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GIL topped expectations in Q3, but the outlook for 4Q and 2011 are now even less certain.

A few of the more notable concerns coming out of this morning’s conference call include:

-  Sales pull forward into Q3 was acknowledged ahead of price increases implemented in Q4

-  Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

-  After originally downplaying the impact of the Haiti earthquake disaster, GIL now assumes the net impact (provided that insurance proceeds of $0.07 are received in Q4 as expected) is now $0.09 in 2010 – another ~$0.03+ in Q4

-  Reduction in full-year capex from to $130mm from $155mm will be realized in 2011

-  If cotton stays at current prices ~$0.80/lb. that will equate to a negative $0.50 EPS impact in 2011

    > 3% price increase in screenprint channel already implemented equates to a positive ~$0.30 in 2011

    > Absence of plant inefficiencies and benefits of investments in capex "should bridge the gap"

Gildan’s track record of forecasting/projecting broad-based earnings impacts from “one-off” events is less than consistent.  Recall that the Dominican Republic disruptions and $0.40 of related inefficiencies were “wiped out by downtime taken to minimize inventories after Broder.”  While the dynamics currently driving elevated cotton prices appear to have staying power beyond the near-term, the assumption that efficient operations will be the key variable offsetting margin pressure appears to be overly optimistic. Despite the assertion that recent labor disputes in Bangladesh have not affected initial operations, it’s hard to believe that 2011 will not be without unexpected challenges. We maintain that earnings will contract in 2011. The fundamentals warrant keeping a very close eye on price vs. expectations in the coming months. Should we see any material recovery in shares following today’s pullback we’d be looking to address a position from the short side.

P&L Notables:

  • Activewear and underwear sales were $351mm, up +36% (down on 1Yr & 2Yr basis) reflecting:
    • Higher market share in U.S. wholesale distributor channel
    • Overall strength in industry demand up +10.5% yy
    • Continued growth in Int'l  and other screenprint markets
    • Unit shipments of underwear and activewear for retailers up more than 2x yy
    • ~2% increase in net selling prices for activewear, more favorable activewear mix and increased shipments
    • Some pull forward ahead of expected price increases effective at start of Q4
    • Unit growth according to S.T.A.R.S. data reflects 20%+ growth across all categories (Sport shirts, Fleece, T-shirts, and all products) compared to 3%-11% industry growth 
      • unit growth up +60% yy
  • Socks sales were $44mm down -11.5% yy (sequential improvement on 1Yr, significant decline on 2Yr) reflecting:
    • 'short-term' issues related to 3rd party contractors during ramp of Rio Nance IV & transition to U.S. DC
    • ASPs lower yy from shift to more basic mix = ~$2.5mm impact
    • Expects to gain share in socks in mass channel
    • July has been a strong month with sales up +15% yy
    • Expect retail sales in Q4 across all categories up significantly higher yy driven by BTS placements in socks and underwear
  • Continue to get new retail programs for 2011 in all categories
  • Expect growth in screenprint channel as production ramps in 2011
  • GMs 27.1%, up 269bps reflecting:
    • Better pricing for activewear and more favorable mix
    • Lower cotton costs
    • Offset by ramp in underwear/activewear programs
    • Add'l costs related to 3rd party sock contractors & Haiti earthquake disruptions
    • Cost of cotton Q4 price will be ~$0.73/lb.; Q1 expected to be $0.78/lb.


  • SG&A up $4mm (+10.2%), down -167bps reflecting:
    • Higher volume distribution expenses
    • Impact of initial ramp of Charleston retail DC
    • Higher value of Canadian dollar on corporate expenses & variable comp
  • Haiti Earthquake Impact:
    • ~$19mm ($0.16 in EPS in Q2-Q4) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share)
    • Assuming insurance recoveries will be realized in 4Q
      • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
    • Net impact assuming insurance proceeds of $0.07 as expected = $0.09 in 2010 
    •   Roughly $0.10 impact from lost sales opportunity from lost production
    •   ~$0.06 from inefficiencies
  • Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

Balance Sheet:

  • $201mm in cash
  • Generated $82mm in FCF

F10 Outlook:

Sales: ~$1.3Bn (+25% yy)

  • Unit sales volume growth in activewear and underwear of approx. +30%
  • Activewear shipments in the 4Q are assumed to be constrained by current low level of finished goods inventories
  • Socks flat based on weaker than expected sales in Q3 (had expected unit sales up +6% in FY10)

GMs: ~27.5% (was 27%)

  • Due to better pricing for activewear and more favorable mix
  • Partially offset by lower than projected benefit of July 5th price increase that is not being applied to back orders
  • Re 2011 - mgmt believes higher selling prices + efficiency gains + lapping inefficiencies will offset cost inflation in cotton, energy and other purchase costs


  • Impact from Haiti earthquake ~$19mm ($0.16 in EPS) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share) expected to be realize in Q4

CapEx now expected to be $130mm (down from $155mm – pushed out to 2011)

  • The Company continues to believe that higher selling prices in fiscal 2011, combined with the impact of projected manufacturing efficiency gains from new capital investments and the non-recurrence of supply chain inefficiencies incurred in fiscal 2010, will fully offset increases in the cost of cotton, energy and other purchased cost inputs.

Production Capacity:

  • Expect to exit 2010 with production capacity for activewear and underwear of more than 60mm dzns + 2-2.5mm dzns of capacity in Bangladesh
  • Approx. 2mm dzns of planned production needed to rebuild activewear finished goods back to optimal levels
  • Ramping Bangladesh facility as Asian hub
    • It was confirmed in Q3 that Bangladesh will indeed have duty free access to China
    • Hasn't been impacted by recent labor disputes
  • Have started development of Rio Nance V facility
    • Expect to be completed in Q4 2011
    • Will provide sock capacity of 6mm dzns in 2011


Decline in Socks:

  • Delay of Rio Nance production in 2009 necessitated the use of 3rd party contractors that were late in deliveries to GIL
  • Initial BTS unit shipments on time - 100% complete
  • Initial sales in July up +15%
  • Charleston DC disruptions now behind them
  • Service and in-stock levels all at high 90% levels
  • Will be using 3rd party distributors through end of Q4 until Rio Nance IV ramps

Pricing on Socks:

  • There was one last large program that was exited at beginning of Q4 so now all disc. programs have been lapped

Program Updates:

  • New programs in all categories in 2011
  • Extension into activewear programs
    • mgmt expects significant growth in activewear next year 3x 2010
    • 2x in underwear
    • Socks will fill year end stated incremental capacity

Deferred CapEx:

  • Reduction in year-end capex from $155mm to $130mm will be realized in 2011
  • Mostly related to timing of equipment purchases
  • Roughly $5mm of small projects that were eliminated - won't impact 2011

Activewear Growth:

  • Private label to big box retailers and branch with regional accounts
  • Expect both t-shirts and sweatshirts to grow significantly from incremental programs


  • Don't see evidence of restocking here, see inventories at retail in "good balance"
  • Didn't have enough sock inventory to meet demand
  • Project significant increase in Q4 into 2011

Capacity Recap in 2011:

  • Caribbean textile facilities exit 2010 north of 60mm dzns (activewear and underwear)
  • Bangladesh (primarily activewear) ~2.5mm dzns in 2011 (exit at ~3.5mm run-rate)
  • Sock capacity with ramp of RN IV will be 65mm dzns
  • In 2010 ~52mm dzns activewear; ~52mm dzns socks

Retail Profitability:

  • Objective to achieve comparable profitability to screenprint channel
  • Believe inefficiencies will be eliminated in 2011
  • Ramp of RN IV will also result in lower costs

Starter Program:

  • Doing well, had major rollout for BTS
  • Looking to expand within that product category and develop new products as well
  • Sole supplier for underwear, but not for socks

Haiti Insurance Recovery:

  • $0.16 total impact to EPS in 2010
  • Roughly $0.10 impact from lost sales opportunity from lost production
  • ~$0.06 from inefficiencies
    • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
  • Receipt of insurance funds reflected in year-end gross margin projections


Tax Rate: Expect 2% for FY

SG&A: Expect 10%-11.5% of sales

Depreciation: ~$70mm

Market Share:

  • Down to 63.9% from 64.4%
  • Mentioned that with inventories tight heading into Q4, likely to lose some share near-term
  • Expect to get pricing in across all categories going forward

Bangladesh Operations:

  • Labor rate only 1/3 of wages in China after recent increase
  • Energy cost also 1/3 of comparable costs in China (nat gas vs. coal & steam)
  • Less expensive RMs, can buy cotton cheaper relative to regulated cotton in China that has be domestically produced, or highly taxed
  • Japan, Australia, Europe, & China (as of July) are all duty free from Bangladesh
  • Are seeing broader rotation towards Bangladesh

Wal-Mart RFID program to include Underwear:

  • WMT has compensated GIL for add'l cost of applying RFID to other products - expect same for underwear

Industry Capacity:

  • Both inventories and supply is tight in all categories
  • Service levels both at retail and wholesale are particularly tight due to RM price inflation
  • Expect supply to remain tight into 2011
  • GIL doesn't have all yarn secure for 2011 programs yet

Sock Profitability:

  • Below corporate average (~27%) but 'moving in the right direction'
  • Underwear also a bit low, but expect to hit margin tgts in 2011
  • Of the 52mm dzns of socks produced in 2010, 20mm dzns produced in less efficient US facilities or by 3rd party contractors
  • Will be out of RN IV next year generating incremental margin

Pricing Environment:

  • GIL's price increase of 3% not significant relative to higher prices in marketplace
  • $1.50 t-shirts marked up to $22-$30 a piece by the time it gets to retail
  • Pricing in asia has gone up 25%-30% on basic t-shirts YTD, more significant than 3% increase GIL projected
  • Feel they are globally competitive - creating demand opportunities
  • Could be room for add'l increases going forward if cotton stays at ~$0.80/lb.

Int'l & Other Screenprint Channel Opportunity:

  • See growth in Eur, Mexico, Japan, China, etc.
  • Project ~50mm dzns in overall production over next 5-years with upside

Wal-Mart Program Expectations/Shifts:

  • Believe focus will continue to be on basics despite recent mgmt chgs - believe they remain aligned

Change to GM Outlook:

  • Primarily due to higher selling prices in the 2H of the year
  • Offsetting more favorable mix coupled with inefficiencies


  • If cotton stays at current prices ~$0.80 that will equate to a $0.50 EPS impact
  • 3% price increase in screenprint channel = ~$0.30 in 2011
  • Nonrecurrance of inefficiencies and benefits of capex "should bridge the gap"
  • Q4 price will be ~$0.73/lb.

Yarn Supply:

  • With capacity striped out of the system in 2008, expect tight market to continue through 2011
  • Takes 12-18+ months to build and ramp new facilities to add capacity
  • "The cost of producing a basic t-shirt globally has relatively hit the bottom"

GIL: 3Q10 Conf Call Notes - GIL S 8 10 post