Gildan Activewear Inc.
Good Q4 results; 3-year guidance points to significant revenue and earnings growth
Our view: We reiterate our positive view on Gildan Activewear Inc. (“Gildan”) following better-than-expected Q4/21 results and the introduction of 3-year targets that imply earnings growth above consensus estimates heading into the print. Revising our price target +$3 to $51; reiterate our Outperform rating.
Key points:
New 3-year outlook announced – The sales and operating margin targets reflected in Gildan’s new “Sustainable Growth Strategy” for the next 3 years imply earnings growth well in excess of consensus estimates leading up to Q4. The 3-year targets included: 1) Net Sales CAGR of 7%-10% (volume to be the primary driver, with additional capacity in Bangladesh/ Central America supporting this growth); and, 2) Adjusted operating margin of 18%-20%. With regard to capital allocation, the company is guiding to Capex as a % of Sales of 6%-8%, as well as annual dividend growth and continued share repurchases. We believe 2022 results should reflect top-line growth at the high-end of the guidance range, driven by the outlook for strong volume growth and some pricing increases in 2022. On the margin front, the non-recurrence of a cotton-related gain recorded in Q1/21 and some inflation headwinds should lead to YoY EBIT margin moderation, followed by stronger YoY margins through 2023 and 2024. Overall, we forecast meaningful Adjusted EPS growth over the next 3 years (~11.0%-11.5% 3-year CAGR), and believe there is potential for upside to these forecasts (we believe 2022 could be much stronger if the current backdrop holds). We will look for additional color on these targets and Gildan's strategy at the upcoming Investor Day on March 29/22.
Managing well through inflationary pressures – Despite inflationary and supply chain related headwinds impacting the broader economy, Gildan was able to generate good top-line growth and strong margins through Q4. The company is implementing modest price increases to offset some inflationary pressures; however, the company is not passing through all the cost increases to customers. The company was able to reduce its promotional spend and leverage its low-cost structure to mitigate margin impacts. Recall that Gildan has historically been able to leverage its cost advantage to capture share, and we see an opportunity for the company to do so again in the current operating environment.
Active on the NCIB; Dividend increased by 10% – Gildan received approval to amend its NCIB to increase the maximum number of shares that may be repurchased to 10% of the public float as at July 31, 2021 (from 5% of issued and outstanding shares previously). Gildan has been active on the NCIB, repurchasing 3.2MM shares during Q4/21, and since the NCIB began in Aug/21, Gildan has repurchased ~9.2MM shares (4.6% s/o). Gildan’s board also approved a 10% increase in the quarterly dividend.