Conclusion: An uncharacteristically mundane quarter for GIL. A penny below consensus yet a penny above GIL’s guidance and the business appears to be in decent shape. The callout is the fact that for the second consecutive quarter GIL is increasing the opacity of its underlying business. Volatility is headed higher in this name. But despite increased opacity, the reality is that the acquisitions and less competition from HBI will give GIL more tailwinds than headwinds in the coming quarters.
The company timed up its new acquisition (Anvil) beautifully last quarter just as Gold Toe is rolling off. This quarter we have GIL announcing that it will no longer report data for the CREST report – just as pricing in the industry is hitting an inflection point. With cotton prices remaining low, manufacturers will be forced to lower pricing now that cotton costs have eased. Some will inevitably hold out longer than others creating price dislocation over coming quarters. The good news is that industry demand is up +4.3% offsetting lower prices this quarter, and Hanesbrands has ceded over $100mm in sales in this space (wide open for GIL). But volatility in this name will be headed higher with the intra-quarter read no longer available.
With 71.3% share in the U.S. Distributor market coming in above the 70% the company expected there’s limited upside for further share gains in this market. As such, this move probably makes sense, but the timing makes it even more difficult given that the company has been layering on acquisitions just at the time when we’d otherwise be looking at the real underlying organic growth. Gold Toe and Anvil accounted for 2-3pts and 5-6pts of growth in Q3, with core growth standing at a more modest modest 4%-5%. In terms of driving sales, the pricing dynamic is arguably at its most critical point over the last few years.
To GIL’s credit, despite slightly lighter than expected gross margins down -437bps vs -331bpsE, the sales/inventory spread in the quarter improved 12pts to +7%. This comes after five consecutive quarters of a negative spread which is bullish for gross margins at the same time product costs are swinging to a tailwind.
As for the FY outlook, no change to top or bottom-line expectations of note implying status quo for Q4.
Despite the opacity, the reality is that the acquisitions and less competition from HBI will give GIL more tailwinds than headwinds in the coming quarters.
