GIL: Smoke in Mirrors

Here's a statement you'll never hear a management team utter. "We have very little confidence that our largest customer will survive as an ongoing entity."  GIL stated the opposite on its call, which shot the stock higher despite abysmal results. I wonder why GIL managed receivables down to 7% of total for a 32% customer if it is so confident in solvency. Using every ounce of analytical objectivity, I simply can't get to a positive narrative here.

 

This is one story where you absolutely can't look at the name today without historical context .What we know in piecing together a longer-term narrative...

1) GIL used the multi-year financial windfall associated with a well-executed offshoring strategy to create an offensive weapon to dominate market share in its core business (55%-60% in T-shirts and Fleece).

 

2) That ended about a year ago, and GIL has since been attempting to grow into lower-margin businesses where the competitive landscape is steeper, the customer relationship is stacked against GIL, and it must compete more heavily on price.

 

3) The first foray was Wal*Mart and US mass channels. That has clearly not turned out as management planned.

 

4) This happens at the same time when Broder (1/3 of sales) is on the ropes, and its status as an ongoing entity is in serious jeopardy. Even if it does not go under, it is a mess.

 

5) So what's next? Yes, the company is looking at Asia (China) to be over 40% of its business within 2-3 years.

 

6) It is restating prior year's results, reclassifying depreciation, and cutting existing capacity to boost utilization due to weak demand.

 

So let me get this straight... This is a company that is currently the low cost producer of an unbranded commodity that is looking to grow into Asia. It manufactures almost 100% of its goods in Honduras and the Dominican Republic. So it would be competing with the likes of Li&Fung and thousands of existing local factories that can make product cheaper, would not be subject to import duties, and have a far deeper understanding of the Chinese consumer. This smells so wrong to me in so many ways.

 

On the flip side, I look at the potential for GIL to boost its capacity utilization by putting Chief Jay Strongbow's 'Sleeper Hold' on existing production and shuttering capacity. Most investors don't remember what leverage this can add to a pure vertical apparel manufacturer given that there are only 1 or 2 that still exist (as opposed to the 1980s where this was the standard). That's something we're clearly researching and will be back with some insight. Also, GIL has a great balance sheet, and that we can't ignore.

 

But the bottom line for me is that unlike other troubled companies like Crocs, Eddie Bauer, and Warnaco or industry standards like VF Corp, PVH, and even Hanesbrands, I can argue that GIL does not need to exist. If some (unwelcome) act of nature wiped out its major manufacturing facilities, there would be another manufacturer that would step in GIL's place in a heartbeat. With no brand value, the residual value here would be ZERO. I repeat, there is NO call option on monetizing brand value. That factor grows in importance in a climate like this.