CIBC Raise TargetThese are USD targets. GLTA
EQUITY RESEARCH
August 4, 2022 Earnings Update
GILDAN ACTIVEWEAR INC.
Leaner, Meaner, And Ready For Anything
Our Conclusion
Gildan posted strong Q2 results, with outperformance on the top and bottom
lines. Shares reflect concerns of a slowdown in demand, though the
distributor channel remains healthy. Even still, we believe GIL is well-
positioned to navigate a recession with its low-cost manufacturing, leading
price positioning, vertical integration, and strong cash generation. Our
estimates are largely unchanged, though our price target edges up to $42
(from $40) as we now use an average of our F22 and F23 EPS estimates.
GIL is rated Outperformer.
Key Points
Q2 Reflects Moderation In Demand And Inflation Headwinds: Gildan
posted a solid quarter with strong GM% despite a sequential pick-up in cost
inflation. Revenue performance was mixed by geography/channel, but most
importantly, North American activewear sales continue to be strong and GIL
is taking market share in key growth categories (ring spun products, fleece).
Demand In Retail Has Softened, But Distributor Channel Healthy:
Management indicated some slowing sequentially from June to July, dragged
by its national account and retail businesses. Though it will take some time
for these businesses to work through elevated inventory levels, the outlook
across other end markets remains strong, with management indicating a
large order book and no order cancellations. We believe GIL has built market
share with its added capacity and vertical integration, and believe its low-cost
base puts it in an enviable position amidst cost volatility.
Broad-based Cost Inflation Is Supportive Of In-market Pricing: Pricing
has been a significant contributor to GIL’s strong top-line results YTD (75%
of sales growth in Q2 came from price vs. 50% in Q1). While cotton prices
have pulled back materially (-33% in the last two months), we believe other
cost headwinds (labour, energy, polyester, and freight) will support higher in-
market prices. Furthermore, Gildan has achieved higher prices mostly
through fewer promotions as opposed to a significant increase in list prices.
In our view, this eliminates risk of a costly devaluation, and also provides GIL
with greater flexibility should inflation moderate. Ultimately, we expect the
company to maintain—and potentially widen—its price gap relative to peers.
Recession Concerns Largely Priced In At Current Levels: Over the last
20 years, GIL’s NTM P/E multiple has rarely stayed below 12x for very long.
Though the shape and duration of a potential recession are both unknown,
we see GIL as well positioned to navigate a softer macro environment with its
leaner cost structure, vertical integration, and favourable pricing position.
With the stock trading at 9.3x NTM P/E, substantial downside from slower
demand has already been priced in, and we believe shares are attractive.
Leverage remains modest at 1.1x net debt/EBITDA and at the low end of the
targeted range. Free cash flow should remain strong, even with higher
capex, and we expect GIL to remain active with its NCIB.