GIL: Finally Shows True Colors (Lack Thereof)

GIL is finally being exposed for what it is – a moderate grower with peak margins and increased capital requirements as it grows into weak categories. Yes, it’s down. But $3-$5 is not unreasonable.

The 4Q result speaks for itself. Top line came in below plan, guide down to 7-9% average price declines in 2009, and a 38% hit to current consensus. I’m actually impressed that Gross Margin was down only 15 bps yy, but this erosion will accelerate as the level of pricing needed to sustain margins is simply failing to come through.

One factor that the bulls have latched on to is that GIL has solid pricing power with its network of US distributors – where GIL is the 900lb gorilla. But no one is considering that many of these little business are simply that – little. They are cash strapped, and some are levered and need credit. In a perverse way, my sense has been that in this environment where pricing power matters, GIL is actually losing relevance.

So now what? This company is not going away. But it also has no ’birthright’ to grow in the new competitive landscape. New guidance of $1.10-$1.30 looks reasonable. But the reality is that this is a basic underwear company with peak margins and an asset-intensive vertically-operated infrastructure. Someone ask Warren Buffet what these assets trade for. The historical bid is 3-5x EBITDA. That suggests a $3-$5 stock.

Let’s see what management says on the call. It’s tough to dig out of this hole…



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