Some clear read-thrus for HBI and the mass channel from the Gildan Analyst Day last week. Great disclosure by the company. Weak US investor attendance. Biolsi used to be a big holder on the buy side…great conversations w management at the event. If I could sum up the feedback (and CEO’s comments) in one sentence it would be that a lessened focus on management to beat HBI bc [HBI is paving its own path to destruction. It doesn’t need our help as much anymore]. Ping Daniel if you want additional detail and specs on GIL’s plans. Here are Daniel’s internal notes to me after attending the GIL meeting.
There is a structural change happening in the mass channel.
- The mass retailers have outlined plans to grow private label before, but ‘this time it’s different’ (it really is).
- Previously the most important factor of private label was capturing a higher margin. Now as online distribution has become commonplace, and brands embrace selling on Amazon for growth, the mass retailers have made a strategic shift to limit the amount of product overlap with e-commerce retail. This reduces price comparisons and offers a point of differentiation online. Mass retail can create a better price/value offering to its store customers with owned brands, rather than national brands that were not traffic drivers in their own right.
- Private label has become part of how the retailers see their raison d'être than merely adding a couple of points of margin.
Gildan will be more calculated in its efforts to gain share (ie doing it profitably)
- Gildan has finally reached the point where it decided it was not going to chase the retail business at the expense of margins.
- Gildan bought its way into retail through two sock acquisitions a decade ago. For Gildan the acquisitions opened doors at retail and introduced itself to management teams. Gildan grew its business at retail, but the sock business consistently lagged expectations. At first the strategy was to add branded socks to the private label business. Then the strategy was to replace private label Starter socks with its own Gildan brand. Now Gildan is pulling back from private label socks.
- By consolidating divisions, the company is shifting its retail strategy away from growth at the expense of margins (note non-GAAP margins already 600bp below Hanesbrands), focusing now on growth with margins comparable to printwear. With both businesses reporting up to the same executives, with the same mandate, retail has to compete against the branded business for the 30% increase in capacity Gildan is adding. At face value, a bull could argue that the competitive threat of Gildan undercutting its way into Hanesbrands’ shelf space has dissipated.
- However, this doesn’t remove the price pressure for Hanesbrands, because private label will expand its share whenever the pricing gap expands. It should just remove the fear of Gildan as an irrational price competitor. But Gildan competing on price is not our concern…it is the sheer volume it will gain (and has gained) at the expense of Hanes and Fruit.
- For Gildan it’s a positive in that it sees enough growth opportunities in its legacy printwear business that it will pull back from chasing lower margin growth. It also will lead to higher margins and returns for the company.
- There are three reasons why private label can work in other categories, but not in socks. 1) The low price points, 2) the number of competitors, and 3) excess industry capacity makes socks unattractive. Gildan gained 160bps of share in 4Q y/y in men’s underwear at Walmart and expects to continue to gain share. Gildan should still be seen as a competitor, but it will be more targeted than it was previously.
Mass will shift more selling space to private label, bad for HBI (proven by cutting Just My Size)
- The loss of Walmart for the Just My Size brand is not a significant loss for Hanesbrands in itself. What matters is that Walmart decided to replace it with its own private label brand. Gildan sees a world evolving with the mass merchants looking to insulate themselves from Amazon by featuring more proprietary brands. Walmart has changed strategies in the past. It’s hard to say how far it will take the strategic change, but it has already started. Traditionally Walmart is a very sticky distribution partner, in the last 18-24 months, that stickiness has diminished in basic apparel, check out HBI’s sales at WMT & TGT during this cycle (chart below).
- Also, note the marketing campaign started by Wal-Mart in conjunction with its “The Walmart Box” video campaign and the Oscars this weekend. The campaign features Wal-Mart private label brands like Time and Tru, Wonder Nation, and George (image below) with the tagline “Quality and style you won’t believe.”
Walmart replaced Iconix’s Starter brand with Russell Performance, a brand exclusive to Walmart and sourced by Walmart.
- Wal-Mart's recent announcement of brands like Just My Size (that really aren’t brands) are among the first to be replaced. Target not too long ago announced it was replacing several private label brands like Cherokee and Mossimo with new private label brands it would target by psychographics and customer profiles. Target has launched JoyLab, a women’s activewear private label brand that has overlap with C9, a Hanesbrands exclusive brand for Target.
- Gildan admitted it has been very difficult to replace incumbent brands at mass. That is something Hanesbrands has been saying all along. Now Wal-mart and Target are looking to replace these brands with its own private labels. Gildan sees an opportunity for it to source the appropriate private label business when the retailer replaces brands with private label.
- What was difficult to do on its own in branded, the mass merchants may bring to Gildan instead in private label. For example a branded activewear program at Wal-mart looks likely to be soon replaced by its own private label brands like George. For brands like Hanesbrands and Fruit of the Loom pursuing private label business is unattractive since neither have a cost advantage in manufacturing (GIL does).
- For Hanesbrands the future looks to be business being consolidated in the mass channel.
- Gonna be VERY tough for HBI to grow organically.