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EQUITY RESEARCH
February 23, 2022 Earnings Update
GILDAN ACTIVEWEAR INC.
Nothing Basic About Record Margins
Our Conclusion
Gildan delivered a blowout Q4 and record full-year results, benefiting from
strong consumer demand while reaping the rewards of its Back To Basics
strategy. The new three-year Gildan Sustainable Growth Strategy outlines
the next phase of growth as it looks to deliver organic sales growth off an
improved cost profile. Our estimates increase to reflect the strong margin
profile and incremental opportunities for market share gains. Our price target rises to $49 (from $47) and Gildan remains Outperformer rated.
Key Points
Solid Q4 Caps Off A Record Year: Gildan delivered another strong quarter,
with robust demand in North America more than offsetting some softness in International markets. Notably, the company has executed on its Back To Basics strategy and 2021 EBIT margins of 20.2% materially exceeded
management’s 18% aspiration.
Growing TAM Drives Accelerating Top-line Opportunity: With F21 sales
modestly above 2019 levels, the outlook for a revenue CAGR between 7% to 10% over the next three years reflects two realities: first, structurally larger end-markets exiting the pandemic as casualization becomes more
widespread; second, the market share opportunity driven by GIL’s capacity and competitive advantage as a low-cost integrated manufacturer. Likewise, the return of nearshoring amongst global lifestyle customers is a tailwind.
Low-cost Manufacturing Supported By Vertical Integration And
Capacity Investments: Back To Basics initiatives have been a key pillar in
cementing GIL’s competitive advantage as a low-cost manufacturer. Notably, Gildan stated that its price gaps relative to peers have widened in the pandemic, even as operating margins reached an all-time high. With
incremental capacity coming online in the near term ($500MM in Central
America for 2022/23 and $500MM more in Bangladesh in 2023/24), we see GIL as well positioned to grow its share across end-markets. A second new Bangladesh facility will support an incremental $500MM in revenue potential, though the plant is not expected to come online until 2025.
Attractive Valuation For Higher-quality Business Post-pandemic: Our
valuation approach is unchanged, and we continue to apply a 17x multiple to our 2022E EPS. This multiple is at the upper-end of our comfort zone, though we are encouraged by what we view as a fundamentally stronger business exiting the pandemic. And even rolling forward our estimates to 2023 at a lower multiple implies significant upside. While rising capex will be a modest headwind to free cash flow generation near term, we believe this will support above-industry organic growth. And we still expect healthy levels of cash flow going forward to support dividend growth and continued share repurchases.