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. The revenue prospects are better than ever. If our model is correct this stock could hit $60 in 1-2 years.
INTERMEDIATE TERM (TREND)
Heading into last quarter there was some overhang from near term concerns and temporary headwinds. Price increases to offset higher cotton costs were on a lag pressuring gross margins in Q1. The new Walmart private label product hitting shelves in Q2 was going to require an inventory drawdown in Q1. A small customer was also going bankrupt hitting the company with $27mm in unpaid deliveries.
From here the outlook improves. In Q2 I expect Gildan to return to its growth algo – MSD% top line growth, ~50bps of margin expansion, and a boost from share repurchase to drive LDD% EPS growth. Then an upbeat analyst day in the fall that will dive into revenue opportunities and capacity expansion plans. This will be followed by a swing in commodity costs on margins leading to accelerating EPS growth in the back half 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 came on line last summer 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.
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. The first new capacity add in five years is happening at the same time two demand-driving forces are converging – a) the accelerated shift in retailers towards private label, and b) the emergence of the ‘fashion basics’ category in its screenprinting business. Retail supply chains need exclusive labels that can’t be price shopped. That’s new, and it’s Walmart, Amazon Essentials, Costco, etc… and there’s only one place to go to keep costs low on new products and it happens to be tariff free. That’s GIL. Customers come to GIL, not the other way around. On the Q1 call management outlined a major expansion in manufacturing capacity in Bangladesh. It will build two large textile plants as well as sewing facilities. Due to trade treaties Gildan can ship duty free to Asia and Europe from Bangladesh. The planned expansion will provide the needed capacity for the next demand driver - international.
The Path To $60 Year Double: Now the two year growth story turned into a five year growth story. We’re looking at $2 in EPS for this year. 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. You win on earnings growth alone on this name, but with this capacity expansion announcement, the ‘winning duration’ just doubled – which is likely to result in a re-rating. That’s your path to a $60 stock over 1-2 years. Reiterate Best Idea Long.
ONE-YEAR TRAILING CHART
