Gildan Activewear Inc.
(GIL-N, GIL-T) US$40.66 | $50.74
Attractive Mid- to Long-term Growth Outlook Gaining Visibility Event
Yesterday, before market, Gildan reported Q3/21 results that were well ahead of consensus.
Impact: POSITIVE
Q3/21 Summary: The Q3/21 results illustrate that Gildan has been successful in further lowering its cost structure and utilizing this advantage through a promotional- pricing approach relative to its competition to gain market share. We believe this, along with onshoring, is leading to share gains in key verticals, including Fashion Basics and National Accounts. Further supported by unit-volume growth and relative product availability due to its vertically integrated operations, Gildan achieved an outsized operating margin despite inflationary headwinds. As such, Gildan reported EPS of $0.80, which exceeded our forecast/consensus of $0.59/$0.57.
Financial Outlook: Leading into Q3/21, investor concern focused on inflationary headwinds such as rising cotton prices/labour shortages. Following the conference call, we remain comfortable with Gildan's earnings growth outlook. Strong consumer demand and limited supply has resulted in tight global inventory levels. This should support a higher pricing environment, with recent price increases having been implemented. A material relative price gap remains versus its competition that should drive market-share gains while maintaining its target operating margin. This should also bode well in filling forthcoming capacity additions, and gaining share upon the commencement of a replenishment cycle. Lastly, its strong financial position should support an ongoing active NCIB. We have increased our financial forecasts.
Investment Thesis: Our investment thesis is unchanged, that there remains a long runway for future earnings/FCF growth for Gildan. Despite removing from the Action List this morning due to price appreciation narrowing our forecast return, we continue to recommend an overweight position. Gildan's industry-leading cost structure, vertically integrated operations, and forthcoming capacity position it well to gain market share in its targeted verticals. We anticipate attractive near-term earnings growth that should lead to heightened investor conviction in its long-term earnings potential and lead to a higher share price.
TD Investment Conclusion
We are lowering our recommendation to BUY from Action List Buy as share-price appreciation narrows our forecast return below our warranted threshold.