EUR 850.00 For Business Accounts Only

Morningstar | GIL Updated Forecasts and Estimates from 05 Oct 2018

Gildan’s strength lies in its vertically integrated low-cost production capabilities and its innovation of a commodity product. That said, it has faced the challenges of a volatile landscape with mass (the largest outlet for basic apparel accounting for over 60% of unit sales) shifting to private label and e-commerce increasing in penetration at the expense of many brick-and-mortar stores. We think the decision to realign the organizational structure to allow for all brands to sit on a centralized manufacturing, operating, and distribution platform is the right one (and should lead to 100-120 basis points of SG&A savings by 2020 from 13.7% in 2017). We also agree that capitalizing on the growing direct-to-consumer and international opportunity (Gildan is sold in over 60 countries) in fashion basics (Gildan owns five out of 20 fashion basics brands in the $6.5 billion U.S. imprintables market and sees a 20% increase in stock-keeping units in 2018) is a strong strategy. In our opinion, the company's acquisition strategy aids in shifting exposure to high growth markets, and we see Gildan doubling American Apparel revenue from roughly $50 million (in 2017) through building a worldwide franchise in imprintable markets, developing a direct-to-consumer business, and exploring ancillary franchising and licensing opportunities. Further, we expect capital expenditures to fall as a percentage of sales (to the low-single-digit range from 4% in 2018). Since 2013, the company has invested heavily in building out capacity (up 30% in its existing footprint) and yarn-spinning capabilities. We believe the existing infrastructure can be leveraged for future growth.However, the products are still commodity products, and we feel that the company has significant exposure to competitive threats--hence, our no-moat rating. The lack of switching costs and presence of other competitors give the company little pricing power, so the company has traded pricing for market share gains in printwear in the past. Overall, we believe it is the retailer that holds all of the power in the relationship, with the top 10 customers accounting for about 59% of sales. In our opinion, they set the price.