Gildan out with a very surprising cut to this year’s revenue forecast due to destocking in the screenprint channel. The company said sales in Q3 were $50mm less than projected and Q4 is expected to be $70mm less than previously expected combined with an anticipated $100mm distributor destocking. While never pleasant at the time, the last three destocking events over the past decade have proven to be the best buying opportunities for GIL, and this time is appears no different. All in, we’re talking $0.30 per share in revenue out of this year – at a mid-teens multiple that’s good (bad) for a $4-$5 hit to the stock.
Distributors destock for one reason, they anticipate lower prices in the future. Once they believe prices have been reset they will order based on demand, which suggests a reacceleration in growth in 2020. Current distributor inventory has embedded cotton prices that are 20-30% above the current run rate, and they’re likely holding back on reorders in anticipation of pass through of lower costs in the form of pricing.
This is clearly a black eye for our Best Idea Long thesis on GIL. But it is temporary. We’re not meaningfully changing our estimates for 2020, hence are taking up our growth rate for the year as we see distributors restock and GIL share gain accelerate in fashion basics out of its Rio Nance 6 facility (which we’ll be touring next month at the company’s analyst meeting in Honduras). Keeping on the intellectual integrity hat, questions we need to ask ourselves is whether this marks a secular demand shift for screenprint clothing, or if GIL is losing share in screen print with lower basic tee units industry wide and not gaining share in fashion basics. Based on our research, I think that the answer to both of those questions – which would be thesis changers -- is a resounding ‘No’.
Assuming GIL takes pricing cuts as it passes through lower input costs, we’re looking at earnings next year of $2.50, which is still 15% above consensus. Trough multiple on GIL is 12-13x, which is a $30 stock. It will likely get there today and should be bought on the hate-selling. The company is ramping up capacity to handle accelerated growth in the retail channel (which appears to be in check based on this announcement) and to grow its fashion basics screenprint business. While this blip – and it is a blip -- flies in the face of the capacity growth, GIL is the low cost leader and share gainer in that space – which should manifest itself in next year’s numbers. When there’s destocking at retail (not the case today) there is very rarely a restock – as it is simply the retailers getting more efficient. But in the screenprinting channel, destocks are almost always followed with a meaningful restock barring a severe downturn in the business cycle. It won’t matter today with the stock down, but growth in both of these businesses should accelerate in 2020.
This stock should be bought on this announcement. I’m far from pleased with this development, but neither our underlying thesis or conviction in GIL’s ability to execute/accelerate on the next stage of growth have wavered. There’s better than $3 in EPS power embedded here over a TAIL duration, and the company has already invested to capture it. That’s good for a $45 stock, or 50% upside from where the stock is likely to open today with the near-term model now de-risked. The upside/downside is extremely compelling.
