Report
David Swartz
EUR 850.00 For Business Accounts Only

Morningstar | Fair Value Reduced as No-Moat Gildan’s Branded Strategy Struggles; Shares Overvalued

As competition intensifies, we’ve reduced our fair value estimate on no-moat Gildan from $30 to $23 (CAD 39 to CAD 30.50). The cut in our fair value estimate reflects our view that Gildan’s returns on invested capital are close to peak levels, as we believe Gildan’s brands do not provide pricing power and its production process provides no permanent cost advantage. The firm generates more than 80% of its operating income from the commoditized business of basic printwear. While it has improved operating margins over the past few years, we forecast operating margins will peak at 15.5% in 2019 and then gradually decline to 14.1% in 2027 because of lower pricing and low-cost competition. Our model assumes Gildan is near its peak gross margins, which will decline by about 100 basis points over the next decade. Further, we forecast SG&A as a percentage of revenue will stabilize around current levels.

Gildan’s brands face significant competition. Its branded business provides operating margins of less than 10%, well below the more than 20% operating margins that competitor Hanesbrands reports for its underwear business. Pricing for Gildan’s basic innerwear can be as much as 30% less than that of main competitors. Further, there is turmoil in the industry as retailers reduce store-level inventories, close physical stores, and increase shelf space for private-label products. Gildan will experience an $85 million decline in 2018 sock revenue due to private-label substitution.

Gildan’s supply chain does not provide a long-term cost advantage. The firm has invested in a vertically integrated supply chain in the U.S. Caribbean, and Central America. We do not, however, believe it has built a cost-advantaged moat as competitors, such as Fruit of the Loom and Hanesbrands, have done the same. Each of them benefits from low wages, low taxes, and free trade agreements. Gildan also faces low-cost competition from factories in China and southeast Asia.
Underlying
Gildan Activewear Inc.

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.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
David Swartz

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