Morningstar | Accelerating Activewear Trends Reinforce Gildan's Longer-Term Sales Growth and Margin Potential
No-moat Gildan continues to capitalize on the strategic priorities laid out at its March investor day, with activewear (sales up 17.3%) and international (up 35.2%) highlighting its second-quarter update and more than offsetting weakness in hosiery/underwear, which was down 23.8% due in large part to the continued shift to private-label socks in the mass channel. We've been optimistic about Gildan's longer-term unit growth opportunity in imprintables as e-commerce increases the accessibility of branded blank apparel, but favorable mix trends (including double-digit growth in fleece shipments and continued momentum in fashion basics), American Apparel expected to be at a revenue run rate of approximately $100 million by year-end, and higher average selling prices reinforce the potential of this category. Although hosiery/underwear sales are expected to decline by $85 million this year versus initial projections of $70 million due to weaker sock sales, the second-quarter update gives us greater conviction that revenue growth can accelerate to 3%-4.5% annually the next five years.While top-line momentum will result in a modest increase in our $30/CAD 39 fair value estimates, some of the benefit will be offset by incremental manufacturing and supply chain costs as the company optimizes its facilities for its evolving product mix and private-label activewear and underwear platforms as well as ongoing raw material inflation. These costs led to 150 basis points of gross margin contraction to 28.3% in the quarter, partly offset by 50 basis points of SG&A leverage from organizational consolidation efforts to bring adjusted operating margins to 16.2% versus 17.3% a year ago. Even after adjusting for the incremental manufacturing costs, we believe updated 2018 guidance calling for adjusted EPS of $1.85-$1.90 (up from $1.80-$1.90) appears realistic, and we still expect adjusted operating margins to expand from midteens to the high teens by 2022.
Gildan Activewear is engaged in the manufacturing and selling of activewear, socks and underwear. Co. sells activewear products to screenprint markets in North America, Europe and other international markets. Co. is the supplier of activewear for the screenprint channel in the United States, Canada, Europe and Mexico. Co. sells socks and underwear, in addition to its activewear products, to mass market and regional retailers in North America.
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