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GIL: Amnesia?

 

Following a 30% tailspin just 2mo ago, the stock is back to pre-‘announcement’ levels. Despite the modest improvement, we think the risk/reward is still unfavorable given the current level of uncertainty and execution risk.

 


Gildan reported a modest beat after severely haircutting expectations some 35% last quarter. Just two months later, following a 30% tailspin, the stock is back to pre-‘announcement’ levels. It’s acting like the incremental pros in the quarter far outweigh the cons, we disagree. GIL is shifting its focus toward growing its own retail via Gold Toe and its international business. We expect this to cause transitional interruptions in the process, which the stock is does not currently reflect.


Let’s take a look at the key highlights at each end of the spectrum this quarter:


Pros:

  • While pricing remains challenging in the U.S. wholesale distributor channel, GIL has been able to get some pricing in the retail channel, which added $10mm in revs (+3%) and accounted for some of the unanticipated upside in sales this quarter.
  • International is finally starting to materialize contributing what we estimate to be less than $10mm of revs in the quarter. It has been identified as an opportunity for a few years now, but the company has never had the capacity to handle the extra business. Ironically, just as international demand comes on, the company is taking one of its facilities and capacity off with the closure of Rio Nance 1 at the end of Q2. The opportunity there is to potentially upgrade the facility to improve efficiency, but for now it’s going to be mothballed for the near-term.
  • With market share in its core t-shirt and fleece markets up around 65% it’s a challenge to maintain share, but GIL was up roughly 4pts yy though down ~1pt sequentially. Perhaps one of the more bullish results of the quarter was GIL’s unit growth coming in up +3-5% vs. the industry down 3-4%. We think this can be primarily attributed to the company being one of the first to take pricing down amidst an aggressive destocking environment at year-end.

Cons:

  • Pricing in the U.S. wholesale distributor business remains highly unstable. While December was a bit less promotional than expected, destocking continues leading to further heightened promotional activity. In fact, the company noted it expects promotional activity to increase through Q2 before improving sometime in Q3. That suggests we’re only half way through this irrationally competitive environment at best.
  • Another variable to consider is that GIL is not fully hedged nor bought for F12. The company’s guidance assumes the remainder of Q4 purchases will be made a current spot prices. This could go both ways.
  • GIL is growing its own retail and international business the same time CapEx is at multi-year lows and SG&A has to head higher if the company expects to capitalize on these opportunities. That could definitely be positive for the business 2-3 years out, but will require significant investment near-term – something GIL is not accustomed to with a historical SG&A ratio of 10-11%.

There are two additinal points to consider. First, management suggested that the Branded Apparel business (~25% of sales) could eventually achieve profitability similar to Printwear in the mid-20s. Its currently just about break even. If we want to paint a super bullish scenario and assume GIL is running at 25% margins (closer to 20% with corporate allocations) we are looking at $3+/sh in earnings power. We think the mere suggestion of this level of profitability was viewed positively if not flat out bullish, but there are a lot of questions between now and then that don’t appear to be appropriately discounted in the stock.


It’s also worth noting that the company hasn’t operated with this type of leverage since ’02-’03 when GIL shifted to its off-shoring model – they don’t have that lever anymore. Given that management didn’t repurchase any stock during the quarter, our sense is they aren’t comfortable running this thin. With the entire 1H generating negative FCF its will provide the company little financial flexibility while simultaneously looking to expand new growth businesses.


We fully acknowledge that there was an improvement in fundamentals on the margin, but not significantly enough to completely dismiss the impact of perhaps the most challenging six-month period in company history. We’re shaking out at $1.08 this year and $1.90 next year reflecting an 22x and 12.5x earnings multiple, and 14.5x and 10x EBITDA = not cheap.


These estimates are predicated on 13.5% revenue growth this year and 12% for next year reflecting the incremental revenue from Gold Toe, pricing in Branded Apparel, and growth of retail and international offsetting the impact of lower unit sales and pricing from destocking in the 1H. In addition, we are assuming gross margins of 16% in Q2 reflecting a sequential increase from Q1 due to the absence of an inventory devaluation (= 7pts), the impact of manufacturing downtime (=3-4pts), and higher unit volume. Similarly, with the closure of Rio Nance 1 at the end of Q2 and higher utilization, we have margins  up to 24-25% in the 2H and up 450bps next year to 23.5% reflecting 300-400bps from lapping the interruptions of the 1H F12, higher utilization, and improved manufacturing efficiencies. While we expect SG&A growth (+20%) to outpace sales (+12%) in support of retail and international initiatives, we expect operating margins to expand 366bps in F13.


Despite the modest improvement, we think the risk/reward is still unfavorable given the current level of uncertainty and execution risk.

 

Casey Flavin

Director

 

GIL: Amnesia? - GIL S

 

GIL: Amnesia? - GIL RNOA

 

Here are our notes from the call:

 

Revs:  -8.3%

Printwear: -41%

Branded Apparel: +93%


GM: 2.1%; -2265bps

 

SG&A: +22%

  • Selling prices slightly higher than projected in December - due to lower projected promotional discounting in Dec
  • Q1 loss due to:
    • Still consuming inventories made at peak cost
      • Avg cost of cotton in Q1 was more than double yy = $0.45/sh impact
    • Selling prices in print were reduced during Q1 in-line with current futures initial through ST promotions and then formal reduction in gross selling prices announced in De
      • Selling prices in Branded Apparel have remained largely unchanged and were increased at the end of FY to reflect current cotton future costs
      • U.S. wholesale distributors delayed replenishment of inventory in anticipation of the above selling price reductions in printwear
      • Distributors were able to lower inventories in Q1 b/c seasonally lowest
      • De-stocking of distributor inventories resulted in close to 40% reduction in GIL's unit sales in Q1 and significantly more impactful than the 3.9% decline in screenprinter demand last yr
      • Partially offset by higher market sales and higher shipments to Europe and other Int'l mkts
      • Lower Printwear sales impacted EPS by $0.25
    • Benefit of Printwear selling price reduction applied to distributor inventories devaluatation = $0.16
    • Extended manufacturing shutdown taken in December to manage inventory levels = $0.07
  • These factors resulted in segment operating losswhen otherwise profitable

Branded Apparel:

  • Improved results due to higher selling prices implemented in Q4
  • Improved sock manufacturing efficiencies
  • Accretion from GoldToe
  • Expect results to continue to improve as lower cost cotton cycles through after Q2 + manufacturing efficiencies as sock facility ramps with integration of GT
  • SG&A expenses for branded apparel division saddled with infrastructure put in place to support LT plan
    • As well as duplication of costs to the GT acq
    • Expect expenses for BA to be more inline with sales despite higher development costs associated with GT for retail over time

BS:

  • Inventories up 67% (down 6pts seq)

Outlook:

 

Q2:

  • EPS $0.20
  • Revs +$500mm
  • Contribution from GoldToe
  • Higher cotton costs expected to impact EPS by $0.70 vs. last yr
  • Impact of higher cotton costs projected to be largely offset by higher printwear unit sales despite assumed industry demand in U.S. distributor channel down -5%
  • And market share gains and increased int'l penetration, higher selling prices, efficiencies and accretion from GT

FY:

  • Higher cost cotton to roll of in Q3
  • Assumes GIL covers remaining open cotton purchases for Q4 at current rates
  • No recovery in overall industry shipments to U.S. distributor channel - guidance assuming 5% decline in Q2 and flat in 2H compared to low base in F11 when demand was down 8%
  • Mkt share in U.S. distributor channel of ~65%
  • Industry pricing slightly lower than Q1; printwear is currently aligned with mkt
  • The industry has experienced inflation in labor, energy and other input costs - no assurance of rational pricing and further promotional activity will not occur
  • Price increases implemented at retail in Q4 stick
  • Progressing with facility for activewear and underwear expect to be online by end of year
  • Will be lowest cost facility adding capacity and further manufacturing efficiencies in F13

  • Expect further efficiencies in sock manufacturing as it ramps up
  • Temporarily retired RN1 to manage pace of capacity expansion at end of Q2
  • CapEx still ~$100mm for F12
  • FCF of $75-$100mm; burn cash in Q2, generate in 2H
  • Did not buy any stock despite stock price decline

Q&A:


Branded Apparel Margins:

  • Anticipate similar to wholesale in the long run ~25%
  • Will take time given investments over the next few years

Cotton Hedging:

  • Avg. quarterly cost peaked at ~$1.60 in Q4 and still flowing through until Q3
  • Have hedges into Q4

Promotions / Price Reductions:

  • t-shirts and fleece
  • Current environment in-line with projections
  • Q2 assumes some additional promotions from Q1
  • Pricing is slightly lower this quarter than Q1 as expected

Q2 Revenues:

  • Expect strong sales growth in Printwear due to int'l penetration and some inventory destocking by U.S. distributors and increased market share

Wholesale Distributor Inventory Levels:

  • ~45% relative to GIL's share in low 60s
  • So far in January seeing stronger POS than projected; also in Feb
  • 30% increase in int'l
  • Hadn't had inventory historically to support
  • Reflects opportunity in Mexico and Europe
  • All int'l markets doing exceptionally well

Retail:

  • Have placed over 15,000 stores and locations
  • Testing GT underwear in different retailers
  • Expanding some categories
  • Launched GT product called solutions - compression sock
  • Have secured new programs for the fall
  • Pushing for BTS and holiday promotional items

Branded Apparel:

  • Re Q2 guidance assuming GT contribution is similar ~$50-$60mm, restocking is some (small) but mostly international penetration within screen print channel

Pricing:

  • Other competitors have had to take write-downs because goods sold for under cost
  • There is still some irrational pricing taking place
  • So far GIL is running well ahead of -5% decline in shipments
  • "So in certain cases, I would say that there is definitely irrational pricing going on in the marketplace at even today's levels. So if the price does continue to deteriorate, it's because it's irrational, it’s not something that I think is sustainable first of all. As well as the same competitors that are pushing pricing down potentially in this channel are racing as fast as they can to raise prices at retail because they are running through all the high cost cotton. So I think as an industry, everybody is in the same boat. We are going to be, obviously, consuming our high cost cotton by the end of -- from the beginning of our third quarter. We feel comfortable with our positioning. We also feel comfortable we can command a premium for our products."

GIL Inventory Levels:

  • Inventories up 67% = 100mm from higher costs (27%); 60mm GT (16%); balance is units (23%)

Price elasticity:

  • POS is down overall at retail b/c raising prices
  • Elasticity almost direct 1/1 relation
  • Took two small price increases at retail vs industry increases in 30%-40% range
  • Prices increases added ~$10mm in revs to the quarter = +3%

Inventories:

  • Inventories down much more than POS unit reduction

Capacity:

  • Taking out a little more time during Easter
  • Will have 70-75mm dzn of Activewear capacity with remaining 3 facilities

Mid-Tier & JCP:

  • Think JCP strategy is going to work well for GIL
  • Got tripped up in answering saying they were mentioned as one of the opportunities…overall happy with Gold Toe placement










BYD TRADE UPDATE

Keith bought BYD in the Hedgeye Virtual Portfolio at $8.86.  According to his model, the TRADE range is between $8.63 and $9.89, and the TREND support level for BYD is at $7.27.

 

Boyd Gaming has been a laggard in the regional gaming space past few year.  The sentiment surrounding the name is negative - JP Morgan, Lazard, and Barclays recently downgraded the stock and short interest is very high. We’ll make this contrarian call due to better than expected performance in Locals Las Vegas and Atlantic City.  A near-term earnings beat is likely and management should provide positive commentary on 2012, particularly as the LV Locals market starts to show consistent, albeit slow, growth going forward.  Any catalyst should impact the stock meaningfully given the attractive FCF valuation and negative sentiment.

 

BYD TRADE UPDATE - BYD


Covering: SP500 Levels, Refreshed

POSITION: Long Energy (XLE)

 

With the SP500 holding my immediate-term TRADE support line of 1337 this morning, I covered-the-dip.

 

We believe that hedge funds should hedge. That’s why I trust the process that has served me better than poorly in the last 4 years – it takes out (some of the) emotion. When you’re in the middle of February and the SP500 hasn’t had a down day of more than -0.57%, that emotion isn’t going away.

 

Across all of my core risk management durations, here are the lines that matter to me most:

  1. Immediate-term TRADE overbought = 1362 (lower long-term high)
  2. Immediate-term TRADE support = 1337
  3. Long-term TAIL support = 1267

My call has been that if we start to see Inflation Readings Accelerate and Growth Readings Slow, the SP500 will make a lower long-term high versus its 2011 closing high of 1363. Today, with all of the high frequency growth data slowing sequentially (China and US Consumer Confidence in particular), I’ll reiterate that view.

 

I’m covering SPY because 1337 holds. If it doesn’t, I won’t be sitting on my hands.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Covering: SP500 Levels, Refreshed - SPX


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

THE HBM: COSI, DNKN, RUTH, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

Another day of consensus staring at a Greek tree – the forest of globally interconnected risk ticks on:

  1. CHINA – China just moved into the Top 3 Most Read on Bloomberg this morning for the first time in a while (Greece has dominated news-flow), and given China actually matters to Global Growth, this makes sense. In the last 48 hrs Chinese data did exactly what we said it was going to do: 1. Inflation accelerating sequentially to 4.5% from 4.1% y/y and 2. Growth Slowed, big time, w/ Exports down -0.5% y/y (1st y/y drop in over 2yrs).
  2. FRANCE – we’re short French Equities for the 1st time since late December for 3 reasons: 1. Growth data slowing as inflation data rising 2. CAC failed at its long-term TAIL of 3565 resistance and 3. EUR/USD is bumping up against a wall of resistance at 1.33 (highly correlated to the CAC). European stocks should stop trading on Greek “news” as the economic gravity of the French slowdown becomes more glaring.
  3. 10-year UST – markets tend to push the Pain Trade to its highest pressure points and then put the pain on those who chased. The 10-year yield ripped yesterday all the way up to my 2.03% (intermediate-term TREND line), and then reversed (2.00% this morning and falling). If I’m right and Global Growth slows sequentially as inflation rises here in FEB, I want to be long the long-bond.

 

SP500 continues to make lower long-term highs (below April 2011’s 1363).

 

SUBSECTOR PERFORMANCE

 

THE HBM: COSI, DNKN, RUTH, BWLD - subsector

 

 

QUICK SERVICE

 

COSI: Cosi initiated a consulting agreement with industry veteran Brad Blum yesterday.   Blum will provide consulting services related to branding, product development, merchandising and marketing in a collaborative effort to maximize long-term shareholder value, according to a company press release.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

DNKN: Dunkin’ Brands declined on accelerating volume after reporting a strong quarter, on the surface, but failing to inspire confidence on the earnings call.  We remain skeptical about the long term growth prospects of the company.

 

 

CASUAL DINING

 

RUTH: Ruth’s Chris reported 4Q EPS of $0.11 versus consensus $0.09.  Company-owned comparable restaurant sales for Ruth’s Chris increased to +7.7%.

 

THE HBM: COSI, DNKN, RUTH, BWLD - ruth pod1

 

 

KONA: Kona Grill reported 4Q11 EPS of $0.12 (excluding severance charges of $0.04) versus $0.01 expectations.  4Q same-store sales gained 7.8%.

 

THE HBM: COSI, DNKN, RUTH, BWLD - kona pod1

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

BWLD: Buffalo Wild Wings continues to trade higher, gaining 3% on accelerating volume yesterday.

 

THE HBM: COSI, DNKN, RUTH, BWLD - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 10, 2012


As we look at today’s set up for the S&P 500, the range is 26 points or -1.33% downside to 1334 and 0.60% upside to 1360. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 36 (-444) 
  • VOLUME: NYSE 759.18 (-0.81%)
  • VIX:  18.63 2.59% YTD PERFORMANCE: -20.38%
  • SPX PUT/CALL RATIO: 1.54 from 1.40 (10.00%)

CREDIT/ECONOMIC MARKET LOOK:


10-year UST – markets tend to push the Pain Trade to its highest pressure points and then put the pain on those who chased. The 10-year yield ripped yesterday all the way up to our 2.03% (intermediate-term TREND line), and then reversed (2.00% this morning and falling). If we’re right and Global Growth slows sequentially as inflation rises here in FEB, we want to be long the long-bond.

  • TED SPREAD: 42.36
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 1.98 from 2.04
  • YIELD CURVE: 1.73 from 1.78

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am, Trade Balance, Dec., est. -$48.5b (prior -$47.8b)
  • 9:55am, UMich consumer confidence, Feb., P, est. 74.8 (prior 75)
  • 12:30pm, Fed’s Bernanke speaks on housing in Orlando
  • 12:50pm, Fed’s Pianalto speaks on housing in Cleveland
  • 1pm: Baker Hughes rig count
  • 2pm, Monthly Budget, Jan., est. -$34b (prior -$49.8b)

GOVERNMENT/POLITICS:

    • President Obama to sign Ultralight Aircraft Smuggling Prevention Act, joined by former Rep. Gabrielle Giffords
    • Mitt Romney, Rick Santorum, Newt Gingrich speak at American Conservative Union’s CPAC ’12 conference, 10am. AFL-CIO holds counter-demonstration, noon
    • Romney holds town hall meeting in Portland, Maine, on eve of state’s Republican caucuses, 5:15pm
    • House, Senate not in session

WHAT TO WATCH: 

  • German Finance Minister Wolfgang Schaeuble said to have told lawmakers in Berlin that Greece will miss its debt-cutting targets
  • U.S. trade deficit may have widened in Dec. to $48.5b from $47.8b previous month: economists
  • P&G said to have decided it will seek to end sale of its Pringles snack business to Diamond Foods
  • IEA cut its 2012 global oil demand forecast for sixth month as a “darkening” economic outlook reduced prospects for global growth
  • Alcatel-Lucent rose after 4Q results; will offer access to patents through licensing syndicate
  • Barclays said it may miss profitability target set by CEO a year ago
  • Micron Techology holds analyst meeting days after CEO Steve Appleton died
  • Google said to be developing home-entertainment system, WSJ says

 EARNINGS:

    • Calpine (CPN) 6 a.m., $0.04
    • Alliant Energy (LNT) 6 a.m., $0.56
    • Laboratory of America Holdings (LH) 6:45 a.m., $1.53
    • PPL (PPL) 6:58 a.m., $0.61
    • Apollo Global Management LLC (APO) 7 a.m., $1.39
    • Buckeye Partners (BPL) 7 a.m., $0.84
    • Brookfield Office Properties (BPO CN) 7 a.m., $0.25
    • AllianceBernstein Holding (AB) 7:15 a.m., $0.19
    • Flir Systems (FLIR) 7:30 a.m., $0.45
    • Arch Coal (ACI) 7:45 a.m., $0.32
    • Telus (T CN) 8 a.m., C$0.79
    • Emera (EMA CN) 9:48 a.m., C$0.35
    • IGM Financial (IGM CN) 10:35 a.m., C$0.76

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Copper Traders Turn Bullish as Economy Spurs Demand: Commodities
  • Oil Falls From Three-Week High as Greece Counters U.S. Economy
  • Gold Falls a Third Day in London as Commodities Drop on Greece
  • Copper Cuts Fifth Weekly Gain on Record Shanghai Stockpiles
  • De Beers Sales Increase 27% on Higher Diamond Demand, Prices
  • Palm Oil Declines as Malaysian Reserves Fall Less Than Forecast
  • China January Copper Imports Fall From Record; Scrap Slumps
  • Palm Oil Inventories in Malaysia Decline to Five-Month Low
  • Contango in Gas Is Sell Signal for SocGen, Citi: Energy Markets
  • Australia’s Floods May Boost 2012-2013 Cotton Output to Record
  • South Africa to Lure Miners With $40 Billion Boost For Railways
  • Bumi’s Largest Shareholders ‘Confident’ of Ousting Rothschild
  • Chocolate Makers In Love With Valentine Sales: Chart of the Day
  • Copper Traders Bullish on Global Growth
  • IEA Cuts 2012 Oil Demand Forecast on ‘Darkening’ Growth
  • Wheat Set for First Weekly Drop in Four on Record Global Stocks
  • Coffee Rises as Roasters May Tap European Stocks; Cocoa Falls

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


FRANCE – we’re short French Equities for the 1st time since late December for 3 reasons: 1. Growth data slowing as inflation data rising 2. CAC failed at its long-term TAIL of 3565 resistance and 3. EUR/USD is bumping up against a wall of resistance at 1.33 (highly correlated to the CAC). European stocks should stop trading on Greek “news” as the economic gravity of the French slowdown becomes more glaring.


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – China just moved into the Top 3 Most Read on Bloomberg this morning for the first time in a while (Greece has dominated news-flow), and given China actually matters to Global Growth, this makes sense. In the last 48 hrs Chinese data did exactly what we said it was going to do: 1. Inflation accelerating sequentially to 4.5% from 4.1% y/y and 2. Growth Slowed, big time, w/ Exports down -0.5% y/y (1st y/y drop in over 2yrs).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 



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