Gildan is reporting 1Q Wednesday after the close.
Near term street estimates are perhaps not bearish enough, but we’re not sure how much influence that will have on the stock, especially in the absence of guidance.
Business Trends
Obviously the results will look bad. In March the screen print industry just about shutdown as 30% of end use is corporate promotions, 30-35% events driven (no sports or concerts happening), then youth leagues, schools, and university (bookstores) another 10-15%. It's nearly at demand of zero over the near term.
In retail demand is certainly weak. Management on the March update talked of POS down 50% the preceding week. We have seen Target disclose apparel & accessories down 20% in late March, trending to down 40% in April. The consumer is not focused on apparel consumption. Still there should be at least some demand in the Mass channel with people shopping WMT and COST, perhaps down 30-50%, but not zero.
Gildan did get permission from the Honduras government on April 8th to start making protective gear. It opened one fabric facility and one sewing facility to make masks and gowns, so that provides at least some offset of fixed costs. Much of Honduras production remains closed since mid March, and it was announced last week that facilities in Nicaragua will remain closed until at least June 7th.
On the fixed costs vs liquidity, we think the company could go 11 to 15 months with current liquidity assuming no sales/orders. Since there is some end demand, GIL is highly likely to make to the other side of the Covid-19 shock. And if there is any company in this industry that lenders would want to work with on covenants, it's this one.
Long Term Opportunity
As the industry’s dominant player, and the low cost leader, there could be big long term market share opportunity for the likes of GIL resulting from this time of disruption.
In screenprint basics, the market had been declining LSD as demand was shifting to fashion basics. In the resulting recession we think the industry will be more price conscious which means higher demand on basics where Gildan is the huge market leader and a return to unit growth.
In screenprint fashion basics, again we think the industry becomes more price conscious and will be willing to substitute comparable Gildan fashion product in for the higher priced competitors. Also this time has to be very challenging for competitors that don’t have the balance sheet and influence of GIL. Bella has admirably been focused on mask production in the US, there is little in the news/media on Next Level. We could be on the other side of this with one of the key competitors either going away or looking to sell, and Gildan should be a buyer at an opportunistic price.
Looking at retail, we think this environment pushes mass retail more and more towards private label. Brands like Hanes/Fruit are going to have to cut marketing as losses in distribution across brick and mortar pressure sales. That means less underlying demand from customers for the top branded names, ie private label value proposition goes up for retailers. Gildan should remain a key player in that growing private label market opportunity. At the same time WMT and COST usually outperform on traffic/sales in weaker consumer environments, meaning share opportunity for GIL private label brands in those stores.
Lastly, cotton has fallen significantly alongside general commodity deflation, running down nearly 30% YY. As end demand picks up that could provide a nice margin tailwind for GIL.
If you believe there is an end to the major virus disruptions in the next 12 months or so, and that a basic t-shirt has utility in the future economy, Gildan will be a huge long opportunity
For our prior note after the GIL Covid update, GIL | Managing the Disruption CLICK HERE
