Gildan Activewear Stock: Multiple Positives (NYSE:GIL)

Elevator Pitch

I raise my investment rating for Gildan Activewear (NYSE:GIL) (TSX:GIL:CA) from a Hold to a Buy.

I wrote about GIL in an earlier September 13, 2021 article where I touched on Gildan’s recovery from the pandemic and its quarterly profit margins which surpassed the management’s guidance and targets.

In this latest article, I highlight a couple of positives for Gildan, such as market share gain potential, resilient profit margins, and the prospects of sustained shareholder capital return. This supports my decision to rate GIL as a Buy.

Acquisition Supports Market Share Gains For GIL

GIL exhibited robust top line growth momentum in the first half of this year. The company’s revenue expanded strongly by +31% YoY in Q1 2022, which was +16% better than what the market had anticipated. Gildan’s sales also increased by an impressive +20% YoY in Q2 2022, and that was +9% ahead of the sell-side’s consensus top line estimate.

The company’s revenue growth for 1H 2022 was good on an absolute basis and also exceeded market expectations.

Gildan revealed on December 13, 2021 that the company has bought “100% of the equity interests of Phoenix Sanford, LLC, the parent company of Frontier Yarns.” In the announcement, GIL referred to Frontier Yarns as “a leading producer of 100% cotton, polyester, and cotton blend yarns.”

Looking ahead, the short-term and intermediate top line expansion outlook for GIL is good, as the Frontier deal completed at the end of last year should be a major growth driver.

One key factor is yarn supply.

At the company’s Investor Day on March 29, 2022, GIL highlighted that it expects that it will be able to cover 90% of the yarn it needs for manufacturing in the Western Hemisphere on its own, following the integration of the Frontier Yarns acquisition.

Gildan had earlier indicated at its 2022 Investor Day that the pandemic and natural disasters like hurricanes have affected yarn production and prevented the company from having sufficient inventories to meet demand in full. The difficulty in securing access to yarn supply has limited Gildan’s production and sales in the past.

Another factor is the nearshoring trend.

Gildan emphasized at its most recent Q2 2022 earnings briefing that the company’s “focus” in 2023 and beyond is to “obtain new programs and new relationships with customers looking to nearshore.” GIL also previously cited a survey at its 2022 Investor Day which suggested that “over 85% of fashion companies” have the intention to “explore new sourcing opportunities throughout 2023.”

It isn’t a surprise that more of GIL’s existing and potential clients are considering the nearshoring option. Nearshoring helps companies to enhance their working capital position with less inventory buffer, minimize supply chain disruptions as compared to outsourcing, and get their products to consumers in a shorter time frame.

The Frontier deal increases the total number of yarn-spinning facilities that Gildan has in the Southeastern United States from 6 previously to 10 now. This provides further support for GIL’s ability to make its products in the US.

In summary, Gildan is in a great position to take market share away from its competitors. GIL’s rivals are either negatively impacted by the shortage of yarn because they don’t have their own yarn-spinning facilities, or disadvantaged (by the onshoring trend) as they source their products from markets outside the US.

The potential for market share gains is reflected in the expected revenue growth for GIL in the next few years. According to consensus financial data taken from S&P Capital IQ, Gildan is forecasted to grow its top line by a CAGR of +8.1% for the FY 2022-2024 period, which is superior to GIL’s revenue CAGR of +3.0% for the FY 2017-2019 time frame prior to COVID-19.

Stable Profit Margins Expected Despite Inflationary Pressures

Inflationary cost pressures should be relatively less of a worry for Gildan.

As per S&P Capital IQ, the consensus financial estimates suggest that GIL’s profitability should be relatively stable in the coming years. The sell-side analysts see Gildan’s gross margin staying in a tight 29.3%-29.9% range between fiscal 2022 and 2024. Wall Street also expects the company’s EBIT margin to range between 18.9% and 19.4% over the same period.

There are two key levers that will enable Gildan to maintain reasonably stable profit margins.

The first lever is price hikes.

GIL noted at its second-quarter earnings call that it has managed to increase “prices to reflect the current cotton prices.” In quantitative terms, Gildan disclosed that price hikes accounted for approximately three-quarters of the company’s revenue growth for Q2 2022. In other words, GIL isn’t a price taker, which would have seen profit margins erode in the current environment.

The second lever is cost management.

Earlier, Gildan had stressed at its 2022 Investor Day that “leveraging our SG&A is going to be definitely a cost reduction” driver for the company. GIL also highlighted that approximately 50% of its SG&A expenses are fixed in nature and do not vary with sales.

In the second quarter of 2022, GIL’s SG&A expenses-to-sales ratio was under 10%. Gildan indicated that the company’s goal is to maintain its SG&A costs-to-revenue cost metric at below 10% for the long run as per management’s comments at the recent quarterly earnings call.

A Commitment To Continued Share Repurchases

Gildan announced in its August 4, 2022 Q2 2022 earnings media release that the Board has “approved the implementation of a new normal course issuer bid (NCIB) program to repurchase 5% of the Company’s issued and outstanding common shares over the next twelve months.”

Notably, GIL mentioned at its second-quarter investor call that the company doesn’t see a lot of acquisition opportunities in the near term. This implies that Gildan will place a greater priority on shareholder capital return and have more excess capital allocated to share repurchases. It also increases the probability that Gildan will execute on a larger proportion of the new share buyback program.

Moreover, this is the right time for Gildan to do more share repurchases. GIL currently trades at an undemanding consensus forward next twelve months’ normalized P/E multiple of 10.1 times as per S&P Capital IQ’s valuation data. As a comparison, Gildan used to consistently trade at a high-teens forward P/E ratio between 2015 and 2019 prior to the pandemic outbreak. As such, it is reasonable for GIL to spend more money to buy back its own undervalued shares now.

Closing Thoughts

Gildan Activewear is rated as a Buy now, as I see multiple positives relating to the stock. The company is a beneficiary of the onshoring trend, and its profitability hasn’t been adversely impacted by cost pressures driven by inflation. In addition, GIL has committed to share repurchases going forward, which should be supportive of its share price.