Quick Take. Just when you need to show real organic earnings growth...buy something.
GIL’s results were rather uneventful relative to expectations, but the actions on the print are perplexing. Most notably, the company acquired Anvil for $88mm – at the precise time that it anniversaries the Gold Toe acquisition. We’ve always had a bias against the direction this business model is headed, so we definitely don’t want to sound like we’re being fair. But is this for real? Seriously. This company has such a defendable base business as the low cost producer of t-shirts and fleece for the distributor channel. Buit then it pushed its way into mass channels (didn’t work), international (yet to work), bought Gold Toe (working so far, we think, but ROIC dilutive at best), and now just when we have an opportunity to see the real earnings power of the company, it gives us $200mm of additional opacity.
On one hand, buying $200mm in revenue for $88mm tells us that either a) the price is outstanding, or b) the brand is not making a whole lot of money. Its historical margins have gone from +20% in the industry hey-day in the early 00’s, to -20% later that decade.
When we do the math, we see that Branded Apparel printed a $122mm revenue number. Assuming Gold Toe is performing as management indicates ($85mm), then we get to core branded apparel sales of $37mm. That’s down 38%. Yeh… I could see why they’d want to do a deal.
Guidance is not entirely clear, but all-in, the year seems to be intact, though GIL is guiding down the 3rdquarter. The interesting note is that it appears that the Anvil acquisition is INCLUDED in guidance. We’ll hope (but won’t count on) the company giving us the details to decipher one component from the others on the 8:30am call.
OUR NOTE FROM EARLIER THIS WEEK
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 Forward Looking Commentary from 1Q12 call headed into 5/3/12 (2Q12) Conference Call:
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
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
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
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
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