I’m expecting GIL’s print on Thursday to be a validator to our long thesis. In a nutshell, that’s that the company has new capacity online at the same time we’re seeing a sea-change in demand for private label programs by major retailers, as well as accelerating demand for fashion basics. GIL is the low cost producer in the world, with highly sought-after western hemisphere manufacturing capacity given the exodus from China. The culmination of these factors should lead to a meaningful acceleration in top line growth at GIL – something that can be sustained for 3-4 years. Importantly, the growth is coming from higher margin businesses while SG&A growth should remain muted. We’re at $0.58 vs the Street at $0.55 and $0.52 last year. Not a huge beat, but simply a validator that top line is accelerating and consensus estimates continue to underestimate the power of the operating model as forces converge to accelerate growth.
What we are looking for
We are looking for progress not surprises. I would like to hear about progress with the new George program, an update on the utilization of the Mexico plant, more understanding of when Global Lifestyle Brands more aggressively courts new programs, an update on fleece vs. t-shirt penetration internationally, how the plans for American Apparel have changed, and an update on Gildan’s fashion basic brands.
Top Line
- We’re modeling 5.7% sales growth compared to consensus expectations of 4%. The upside from earlier fleece and George deliveries in Q1 borrowed from Q2. Top line should accelerate to 10% in 2H, which is not in Street estimates.
- There is still a little headwind from culling low margin programs like the sock program at Dollar General. The new private label George program for WMT was fully ramped up in Q1. At the store level we have seen variation between the amount of shelf space gains for Gildan’s private label program compared to its branded program that was replaced. Gildan has said the private label program would have 50% more shelf space while we have seen space gains between 50% and 200%.
- Our channel checks suggest the screenprint industry continued to be robust driven by fashion basics at higher price points while cotton basic units were down somewhat. Pricing appears to be stable while cotton prices are at three year lows.
Margins
- We’re modeling gross margins to contract 30bps – the last quarter of price increases lagging the higher cost of cotton. The price increases will be a tailwind in the 2H and lower cotton costs for this year's crop will be a further tailwind next year.
- Gross margins contracted 150bps LY. Some of the contraction was due to Nicaragua disruptions, so our -30bp estimate might be conservative.
- The company is lapping the cost savings initiatives from last year’s divisional consolidation, but it wasn’t at the full run rate until Q3. All in, SG&A should be flattish for the quarter.
