Gildan Activewear Inc.
(GIL-N, GIL-T) US$41.50 | $51.95
Q4/21 Preview: Strong Quarter to Foreshadow Earnings Power
Event
Gildan is scheduled to report Q4/21 results on February 23.
Impact: SLIGHTLY POSITIVE
Q4/21 Preview: We forecast another strong quarter of y/y earnings growth, due to similar trends exhibited in the Q3/21 financial results. This includes top-line benefits from product mix, pricing power, onshoring, and market-share gains across its key target verticals. Although inflationary pressure should weigh on gross margin relative to Q3/21, we believe that Gildan should achieve its 18% target operating margin for both the quarter and year. We have modestly increased our Q4/21 forecasts based on recent channel checks, but we are only slightly above consensus. That stated, it is our view that Gildan is the best positioned within our coverage universe to potentially exceed consensus.
Acquisition/Financial Leverage: We believe that Gildan made a strategic move, acquiring Frontier Yarns in mid-December, despite flying somewhat under the radar screen of investors. Throughout 2021, the industry has been dealing with yarn constraints due to labour shortages, and this should increase the amount of internally produced yarn for its Central American hub to 85% (from 65%) over the next three years. We reiterate that this should have no impact on Gildan's ability to return capital to shareholders. Inclusive of an active NCIB, we anticipate that Gildan's leverage will remain at ~1.0x through 2023.
Financial Outlook: We are maintaining our positive EPS growth outlook for Gildan despite inflationary headwinds. This view is a function of strong demand and market- share gains in target verticals, cost initiatives driving leverage, recent price action being implemented, and an active NCIB. Recall, Gildan has ~$500mm of capacity coming online in H1/22 and another additional $500mm coming online in early-2023. It remains our view that Gildan's low-cost vertically integrated operations position the company very well to capitalize on securing product and offering it at a compelling price relative to the competition. This strategy, in our view, should provide the company with a significant runway for growth, looking forward.
TD Investment Conclusion
We are maintaining our BUY recommendation and US$50.00 target price. We believe that meeting/exceeding consensus growth estimates yet again should lead to investors taking a deeper dive into Gildan's potential long-term earnings power.