GIL: A Binary Call On Pricing

 

Conclusion: Volumes are stabilizing. But playing the market share game in a commodity space in dangerous. 2H utilization should improve, but that's when GIL laps 30% growth largely from Gold Toe. Ultimately, this is all about pricing.


Volumes are stabilizing. But playing the market share game in a commodity space in dangerous. 2H utilization should improve, but that's when GIL laps 30% growth largely from Gold Toe. Ultimately, this is all about pricing. 


1)  Position in the screenprint channel: CREST data suggests unit sales have been coming in stronger than originally expected, running up +12% through February compared to management’s assumption of down -5%. The data suggests that the company is gaining share in the screenprint channel and we have no reason to dispute that. So, while margins will remain pressured, are likely to come in higher than originally planned. GIL's Q2 should reflect the third straight quarter of share gains after capacity constraints impacted share through most of last fiscal year, and GIL roared back with 25%+ cut in its price. In fact, Broder came out 5 weeks ago and noted that cotton is now priced at ~$1.00 for a t-shirt from ~$1.55 per pound at the peak, and almost all of it is being passed through to customers. In other words,  margins in the supply chain remain tight.  While Q2 typically represents GIL’s greatest share for the year, we expect 2H share to reflect incremental gains though we are still not convinced it will capture the 65% share in management’s plan as it competes against smaller players forced to be aggressive. If it does, GIL is likely to be buying it. Playing the market share game in a commodity space is wreckless. 

2) Gold Toe contribution: Q2 is the last quarter of a full incremental Gold Toe contribution with the deal lapping in April. While there has been substantial opacity surrounding the performance of this business since its inclusion, management confirmed that it remains ‘on plan’ to deliver $0.20 in EPS this year. Gold Toe accounted for ~$85mm in sales in Q1 and is expected to generate a similar contribution in Q2, or +22% total revenue growth. In addition, ~$0.05 in earnings implies ~$6-$7mm in EBIT contribution in Q1 and similar amount to what we expect in Q2. We have no reason to think this business is not moving forward as planned. Though it's very important to remember that a 20%+ kicker to GIL's top-line goes away next quarter. That kind of opacity definitely helped over the past year. Bye bye. 


3)  Input Cost/Pricing impact: While the inventory GIL is selling through at ~$0.95 cotton is closer to current prices, it’s still 35%-40% below where the company likely secured the inventory based on the typical 6-9 month production cycle. Lower prices in the screenprint channel (~70% of revs) continue to pressure margins slightly offset by HSD price increases in the Branded Apparel. We’re modeling gross margins of 16% below consensus expectations of 17% and -1100bps below year ago levels.


 

All in we are shaking out at $0.21 in EPS for the quarter with higher revenues of $521mm lighter gross margins relative to the Street. We’re 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. For the year we’re shaking out at $1.10 and $1.93 next year reflecting a 26x and 15x earnings multiple, and 16.5x and 11.5x EBITDA.


GIL: A Binary Call On Pricing - GIL Sentiment Monitor

 

GIL: A Binary Call On Pricing - cotton chart

 

 



GIL Forward Looking Commentary from 1Q12 call headed into 5/3/12 (2Q12) Conference Call:


Revenues:

Full year: $1.9bn

Printerwear Business: $1.3bn

Branded Apparel Business: $0.6bn

2H industry demand expected to be flat YoY when demand fell (-8%) in 2011

Assuming market share of 65% in the US Distributor Channel


2Q12: $500mm

Assuming 5% decline in industry shipments from US wholesale distributors to US Screenprinters in 2Q12

Expecting Strong Growth in Printwear due to penetration in international markets and some inventory destocking by distributors in the U.S. wholesale channel, and also increased market share

 

Gross Margin:

Pricing: Printwear Pricing expected to be slightly lower than Q1 for the balance of the year

 

Every 1% change in net selling prices for Printwear impacts projected EPS for the balance of fiscal 2012 by approximately U.S. $0.09

 

Pricing will reflect 4th quarter increases for the balance of the year which did not reflect full pass-through of high cost cotton

 

Cotton Cost: In line with 1Q12 and significantly higher than 2Q11

 

2H costs expected to be significantly lower than 1H based on cotton futures

 

Inventory at peak cost expected to be consumed early in 3Q12

 

Earnings:

Full year: $1.30

Second Quarter: $0.20

Higher cotton YoY expected to impact Q2 ESP by ~$0.70

Partially Offset by manufacturing efficiencies & Gold Toe

For every 1 million dozen change in demand for activewear, EPS is impacted by $0.05

 

Capex

Full Year: $100mm

Free Cash Flow:

Full Year: $75-100mm


Inventories: Expect to end F12 with unit volume slightly higher vs. last year

 

Rio Nance V: Will become the lowest cost facility for Activewear & Underwear

Expected to be fully ramped up by the end of F12

Expect additional production capacity and manufacturing efficiencies in F13

Temporarily retiring Rio Nance 1 at the end of 2Q12 and evaluating the modernization of Rio Nance 1 which would provide further cost efficiencies in the future


 


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