Key points:
Investor focus – At Q2 reporting, we expect investor focus to be on: 1) how POS trends in the U.S. Printwear channel evolved through Q2 as there was progress on vaccinations and restrictions were eased on larger gatherings; 2) potential impact (if any) of labor shortages/input cost inflation on the H2 outlook; 3) trends in the retail channel and performance of the company's private label offerings amidst the current backdrop; 4) balance sheet position (leverage/liquidity) exiting Q2; and, 5) updates on capital allocation plans for the remainder of the year.
Forecasts: Looking for Q2 EPS of $0.53/share (vs. -$0.99/share last year; consensus: $0.51/share) – For Q2 2021, we expect a meaningful YoY improvement in sales and margins, reflecting an improving demand environment, higher utilization at the company's manufacturing facilities, and easier prior year comparables. Our EPS forecast reflects revenue of $700MM (+204.7% YoY), a gross margin of 28.5% and SG&A as a % of sales of 11.3%.
Keeping an eye on the global minimum corporate tax rate headlines – The U.S. Treasury Department proposed a global minimum corporate tax rate of 15%. The Treasury expressed that the international tax architecture “must be stabilized”, citing the need to ensure the global tax system is “equitable and equipped to meet the needs of the 21st century global economy”. After meetings held by the OECD and G20 countries in July, ~130 countries have backed the global minimum corporate tax rate, which could take effect in 2023. We believe that the 15% global minimum corporate tax rate presents a potential headwind for Gildan, considering that the company currently benefits from a tax rate in the ~5%-6% range. Assuming the global minimum tax rate is enacted, the company could look for further efficiencies in its operations to partially offset the impact. At this point, however, we are following the developments, and believe that any potential impact from a higher tax rate is likely a +3 year consideration.
Capital allocation update – Gildan reinstated its quarterly dividend at $0.154/share (in line with the payout prior to the suspension of dividend payments in Q1 2020). Effective April 5, 2021, the company was no longer required to comply with the restrictions/provisions put in place when it amended its loan agreements to obtain covenant relief. We expect the company to potentially revisit the reinstatement of its NCIB as it gains additional visibility to the post-pandemic operating environment.