Gildan with a huge revenue beat and strong flow though to earnings. This model is juiced for a full recovery in demand given management’s ‘Back to Basics’ simplification strategy and approaching high factory utilization rate for big incremental margins. The recovery here will be gradual and long, which we think is a positive for continued earnings beats and positive earnings estimate revisions. Some key end markets for GIL will be the last to come back, that's things like full capacity sporting events, concerts, and other large gatherings where matching custom T-shirts are the uniform. For now retail channels are filling demand holes, we suspect we’ll see improving spend in the corporate promotional channel as marketing budgets are returning and will be shifted from digital heavy back to more 'physical' as vaccinations roll out and gatherings return.
Imprintables POS demand is still only at 85% to 90% of pre pandemic levels yet GIL is delivering huge gross margins and SG&A leverage. This Q gross margin got a 300bps boost from a USDA cotton user assistance payment, so 2Q might not look quite as good, but margins are still accelerating excluding the benefit. Management noted some help from net restocking this Q, but the inventories in the imprintables channel remain about 40% below 2019 levels, which means further potential demand as distributors get more confident in a full reopening. Cash generation and liquidity are strong giving the board confidence to reinstate the dividend at the pre-pandemic level, and we suspect share repo will be coming back in the not too distant future as well. Long term there is still lots of share for GIL to win in high margin businesses like fashion basics in the US, and further growth opportunity in international via the coming Bangladesh plant capacity expected to come online in 2023.
We see 2021 EPS at $2.31 and Tail earnings power in the $3.50 range. Gildan is a high quality business with a strong competitive moat around its low cost advantage. We think its deserving of a high teens to 20x multiple at least. That puts fair value on this at $40-$46 vs $35 at the close. Tail upside to $60+.
