Gildan Activewear Inc.
(GIL-N, GIL-T) US$28.89 | $36.66
Q2/22 Preview: Macro Conditions Weighing on Growth Outlook Event
We are updating our financial forecasts and target price in advance of Gildan's Q2/22 financial release in late-July/early-August.
Impact: SLIGHTLY NEGATIVE
Q2/22 Preview: We forecast another strong quarter of y/y EPS growth in Q2/22. We believe unit volume growth and pricing should lead to double-digit top-line growth, while cost efficiencies, mix shift, and further vertical integration should sustain an attractive operating margin performance within Gildan's annual target range. An active NCIB should further heighten the y/y EPS growth rate.
Market Outlook: We remain positive on Gildan's operational strategy, but we are cognizant that rising inflation and the outlook for rising interest rates have changed since Gildan's March investor day and even its early-May Q1/22 release. Our channel checks indicate that the rate of unit volume growth has slowed in the past month, albeit it remains positive y/y. Pricing appears to remain healthy that should support our H2/22 top-line forecast. That stated, we believe it is prudent to lower our 2023 financial forecasts modestly, based on a slowing North American economic growth outlook. The slowing growth profile, along with heightened fears of recession/ economic slowdown, in our view, warrant the lowering of our target multiple, and in turn our target price.
Cotton Price Decline: The rapid decline of cotton prices in recent weeks may increase the fear of a potential devaluation discount, and high-price hedges weighing on future earnings. We are content currently that this is unlikely, as our checks indicate that inventory in the distributor channel remains lean. In addition, management has publicly commented that it is well-positioned with its cotton needs in 2022, leading us to believe it is unlikely to have locked-in at recent elevated levels.
Summary: We view Gildan's recent share-price decline as excessive, but admittedly, we see few near-term share-price catalysts to offset the current slowing of industry/ economic growth. We believe improved earnings visibility for 2023 is required to lead to an expansion of the current applied multiple that we view as punitive.
TD Investment Conclusion
We are maintaining our BUY rating on Gildan, with a reduced US$43.00 target price.