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Takeaway: We added GIL to Investing Ideas on the long side on 8/14.

Stock Report: Gildan Activewear (GIL) - Gil Table

THE HEDGEYE EDGE

At face value, Gildan Activewear (GIL) is a boring company. It makes shirts. That's kind of it. But for many reasons I think it is one of the most exciting stories in retail. I see a huge beat in store here, which will play out over a multi-quarter time line. Gildan has the widest moat in retail with a rapidly changing story. If our model is correct this stock could double over the next 18-24 months.

INTERMEDIATE TERM (TREND)

Heading into last quarter the stock was being hit by misguided negativity. Negative reports and downgrades about political unrest in Nicaragua disrupting GIL’s sewing facilities activity were missing the mark, and the 2Q print proved them wrong.

The other major concern over the trend duration is to what extent is Gildan losing business at mass retail, as investors notice socks have been removed.  What is being missed though, is that socks were exited intentionally by GIL as they are margin dilutive.  There is a chance GIL loses some incremental branded space in WMT, but any losses will be to make room for new private label, which is where GIL can compete and win business.

Also, the screen print industry is as healthy as it has been in years; this is GIL’s bread and butter core business.  Prices in many classifications are up ~25% YY. The industry has been short supply since factory disruptions in Honduras in November.

Put simply, Gildan’s largest and most profitable division is selling everything it can make.  The strong demand could drive EBIT $50mm higher over the rest of the year. 

LONG TERM (TAIL)

Widest Moat in Retail Just Got Deeper: For many reasons, I could make a strong case that it is harder to recreate Gildan’s business model than 95% of companies in retail. It is the structural low-cost provider for any basics made of cotton.

Our conservative total addressable market of $50 billion with capacity growth as the only constraint. New capacity comes on line this quarter that adds $1bn in sales -- and the fill rate and margin upside is clocking in faster with higher quality business than is built into consensus. Cotton is a relative non-event – unlike brands like HBI (which I’d argue is a completely different business model) GIL can pass through 100% of cost pressures. Predictability here is quite high, with vol extremely low.

This Story Is Changing Right Now: The call here used to be that a company that dominated in the screen print business is using an outsized (25%) margin to fund growth in a lower margin (8%) Branded model.

That’s a multiple killer (has been) but is changing fast. Retail supply chains need exclusive labels that can’t be price shopped. That’s new, and it’s Walmart, Amazon Essentials, Target, etc… and there’s only one place to go to keep costs low on new products. That’s GIL. Customers come to GIL, not the other way around. New growth is coming on at higher margin than the investment community thinks.

The Path To A Two Year Double: We’re looking at $1.90 in EPS today for a company that has not grown in two years. If our model is correct, GIL accelerates to $3.00 over two years. We get severe pushback on this number, but it’s in the cards. Then we see new plants coming on board to perpetuate top line growth again. The reacceleration to a 25% growth CAGR points to gradual revaluation from 14x today to 20x on a $3 EPS number in two years. There’s your two-year double.

ONE-YEAR TRAILING CHART

Stock Report: Gildan Activewear (GIL) - Gil Chart 2