Gilden has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics

Business Strategy & Outlook

Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates disruption from the coronavirus pandemic and inflation. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. Narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its total yearly hosiery and underwear sales declined 21% between 2017 and 2021.

There is a possibility that Gildan may end some of its hosiery programs to concentrate on its private-label business. Gildan’s success in printwear to its investments in the category and its cost-efficient production model. The firm has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics. Gildan’s printwear benefits from its strong supply chain as most of its clothing is manufactured in company-owned factories in low-wage, developing countries. Moreover, Gildan, unlike rivals, owns yarn-spinning factories in the U.S. that may improve its efficiency. In 2021, it bolstered its U.S. production with the acquisition of Frontier Yarns for about $170 million. Gildan’s investments have lowered its production costs, a permanent cost advantage hasn’t been created as its processes can be replicated by competitors and cost savings may be lost to lower prices.

Financial Strengths

In a move, Gildan cut spending to conserve cash during the COVID-19 crisis in 2020. Specifically, the firm lowered selling, general, and administrative expenses by 20%, suspended its dividends and share repurchases, and reduced its capital expenditures. However, as its results and finances improved in 2021, it stepped up cash usage, with capital expenditures of $127 million (4.4% of sales), about $250 million in share repurchases, and $90 million in dividend payments. Capital expenditures will rise to 6%-7% of sales over the next three years due to building projects and efficiency investments. Over the next decade, annual average repurchases of about $330 million and an annual average dividend payout ratio of 23%. Gildan’s total liquidity is solid. As of the end of September 2022, the firm had $920 million in debt, but also $69 million in cash and $680 million available on its revolving credit facility. Gildan will generate about $227 million in free cash flow to equity in 2022, more than enough to cover its obligations. Gildan renegotiated its debt covenants in June 2020 to avoid a possible violation. The firm closed 2019 with net debt/adjusted EBITDA of about 1.4 times, but this increased to 3.0 times at the end of 2020 because of the increased debt and a 70% drop in adjusted EBITDA for the year. However, its net debt/adjusted EBITDA fell to 0.6 times at the end of 2021 on debt reduction and higher EBITDA.

Bulls Say

Gildan has dominant market share in printwear basics and has invested in a low-cost production and distribution process to maintain its position. This business is recovering from the severe impact of the pandemic.
In 2019, Gildan won a contract with Walmart to supply men’s underwear for its in-house brand called George. While a blow to its branded business, the deal increased Gildan’s shelf space in the category.
Gildan’s Back to Basics efficiency strategy should allow it to hold operating margins around 18%, an improvement from prepandemic levels of about 15%.

Company Description

Gildan is a vertically-integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. Its primary market is the sale of blank T-shirts and other apparel to wholesalers, major clothing brands, and printers (printwear). Gildan also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. Gildan produces most of its clothing at factories in Latin America. The Montreal-based company generates most of its sales in the U.S. and was incorporated in 1984.

(Source: Morningstar)

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