Gildan Activewear Inc.
(GIL-N, GIL-T) US$30.17 | $41.49
Q3/22 Preview: Share Price Decline Overly Punitive, in Our View
Event
Gildan should report its Q3/22 results on November 3.
Impact: NEUTRAL
Investment Summary: We have made modest revisions to our financial forecasts to adjust for a slight softening in the demand environment in recent months. We attribute this to the impact of inflation shifting consumer capital allocation increasingly toward necessities, largely for the Hosiery and Underwear segment. Despite lowering our 2023 EPS forecast to essentially flat, we believe investors are pricing-in a more significant decline of ~30-35% below current 2023 consensus. As such, we believe the Q3/22 results could potentially mitigate investor concerns on the degree of downside within the outlook and lead to an improved valuation from what we currently view as overly punitive.
Q3/22 Preview: We forecast that Q3/22 EPS will be flattish y/y. We anticipate top- line y/y growth to be driven by the Activewear segment, partially offset by weakness in the smaller Hosiery and Underwear segment. Recall that Q3/21 realized outsized operating margins, and although we anticipate a strong margin performance in Q3/22, we forecast a return to its target range. We see mix/pricing as positive contributors to the margin performance, offset by a degree of inflationary pressure. We believe these results should place Gildan on a glidepath to handily achieve 2022 annual EPS of >$3.00 per share.
Cotton Price: There has been increasing investor interest in the decline in cotton prices and the potential risk of a negative impact on Gildan's financial performance. We believe that unless we see a further material rapid decline in the price of cotton, any impact should be limited in the near term. We say this as distributor inventory levels remain fairly lean, in addition to other inflationary pressure being supportive of current pricing.
Summary: We believe that Gildan's mid-term outlook is attractive, being the industry low-cost leader with a focus on verticals with material growth opportunity. We acknowledge that a sustained rally toward our target price is likely to require a sustained decline in inflation/bond yields, but we believe that the forthcoming Q3/22 results would be supportive of a bottoming/near-term rally in the share price.
TD Investment Conclusion
We are maintaining our BUY rating, with a reduced US$43.00 target price.