GIL: Why?

08/12/08 03:26PM EDT
Why is the consensus banking on a 140bp margin improvement next year for Gildan? I’m getting to a mid single digit EPS and Cash Flow growth rate, versus 30%+ for the Street. Worth flagging with the stock at 23x earnings and 12x+ forward EBITDA, no?

Yeah, I know the stock has already been hit, and management already took down guidance for the year. In addition, this is a management team that gets compensated to hit pre-tax income growth targets. With such short-term incentives and a rather complex tax structure given its domicile, my sense is that the company (like most) can print whatever it wants on the 3Q report tomorrow.
  • But on any good news whatsoever, that’s when I’m in there pounding on such a high-conviction idea like this.
  • I guess the consensus and its 140bp margin improvement and 30% EPS growth for FY09 does not agree with me.
  • I won’t rehash all of my more detailed comment on 6/2 (The Stock Has Popped But The Model Has Not), but consider the following when evaluating whether the company can prevent a massive slowdown in growth next year.
  • a) GIL’s top line slows to a (still respectable) mid-teens growth rate as capacity is near fully ramped (vs 25-30% over past 2 years).
    b) GIL is at the end of its multi-year offshoring shift that boosted margins by 7 points over 6 years. At the same time, sourcing cotton costs are headed meaningfully higher, and labor rates in Honduras (primary production hub) has just broken into double digit growth range.
    c) The industry’s sourcing tailwind becomes a headwind and competitive pressures therefore intensify due to irrational behavior.
    d) One of its top competitors, Hanesbrands, is now public and has its own arsenal of cost cuts to pass through to customers as it rightsizes its own business.
    e) GIL is shifting its growth to customized programs to US mass retailers, and becomes a price taker instead of a price-maker (as it is in its current screen printing business).
    f) With a 12% SG&A ratio, GIL hardly has the sales and marketing structure to profitably grow with mass customers.
  • I’m pretty bearish on the fallout from a structural change in the margin structure in this industry. That’s where picking the winners vs. losers gets fun.
  • Is Gildan going away? Probably not, but growth is slowing, gross margins are headed lower, and the SG&A rate is headed up. Not only is a 140bp margin boost unattainable, but I don’t see how the current rate is in any way sustainable.
Inflation (including wages) in Honduras is going vertical.
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