Gildan Activewear Inc.
(GIL-N, GIL-T) US$35.29 | $43.96
Q2/21 Preview: U.S. Recovery Should Bode Well for Gildan Outlook
Event
Gildan will report its Q2/21 financial results before market open on August 5.
Impact: NEUTRAL
Q2/21 Preview Summary: Our Q2/21 EPS forecast is in line with consensus. That stated, we believe that demand in the U.S. imprintable market is accelerating in tandem with the U.S. economic recovery, and being complemented by National Account strength. Although Gildan, in our view, is more likely than not to exceed expectations, we are cautious to heighten our quarterly forecasts as Q2 is a seasonally strong period, in addition to industry labour shortages potentially limiting near-term capacity increases. As such, we believe that supply and demand will be near equilibrium and mitigate replenishment demand until Q4/21. That said, improving sequential volumes should drive scale, magnified by Gildan's focus on cost reduction, and lead to an improving operating-margin performance. This should result in attractive EPS growth on a sequential basis and toward financial results achieved before the pandemic.
Financial Position: This quarter, Gildan will lap the idling of its manufacturing facilities in Q2/20, which should result in a material improvement in its leverage ratio as the LTM EBITDA increases notably. We forecast that Q2/21 leverage will be at or below the low end of its target range and lead to a reinstatement of an active NCIB by the end of 2021. Recall, Gildan reinstated its dividend in Q1/21, along with an improving operational/financial outlook.
Investment Thesis: We believe that the demand environment for Gildan is accelerating, which should lead to improving volumes, market-share gains, and an expansion of its operating margin. Should this take hold as we envision, it is our view that Gildan will handily exceed its elusive $2.00 in annual EPS in 2022, which should result in investors shifting their focus toward the company's mid- to long-term earnings potential, inclusive of the forthcoming capacity expansion in Bangladesh.
TD Investment Conclusion
We believe that Gildan is positioned to achieve market-share gains in its key growth verticals, which, along with a potential reinstatement of its NCIB and shift in investor focus toward Gildan's long-term earnings potential, should act as catalysts to the share price. We are maintaining our BUY recommendation and US$42.00 target price