and a cotton subsidy received in Q4 LY

Maintained market share in US distribution channel at 62.3%, essentially flat to last year


Lower unit sales for activewear was due to

  •  6.3% reduction in shipments from US distributors to US screenprinters and investor destocking
  • Negative factors were partially offset by
  •  impacts of income tax recoveries
  •  growth in international screen print shipments and
  • more favorable product mix as well as earnings accretion from Gold Toe

"Compared to the assumptions in our August guidance, the unfavorable impact of weaker screen print demand and increase promotional discounting in the wholesale distributor channel at the end of the quarter and lower than forecast sock manufacturing efficiencies was more than offset by the later than anticipated timing of destocking of manufacturer inventories by wholesale distributors, which is not occurring in the first quarter of fiscal 2012, and the benefit of income tax recoveries. Weak demanded in increasing competitive pricing pressure in the screenprint markets have continued into the first quarter of fiscal 2012."


Shipments from US distributors to US screen prints: down 6.2% in October

  • Distributors have been reluctant to replenish inventories under the assumption that gross selling prices will be reduced further

GIL Projecting a 40% decline in unit sales volume in the screen  print markets in 1Q12 due to weakened  demand and distributor destocking


Gildan has taken the following actions:

  • In order for distributors to better plan and stimulate use end demand for Gildan products:
  • Lowering gross selling prices in the US distributor channel and will apply the benefits of selling price reduction through existing distributor inventories
  • The special distributor evaluation is expected to impact DTS in the first quarter by approximately $0.16 per share.
    • In order to manage inventory levels:
    • Extend normal X-mas shutdown of manufacturing facility
      • Continuing to ramp Rio Nance V, largest and most cost efficient facility
      • Also planning to reduce capacity of Rio Nance 1 and potentially modernize older technology

First Quarter Screen print business performance:

  • "a perfect storm of negative factors"
  • 1Q is lowest seasonal volume unit Q for the screenprint business
  • Low seasonal demand is compounded by significant destocking
  • Promotional activity is high while producers are using high cost cotton
  • Selling price promotion will be abnormally high
  • Special distributor inventory evaluation is projected to impact EPS by $0.16
  • SG&A expense (largely fixed) and incurred evenly through the year will be abnormally high as percent of sales due to weak demand and destocking
    • Results for screenprint are expected to improve gradually throughout the year
    • Benefit from reduction in cotton costs in 2H

High cost cotton is not expected to continue into early in the third quarter due to weak demand and slow inventory turnover.


Assuming shipments from US distributors to US screenprinters will decline by 5% YoY in 2Q and unchanged in 2H


Also assuming average market share of approximately 65% in US distributor channel


"Every one million dozen change in screenprint sales volume impacts EPS by over $0.05 per share. In spite of the weak economic environment, we are projecting further penetration in international and other markets in fiscal 2012 due to lack of capacity constraints, which have limited our penetration in these markets and the introduction of new products."


4Q Sock performance +84% as a result of Gold Toe partially offset by lower inventory replenishments

  • Sock business remained unprofitable despite gold toe due to high cost cotton

Projecting retail segment to report operating profit during FY12 through efficiency goals and declines in cotton prices


4Q selling price increases were implemented in Q4 and 1Q12 were aligned with cotton futures

  • Thus prices do not pass through peak cotton costs and will therefore not reduce prices when cheaper cotton flows through the P&L


Gold Toe integration:

Will result in:

  • Manufacturer savings
  • Eliminate duplicate overhead expenses
  • Result in further organic sales growth through Gildan's low cost vertical manufacturing making gold toe brands more competitive
  • Pursuing new retail programs for Gold toe owned and licenses brands as well as Gildan brand development


FY11 EBITDA of $312.5 excluding Gold Toe

Capex: $165mm

Debt: ~$120mm

Expect FCF of $75-100mm in FY12

2012 capex expected to be $100mm




Manufacturing downtime extension

  • Take roughly 12 days extra based on normal shutdown
  • Rio Nance V started production in September
    • Will be ramped up during 2012
    • Cost difference should more than offset the extended shutdown or lower capacity of Rio Nance 1
  • Rio Nance 1 will run through Q1 or Q2- will reduce capacity once Rio Nance V begins excelling (based on current outlook- subject to change with demand)
  • Impact from the shutdown is about $0.15 (embedded in guidance) of which about half is in Q1, other half is throughout the year
  • Rue Nancy 1 has been operating for 10 years, oldest facility, will take time to reenergize the infrastructure and potentially upgrade some of the technology in the facility during downtime
  • Rue Nancy 5 costs of factory alone provide a payback compared to operating Rio Nance 1 and will be by far a cost reduction initiative in itself

Gold Toe Guidance

  • $0.20 contribution from Gold Toe in 2012 provided earlier in the year still holds

Non-Profitable Program exit:

  • Exiting non profitable programs that are large volume, basic and within the skill set that be be produced "within our own facilities"
  • The Company's goal is to drive its own brand strategy:
    1. Exiting programs they do not fit the product and profitability criteria
    2. Leveraging Gold Toe as a marketing/merchandising company to drive not only Gold Toe brands, but Gildan brands as well
  • Not exiting the private label program (Starter & Danskin)

Brand Advertising:

  • Title sponsor of the New Mexico Bowl
  • Signed a 3 yr deal with ESPN
  • Just completed an event at Madison square Garden that gave exposure
  • Ultimately the best way to build the brand and create shareholder value

2012 Guidance:

  • Not planning for a big recovery in the industry
  • Believe the company will create demand and stimulate opportunity through aggressive price stance
  • Pricing products now based on future cost and flushing through the inventory now at a higher Cost of Good sold
  • This strategy will hopefully stimulate demand necessary to achieve Guidance


  • Reductions primarily on basic shirts only right now
  • Reduction represents a 13% discount (cost $3-$4/dz)
  • A little bit more than half of the price increases they implemented during the year on Ts


  • Not willing to give detail on pricing, but now expects higher cost cotton to push into Q3 COGS due to slower turns

Int’l Volume Expectations:

  • Expect strong growth, no specifics
  • Governor has been capacity which is now ramping
  • Also adding new products
  • Unit volume increases from int’l offsetting some of the U.S. distribution shortfall

Marketing Spend:

  • Plan on spending more this year to support Gildan brand
  • Stepped up spending significantly last year, expect to continue to invest
  • Looking to leverage SG&A in retail business (higher rates than overall)

Profitability Challenges at Retail:

  • Haven’t raised prices in-line with higher cotton costs
  • Integration issues with ramping U.S. production into the Honduras facility
  • Retail product requires more changes to product creating manufacturing inefficiencies vs producing private label to customer specs
  • Prior wholesale model of driving branch strategy changes with retail, are doing in most of activewear product, but need to establish in sock facilities as well
  • Only implemented selling price increases at the end of the FY so have been impacted by higher cotton costs
  • Retail business at ~$600mm should get margins roughly equal to wholesale margins
  • Has been more difficult to raise prices at retail
  • Turn inventory faster than most (3mo) so higher costs flowing through earlier
  • Still realizing manufacturing inefficiencies that carry into 2012 in retail
  • See margins improving gradually over the year

Brand Focus:

  • Basically have brands for every channel – can maximize distribution

Private Label:

  • Continue to divest programs that aren’t meeting profitability levels
  • There is probably another $20-$40mm worth of business that they will have to either 1) increase pricing, 2) chg product categories, or 3) eliminate
  • Danskin and Starter are profitable and still see big opportunity

Competitive Landscape:

  • Distributors are looking at the future price coming down potentially so they are destocking shelves
  • In Sept, end stock levels based on SKUs in stock were at 98%, now down to low 90s reflecting holes in customer inventories where they are waiting for GIL to cover costs of marking down inventory
  • Channel on the whole in screenprint destocking while they see cotton come down buying only what they need – even in retail as well
  • Believe pricing now is relative to where future pricing will be

Finanicial Health of Screenprinters:

  • Not concerned, feel confident

Destocking in the Channel:

  • Destocking pretty consistent across players
  • No color on Broder specifically
  • Broder is still largest customer

Unit Volume Expectations:

  • Prices coming down in the market
  • Were discounting product in November through incentives so distributors don’t want to take on the inventory risk
  • Example: if 10mm dz in the channel and prices come down by $4 that’s $40mm of exposure re distributor’s inventory
  • GIL is now addressing that by reducing prices
  • Trying to take uncertainty out for both distributors and end users
  • ‘hoping’ to see some activity and to stimulate new business by selling at a lower cost

Timing of Destocking:

  • Really started in 1stand 2ndweek of October
  • Believe most of destocking in rear-view because distributors at levels that they can’t fully service

“As far as the pricing is concerned, look, we don’t have a crystal ball, I can tell you that even the pricing based on

what we’ve set today is not representative of what the cost is of most of the manufacturers because everybody in

the industry has high cost cuts and there is no way to avoid it and so at the end of the day this question is how

much money our people willing to lose.”



  • As the low cost producer, for GIL not to make a return in this environment is likely to mean that others are in even worse shape
  • Could see further price reductions, still uncertain
  • Have planned for some lower prices gradually during the year
  • Have put some gradual price decreases into guidance, but anything more material would be further neg to EPS


  • All of the $ is going towards completion of Rio Nance V
  • The biomass project (cost savings initiative) is starting in January – fully ramped up by Q2
  • Will see the benefits of these cost initiatives by Q4
  • Benefits beyond $0.15 in EPS will more than offset $0.15 impact from closing facilities
  • Also looking into investing in an electrical plant for sustainable power going forward
  • Moving up in priority given increase in electricity costs in Central America
  • Also looking to potentially expand Gold Toe ops in Charleston


  • Taking time out in activewear near-term
  • Have the capacity when demand returns
  • For the first time in years they have the capacity to sell and are trying to aggressively looking for ways to fill it

Sock Volumes:

  • Sock business performance ex Gold Toe was a complete non-answer
  • Not generating a good profit – probably where most if not all of the $30-$40mm in unprofitable business is
  • Should start to see some Gold Toe efficiencies during the year

Retailers Potentially Looking for Further Price Reductions:

  • Don’t expect it
  • GIL didn’t bring pricing up as much as ‘a lot of the national brands did’


  • Pretty stable
  • Plan on launching several new programs under Gold Toe
  • Trying to lever Gildan brand underwear as well

Starter at WMT:

  • Didn’t lose any volume b/c sq. ft. is producing well, but lost 2 feet of space
  • Starter wanted to put in real performance underwear and it didn’t perform well
  • Selling equal with less space as they had sold with more space previously
  • It’s the #1 selling product on the floor



Athletic Retail: Slight Trend Reversal

Underlying sales trends look quite good for athletics, but the 1 year growth rates are reflecting increasingly difficult comps.


Athletic apparel growth slowed last week as the industry lapped a 20% comp but the underlying trailing 3 week and 2 yr trends accelerated. Alternatively, Footwear trends improved incrementally in spite of tougher year over year compares after three weeks of deteriorating trends. Improvements here are notable as the industry approaches a stretch of easier compares to close out 2011.


Here are some additional highlights on last week’s trends:


  • Nike (including Brand Jordan and Converse) gained an aggregate 416bps of share on a base of 43%. Nike has been a consistent share gainer, but Brand Jordan added an incremental 105bps of share last week
  • Basketball footwear has been down since an NBA-prompted slump in sales throughout October, but perked its head into positive territory along with the announcement of the season being brought back from the grave.
  • Outerwear, which outperformed in Q3 continues to show strong growth (up 27% last week & 30% YTD) however there was a notable slowdown in the category’s share of athletic apparel (see chart below) which was 13.4% vs. 12% LY. The YoY spread remains up 140 bps however the spread has been running at a full 3 points for 2 months. While the unseasonal ramp in the category’s sales as a percent of total has been hugely positive for VFC (TNF) and COLM, Columbia lost 100 bps of share this week with VFC’s gains slowing to 61 bps. This could be an anomalous week for a trend that will continue through the holidays but it could also be the beginning of the snapback in unit sales as the channel begins to recognize the pull forward in sales
  • Champion Sales continue to deteriorate – posting a 17% decline on the week (Champion accounts for ~15% of HBI sales). We highlighted the LSD declines a few weeks back as a potential anomaly however the sharp acceleration to the downside has confirmed a trend here. What’s notable is that Target has noted the strength in Champion’s C9 program, which is exclusive to target.  TGT is not represented in this data, which suggests that the company may be robbing Peter to pay Paul. We’ll have to look into this further. If true, definitely not good for HBI.
  • The Department Store and Family Retail apparel channels had strong weeks with sales up 18% and 23% respectively on incrementally more difficult comps. These channels only account for an aggregate 25% of the Athletic specialty apparel market but are notable for JCP, M & KSS. The athletic specialty channel’s year over year growth slowed to ~8%, which by any measure is a very healthy rate as it is lapping a 30% compare.  Nonetheless, deceleration is what it is. We like FL in the athletic specialty channel; see our recent note "FL: We're Getting more Cautious." 

Athletic Retail: Slight Trend Reversal - chart 1


Athletic Retail: Slight Trend Reversal - chart 2


Athletic Retail: Slight Trend Reversal - chart 3


Athletic Retail: Slight Trend Reversal - chart 4


Athletic Retail: Slight Trend Reversal - chart 5


Athletic Retail: Slight Trend Reversal - chart 6


Athletic Retail: Slight Trend Reversal - chart 7


Athletic Retail: Slight Trend Reversal - chart 8


Athletic Retail: Slight Trend Reversal - chart 9

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.