We’ve highlighted how the WMT George private label program rollout is both very bullish for GIL and very bearish for HBI. Now we’re diving in on the specifics.
The Details
- Walmart has launched its first private label brand within men’s underwear under the George label.
- The George underwear program started its roll out to all Walmart stores in mid May.
- It’s important to note that in the weeks leading up to the changeover, Gildan product was often out of or had limited in-stocks, meaning there was an opportunity for unit share for the likes of Hanes/Fruit.
- When Gildan announced the new program it was signaled to grow ~50% in terms of space relative to the prior Gildan brand space.
- In a 3 store sample we tracked, we have seen space expansion for GIL product ranging from flat to about +200%. (A sample of 3 includes +200%, plus 100% and flat)
- Hanes is a loser of space with this changeover. In a 2 store sample we saw shelf space remain flat in one and down 11% for Hanes Men’s Underwear.
- Obviously the store have different results, but we think the read on the aggregate space change here is 50-100% growth for GIL, and MSD% decline for Hanes, these changes would have a corresponding pressure on unit/revenue growth for the associated business.
- *Note woven George boxers (~5-10% of SKUs) do not appear to be made by Gildan.
Here is an illustration of the change at one store in Danbury CT.
Pricing
The George product made by Gildan is priced at a discount relative to Hanes and Fruit of the Loom.
On a per unit basis the average discount to Fruit of the Loom and Hanesbrands is 12% and 15% respectively.
Seemingly just as important at Walmart, where so much volume is done at the lower sticker price points, the average sticker discount is 14% and 17% respectively.
Walmart brought the George brand to the US nearly two decades ago to improve the company’s fashion apparel offering. Walmart customers have long known the brand and it likely has more brand recognition within the store than the Gildan brand. The combination of a more recognized brand, discount to the national brands, similar product specifications, and Walmart’s vested interest in its success should lead to better sales velocity vs previous Gildan product.
Higher Price = GIL Margin Opportunity
The George brand sticker price for each package was increased 17% across the board compared to the Gildan branded package it replaced. Importantly the package is still priced below the other national brands. On a per unit basis the prices were raised by 17% for three products while being lowered by 3% for two products. The 17% increase in price should answer the question we hear the most about Gildan shifting back to private label – “How can it have the same gross margin?” There are some cost savings Gildan can pursue to retain a similar gross margin on a branded sale vs. a private label sale (less advertising, inventory risk, costs to change the product or packaging), but the retailer raising its markup solves the math about how Gildan can have the same margin.
GIL Punchline (Best Idea Long)
The growing penetration of private label apparel in the US mass channel represents an attractive growth opportunity for Gildan as the world leader in low cost basic apparel manufacturing.
The transition from selling its own brand inside Wal-Mart to supplying the George brand should have several benefits for Gildan.
Walmart now has a private label “horse” in the basic apparel department that it should support. By having a strong private label program Walmart avoids the price pressure of matching online competitors. Gildan also manufactures many more products than just the men’s underwear shirts, boxer briefs, and briefs it is currently supplying. As a private label supplier in good standing with Walmart, Gildan is positioned to win many further programs in several other apparel categories.
So the George brand represents space gains, improved placement, unit velocity opportunity, and the optionality of further program wins at WMT. And, contrary to the concerns of many the change should be neutral to margins for Gildan.
Management’s announcement new manufacturing hub in Bangladesh is in part due to the growth prospects for private label. The launch of the Gildan made George men’s underwear program is just the start.
GIL is setup for a highly accretive multiyear acceleration in revenue growth that will drive significant earnings upside vs street expectations.
HBI Punchline (Best Idea Short)
The dynamics discussed above indicate risk for HBI’s innerwear sales inside Walmart which still accounts for about a third of all innerwear sales.
HBI is losing space, while seeing the potential for further velocity risk due to better presentation, placement, and cultivation of the George brand by WMT.
As we look at the HBI 2Q and 2019 setup, with the new Dollar General sock program rollout, and GIL out of stocks at WMT leading into the George change mean that HBI has some innerwear tailwinds in 2Q.
However we think the revenue risk from the space loss with George, coupled with TGT’s C9 comping down as TGT winds the brand down(C9 includes ~$70mm in innerwear), will mean that innerwear will weaken in 2H with street expectations for an acceleration vs 1H.
We also think C9 profit loss risk is not in numbers for 2020, which leads us to believe earnings misses or guide downs are coming in the next few quarters, as Champion’s growth won’t drive enough profits to offset the losses in higher margin businesses.
