GIL is clearly not a raging long today based on the weakness of underlying demand trends. But the company is making all the right moves to come out the other end a better company with a sharper competitive edge. 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 with the stock currently sitting at just $16.
Business Trends
Business trends are clearly weak. GIL management was very clear and transparent in identifying the numbers.
North American imprintables channel POS is trending down approximately 75%. POS in Europe is down similar to NA; Asia is slightly better down 65%.
CEO Glenn Chamandy thinks down 75% is likely the demand floor. It was the bottom in China, and it was the bottom in Europe. It was however not the end of declines as he noted China recovered to down ~35% in March but has fallen back below down 50%, so it got worse after getting better.
In retail, POS for all GIL products in April is down approximately 45%. That syncs with apparel trend commentary from the likes of TGT. Though within that weakness the company shared some positivity around private label at mass performance and the ecommerce channel saying “we’re encouraged by the strong performance of our private brand underwear business in mass stores and our e-commerce sales, particularly as online retailers are starting to include our basic apparel product categories as priority shipments”
On margins, without the margin impact of COVID-19 the company expects the gross margin in 1Q (which was down 120bps on adjusted basis) would have been up 220bps citing “favorable product mix related to our underwear business, lower raw material costs and most notably the benefit of an improving cost structure for manufacturing optimization”. That’s a positive read on longer term margin opportunity, especially as cotton has trended even lower alongside the larger commodity deflation we have seen.
Management cited heightened credit risk as it relates to receivables and is provisioning for potential losses. There is nothing imminent with customer receivables and Gildan is working with customers accordingly, but planning cautiously given the outlook on the industry.
Given the continued demand pressure the company expects to have an earnings loss in 2Q, which we think is correct.
Also the company disclosed that it is making over 150mm masks and gowns for local governments of its manufacturing assets and for the North American healthcare system.
Liquidity
The company is trending to the cash burn rate it cited back in March. It expects to see fixed cash expenses concurrent with idling production in the $35-$40mm range.
GIL has $650mm cash on hand and $300mm in credit availability. At the same time it is planning to fill and sales on current inventory so tapping into working capital should provide a little incremental cash flow. That implies at least a year and a half of operating on current liquidity. So as we said in our preview, GIL’s liquidity position means it is highly likely to make it to the end of any Covid disruptions.
With that said, the company is suspending its dividend. We think this is the right move. Frankly, any company that is seeing a demand drop anywhere near this, without visibility to a clear end, would be irresponsible to continue distributing a dividend. You can always turn the dividend back on, you can’t get the cash back. Not to mention if you are going to cut compensation company-wide to preserve cash, what message does it send to employees if you don’t temporarily cut the cash stream to equity investors.
Leverage finished at 2.2x debt to EBITDA for the Q. Management doesn’t currently expect to have to address a covenant issue, but thinks it can negotiate flexibility with creditors if it had to.
Long Term
The company had just a few thoughts on the long term for the business. It is obviously making decisions today to preserve its longevity and ability to invest when the time is right.
On the longer term industry outlook Chamandy doesn’t expect the industry to be fully recovered by 2021, but improving. But later this year he thinks the market will see shake up when demand starts to return and it will be important time on determining what the industry looks like and how competitors landscape plays out.
We think this is a good strategic leadership team that will be prepared to make key competitive moves. Afterall, the company has already thought through and implemented a process for social distancing manufacturing as it makes masks and gowns in a small portion of its capacity. Again long term competitive/cost strategy and manufacturing logistics is where this company has shown its stripes.
We think GIL comes out the other end of this with a stronger opportunity in gaining share in screenprint basics and fashion basics as well as retail/private label. We still see $3 in tail EPS power.
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.
