I’m kicking myself over this one. GIL has long been my favorite name to short. Not only was I not there to capture today’s alpha but I fell into the trap of thinking that expectations were nearing bottom.
Lesson: When you feel so strongly that 1) management is flat-out bad, 2) they’re making the wrong strategic decisions and investing capital in higher-risk, lower return business, and 3) they're feeding a different message that the Street actually believes, then 4) stick to your guns – especially when it is at a 20% premium to the group.
A few big picture points.
1) The triangulation and rate of change between sales, inventories and gross margins was more out of whack than almost any company I have ever seen. You know that SIGMA chart we use (Sales/Inventory Gross Margin Analysis) that tracks profitability and the components thereof? We literally need to recreate it for GIL this quarter because inventories were so out of whack (+31% vs. sales-27%). See chart below.
2) Note to CEO: C’mon Glenn, you have a good base business. Why do you need to grow into all these new categories where you have minimal control and visibility over pricing and orders? In such an abysmal quarter, your market share in core T-shirts was up 4 points to 54%, and fleece share was up 3 points to 52%. And yet total sales were down 27%! Don’t you 'get it' that it’s not just the economy that’s causing your problems? All these challenges began when you ran out of sourcing savings that you used to max out share in this core, and then started to grow into a secularly-challenged business (private label for Wal*Mart) without a big cost save to pad your margins and use as an offensive pricing weapon?
3) Best quote of the conference call (per Thompson transcript) – in answer to a question to Glenn Chamandy about price discounting philosophy. “…part of pricing strategy is to try and gain as much share as possible, but the reality is that there’s a point where no return in terms of spending my good money after bad money.” I agree with the philosophical view, but I’ve never heard a CEO use the term ‘my money’ when referring to the P&L on a call with investors. Glenn, isn’t it ‘our money’ when speaking to fellow shareholders? Maybe this is McGough being petty. But the comment rubbed me the wrong way.
4) So what’s GIL worth? Every story has its price. I think it’s safe to say that the halo that has rested on the crown of this bad boy has finally been lifted, stomped on, and left for dead. So we know that the 10x-20x EBITDA multiples of yesteryear are history. Now what? I have no reason to think that GIL will earn over a buck in any of the next 3 years. In fact, this year I can model anything from $0.80 to ($0.20) – no kidding. Remember that vertically owned and operated basic apparel brands have historically traded hands for 3-5x EBITDA – and those are BRANDS (i.e. Fruit and VF Intimates, to name two). Why should GIL (i.e. no brand) trade higher? Better top line? Perhaps. But the company is proving that anything beyond the screen-printing/T shirt business is both margin and return-dilutive. I think this stock is in single-digit purgatory for a long time.