Last weekend Biolsi attended the Imprinted Sportswear Show (ISS), which is Gildan's key annual trade show. Here's a summary of my Q&A with him on his key takeaways. Replay Link: CLICK HERE
Tell me what the ISS tradeshow is and who attends?
It’s the largest screen print conference of the year and most of the attendees are screen printers while the booths are the vendors selling everything from shirts, to distribution, to machines, to the ink. The important thing to keep in mind is that the tradeshow is generally about selling what is new. So at a distributor’s booth they will have a whole bunch of products that barely sell and not even have the G5000, the best selling style in the industry that represents half of Gildan’s US business. So it’s easy to lose perspective when you are seeing all the new styles and fabrications. Attendance was said to be up and the environment was optimistic and not one that has seen a sudden drop in demand.
What is the current state of the screen print market?
The industry is healthy. New printing technologies, fabrications, and more style innovations have been drivers of growth. This is an industry that is seeing accelerating change.
What did you take away from your time there?
I met with representatives of the mills, distributors, some of the equipment vendors, and a dozen screen printers. Back in December after Gildan’s analyst day that blamed the sales shortfall on a drop in corporate demand I noted we are also picking up an inventory shortage. I couldn’t explain the difference, but it’s what I heard from the channel. Talking to all those parties I feel very convicted that it’s more than just a drop in corporate demand. The upside from that is better in stock levels should drive better sales and the industry is growing which facilitates a recovery.
Let’s do a deeper dive into fashion basics. Who is taking share?
Bella Canvas, Next Level and Gildan have similar share in fashion basics according to Gildan. Most of Gildan’s fashion basics revenue is at the low end which Bella Canvas and Next Level do not consider to be the same level. There is an element of the answer depends on who you are asking and how they define the market. Gildan is very satisfied with fashion basics at the lower end. The success of Anvil and American Apparel is the question mark. Pricing is similar or above the industry leaders, but the perception of quality from the middlemen (distributors and screen printers) is American Apparel is not as high. Comfort Colors is also doing well and growing.
Can Gildan effectively compete in fashion basics?
Of course. It has the #1 shirt style in fashion basics the G64000. The silhouette is the exact same as Bella’s best-selling SKU except that it is tubular, not side seamed. The stitching is more fashionable for Bella Canvas and Next Level. I’ve been assured by neutral parties that only experts can tell in blind feel tests. In my own blind test I couldn’t tell the difference. Bella’s core product is cut and dyed in California and shipped to Central America where it is sewn and shipped back to California. Just compare that to Gildan that does not want to add the cost of two side stitches.
Is fashion basics a commodity market or not?
This is the most important long-term tail question. If it’s a commodity industry than the low-cost manufacturer wins. The best-selling shirt style for Bella and Next Level have tear away labels. That defines fashion basics as a commodity. Bella Canvas is looking to grow its direct to consumer business and open retail stores so branding will play a larger role for it, but that is outside screen print.
What is your view of American Apparel?
American Apparel is at the top of Gildan’s fashion basics pricing. Currently the only side-seamed product it sells are branded with American Apparel and it does not have tear away labels. It is priced at parity with the higher end screen print styles for Bella Canvas and Next Level. Talking to screen printers I do not think the brand resonates enough to command similar pricing. Gildan points out that it would be very difficult to take pricing back up after selling it at a discount, so it is being very careful about where it is positioned with price. So pricing is an obvious lever management will pull if American Apparel is not selling. I think there is a lot more that can be done with marketing, but that is not Gildan’s strength. So there is more to be done which I don’t expect to see in 2020, but the pricing lever is a significant catalyst in the future.
How did the destocking play out in Q4?
I didn’t hear anyone mention destocking. The distributors all say they could have sold more Gildan inventory if they had more of it.
What happened to International revenue in the 2H?
China has been a growth market for Gildan for the past couple of years. Gildan’s proposition is quicker turnaround times for Chinese factories that previously manufactured the t-shirt and decorated it. This enables the factories to focus on screen printing. During the slowdown in 2019 caused by the US tariffs factories took a portion of the t-shirt manufacturing back in-house. As production has recovered in China so has Gildan’s orders. From a long term perspective, Gildan is actually creating the market here as low priced cotton basics were not typically used, International markets are adopting use in ways similar to the US creating the market growth.
Any better explanation of what happened to Gildan revenue shortfall in Q3?
A corporate slowdown isn’t descriptive enough in my opinion. I think industry growth was more skewed to fashion basics for which Gildan had less inventory for. At the same time demand in cotton basics was uneven as certain demand drivers fell more than others. For example there was less demand for the lowest price white basic shirts while demand for certain colors (like fluorescent colors used in construction) did not contract throwing off production forecasting.
Any learnings about private label business at retail?
The point of the tradeshow is on the screen print business. Speaking to management I would say that I expect small wins like we outlined after the analyst day and not a major win this year. The George brand continues to expand within Walmart and that is likely to be the near term growth. I do not think Gildan pursued making the replacement for C9 at Target, because of the more frequent changes to the product.
What are the expectations for prices?
No one expects lower prices due to lower cotton prices. In fact distributors think there will be price increases at some point this year, because cotton prices have been rising since September. That should make the channel more eager to add to inventory levels. Distributors for example have high shipping costs which have been inflationary and price increases are welcome offsets.
A review of the players in the industry:
What is happening among the distributors?
It’s difficult to find a definitive answer on the tradefloor, but AlphaBroder and SanMar appear to be similarly sized. AlphaBroder is Gildan’s largest customer and twice as large as SanMar. AlphaBroder is said to be looking for a buyer so it has drawn down working capital levels which has led to lower inventory levels and missed sales.
SanMar is family owned with its focus on being the best in-stock distributor. Availability matters the most to win an order for a distributor. SanMar is more focused on its own private label brands, but it appears to have benefited from tight inventory at other distributors.
S&S opened two distribution centers in 2019 which likely led to a degree of sell-in during 2019. S&S does not have its own private label brands, so its focus is on the mills’ brands.
What is happening among the mills?
Both Next Level and Bella Canvas representatives report growth in 2019. Fruit of the Loom’s booth appeared like an afterthought. Hanes had separate booths for Alternative Apparel and Comfort Wash, its competing brands for fashion basics and for Gildan’s Comfort Colors. Bella has been discounting some products for the past six months. Gildan has not lowered prices, but matching prices is common practice.
What is happening among the screen printers?
Digital printing is the largest technology change for the screen printers. It’s not a recent innovation, but as price points have come down it has grown in prominence. It allows for much more detailed graphics and provides an ability to make individual runs. It does come at a higher ink cost of ~$.60 per shirt compared to pennies for traditional screen print. However, the set-up cost could be minimal compared to $200 for traditional screen printing.
There has been a lot of growth in t-shirt websites like TeePublic, Custom Ink or Zazzle. Those websites have been moving to outsource production, manufacturing, and distribution of their products. Amazon and Delta Apparel have become the larger screen printers in this market. Both companies have large digital printers at several distribution facilities to expedite shipping. Personalized t-shirts printed on demand are a relatively new demand driver. Digital printing looks best on higher thread count shirts – fashion basics, so it has been another driver for fashion basic growth.
Digital printing can’t replace traditional screen printing for large runs. The large orders that are focused on lower costs still use traditional screen printing on open-end cotton shirts and still represent the largest share of the market.
Any change to your long term view of the industry?
I think the only potential demand change is if increased environmental concerns lead to less desire for one-time/promotional shirts. However, the perceived value of a decorated t-shirt is two to three times the cost so consumer demand continues to be strong. More environmental concern should be directed towards polyester shirts first, because cotton is a renewable resource. Environmental concerns do not necessarily follow logic.
Any changes to our estimates for Q4 and 2020?
Because destocking seems less significant than Gildan projected earlier, we are taking up our revenue estimate by $40mm and EPS by $.02 in Q4. Our 2020 estimate of $2.15 stays the same. I expect Gildan’s revenue to inflect in Q1 and return to growth in Q2. I think 2020 will be a return to balance for Gildan – where it was in the 1H of 2019 where cotton basics is down LSD%, but GLB, fashion basics, and international re-accelerate. The fashion basics fight for share is probably not in 2020. It just doesn’t happen until Gildan lowers price, but it is happy with growth and margins.
