Gildan reports Q4 on Thursday Feb. 20. For our latest Black Book on GIL from December: CLICK HERE
Q4 EPS should be beatable
- The consensus EPS estimate is $0.41. We took up our estimate by $.02 following the ISS tradeshow in January and are looking for $0.43.
- Sales are already guided to be down HSD% due to a drop in corporate demand and destocking by distributors – something we believe does not capture the reality of what transpired.
- Gross margins should expand for the first time in two years largely driven by lower cost cotton.
- SG&A should deleverage modestly due to the sales decline.
- We are above the consensus estimate due to a better top line trend as our research and conversations with the channel does not suggest inventory destocking by distributors (and therefore less SG&A deleverage).
Initial 2020 guidance will be conservative – Not A Surprise
- Consensus expectations for 2020 EPS is $1.97, representing 19% YY growth.
- We expect management to be more conservative when providing their initial outlook because the screenprint market is still downtrending for Gildan.
- The CFO also just lowered guidance two quarters ago and would prefer to set a lower bar when providing 2020 targets.
- $1.83 representing 10% EPS growth or a range of $1.80-1.85 is what we believe would be a more likely initial guide.
- We think the market understands this, we have been saying expect a lower bar to be set for 2020 since the analyst day in Honduras in November.
- To be clear, this is what we think GIL will guide, not what it can actually earn. We’re at $2.15 for the year.
Top line trends are more important
The return to growth for the screenprint industry and Gildan is what we are most focused on. Further visibility into trends improving sequentially in Q1 would be in keeping with past downturns lasting no more than three quarters. Past downturns have relied upon price decreases to stimulate end-demand and end de-stocking at the distributors. This downturn differs from the past because there has been no industry wide price cut and discounting is limited to one or two manufacturers. In fact, we think that distributors are bracing for a price increase in 2020.
International growth gets the flu
International demand is insignificant for the screenprint industry, but at 10% of sales is meaningful for Gildan. International had also been a market Gildan could ship excess goods to smooth out domestic demand. International had been growing consistently double digits for Gildan until 2019 when it slowed to LSD% before turning negative in 2H. Management’s bet on international growth in 2019 coming from China over the UK due to Brexit concerns caused a sales shortfall when Chinese factories responded to Trump tariffs by producing more of their own blank t-shirts needs. Management said international had inflected at the time of the analyst day. China is a LSD percentage of sales and demand is likely significantly impacted by economic disruptions of the coronavirus. Once China returns to normal production, we expect growth in China for GIL to resume. International market growth is the reason Gildan is planning to add capacity in Bangladesh.
The setup as we see it from here
Growth is likely to inflect in 2Q20 and it should be at a greater magnitude than the market expects. Growth is coming from higher-margin product lines, so there’s good visibility to margin expansion in 2020. While this is a ‘show me story’ for now, by 2H we should be looking at 10%+ top line growth at higher margins which is bullish for Gildan’s multiple. After four quarters of growth acceleration we get visibility on the contribution from new capacity in Bangladesh which perpetuates the growth story. Gildan’s goal is not to just gain share in Fashion Basics, but to triple share and put the competition out of business. We’re at $2.15 in 2020, ahead of the Street and where the company will likely guide and build to $3 in TAIL earnings power. That growth is worth a high-teens multiple, which gets to 75% upside over a TAIL duration.
