Morningstar | No-Moat Gildan Reports in Line but Messy Quarter; We Maintain our Overvalued View
No-moat Gildan’s 2019 first-quarter sales marginally beat our $619 million forecast by 1% but profitability was impacted by higher expenses and one-time charges. Gildan’s activewear sales of $493.6 dropped 4.1% year over year and fell short of our forecast of $499.0 million, but hosiery and underwear sales of $130.4 exceeded our forecast of $119.5 million. Gildan began shipments under its new private-label men’s underwear contract (which we believe is with wide-moat Walmart) earlier than anticipated. While we think this private-label contract stabilizes Gildan’s hosiery and underwear segment, we also believe it reflects the weakness of the Gildan brand as the private-label underwear will take shelf space from its branded underwear. Gildan’s first-quarter operating margin of 5.2% missed our estimate of 6.5% and was negatively impacted by higher operating expenses and a $24.4 million impairment on the bankruptcies of distributor Heritage Sportswear and retailer Payless ShoeSource. As Gildan’s projected 2019 EPS of $1.75 to $1.85 is in line with our forecast of $1.81, we do not expect to adjust our fair value estimates of USD 23 and CAD 30 on Gildan and continue to view it as overvalued.We think Gildan has little room for cost improvements as it competes in competitive markets. In April, Gildan spent $45 million to purchase land in Bangladesh for a new production facility. While this project will increase capacity, we do not think it will produce a long-term cost edge as many competitors already operate in southeast Asia.
Further, although Gildan has projected long-term cost benefits from supply chain optimization, progress appears slow as gross margin and sales, general, and administrative expenses as a percentage of revenue worsened year over year in the first quarter by 140 and 60 basis points to 25.8% and 14.9%, respectively. We forecast Gildan’s long-term gross margins will remain at least 10 percentage points below those of rivals with stronger brands and pricing, such as narrow-moat Hanesbrands.
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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