The GIL print – not very relevant in itself.
- GIL missed EPS by a penny with light revenues (1.4% miss)
- And guided down full year 2%, implying 4Q EPS revised down 9%
- Note: Gildan habitually puts up numbers inline or +/- a penny. That's the case over the last 13 quarters.
Callouts as it relates to HBI:
1. Underwear Market Share (bearish as it relates to HBI’s 27% share being clipped at the low end).
- Gildan market share held steady at 9% of units in 3Q.
- Branded underwear put up double digit point of sale and revenue growth in the Q seeing improved in-store placement.
- For reference, HBI's basics business was up 9% over last year, including a 20% increase in men's underwear.
- The company is guiding market share to increase to 10% by Q end implying an acceleration in share gain yy.
2. Branded Category Downward Revision
- Gildan revised down revenue, specifically within its Branded Apparel segment.
- At face value, this could be considered a positive for HBI.
- Management attributed a portion of the revision (~25%) to a shifted program with a major retailer to 1Q.
- The rest was attributed to softness, which could be an excuse for competitor pressure.
However consider the following:
- GIL organic branded growth was 8.5% in this quarter while HBI saw total organic growth of -0.6%.
- At the same time, HBI revised revenue guidance down while taking its 2016 acquisition benefit up ~$100mm.
- So perhaps this revision by GIL is actually a sign of the economic environment rather than competitive dynamics.
3. Cotton (HBI ability to pass through cotton costs = Bearish)
- When asked about cotton and hedging, management chose not to give specifics on hedging, but to erase all doubt about cotton in 2017, GIL stated:
- "I would say that in terms of cotton, there's definitely cotton pressure going forward."
- Again a sustained 10% move in cotton will result in about 50bps of gross margin pressure for HBI when it flows through to the P&L on a roughly 4-5 quarter lag.
- Cotton prices are now 9% above the TTM price from 1 year ago. Not a disaster, but negative nonetheless.
4. Back to School And Retail Commentary (Bearish)
- When asked if the national department store chain retail environment deteriorated since the last call, management's answer was pretty explicit saying
- "it's a little worse than we thought it was going to be, I can tell you that…. I would think even the overall back to school -- in every category is down. Underwear unit shipments are down. Sock shipments are down. And I think the overall apparel segment is down. So, the market is not robust..."
- When you combine this consumer environment, with the competitive pressures that HBI is facing, we think organic growth for HBI remains negative, meaning significant risk to the peak margins at peak utilization.
5. Cash Flow Comparison given the focus on HBI cash flow
- Operating cash flow for Gildan is up 47% YTD, and the company is guiding it to be up about 30% for the full year.
- For HBI, CFFO is guided to be up 240% for the year.
- Which one looks more achievable and sustainable?
6. Market share for GILDAN
- On private label, its seems Gildan doesn't do much in private label anymore in underwear.
- Branded apparel as a whole is at about a 13% market share ($1bn in wholesale grossed up to $2bn in end retail, in a $15bn addressable market)
- GIL underwear products are mostly branded now, with mix of its own brands and licensed ones.
Source: Gildan Company Presentation
Source: Gildan Company Presentation
