Gildan Activewear Inc. (GIL)

February 14, 2019


Gildan Activewear (GIL) manufactures basis apparel. It supplies t-shirts, sport shirts and fleece to wholesalers in the U.S. and is growing in international markets. The company is also a top supplier of socks in the U.S. retail market. GIL is utilizing its manufacturing capabilities and retail relationships to increase its share of the retail market for activewear and underwear.


We think Gildan can continue to achieve revenue and margin improvements from its investments in fashion basics and reorganization. We expect retailers’ shift to private label brands to result in higher EPS and a higher earnings multiple for the shares.


On November 1, 2018, Gildan announced third-quarter 2018 results. Net sales increased 5% to $754 million, driven by 28% higher international revenue and double-digit growth in activewear. The gross margin decreased 200 basis points due to higher input costs and raw material prices. Adjusted operating earnings rose to $0.57 per share from $0.53 in the third quarter of 2017, driven by 150 basis points of positive SG&A leverage.


In 2019, we expect revenue to increase 6% to $2.9 billion, as the company’s acquisitions of Comfort Colors and American Apparel provide additional revenue and it manufactures additional private label products. The branded apparel division is likely to achieve modest gains over the next two years as customers chose private labels over brands.

As for profitability, we expect the gross margin to increase 70 basis points to 29%, helped by growing demand for private label brands, offset in part by higher supply-chain costs. Nevertheless, we are confident Gildan can negate some product cost increases through the careful management of its supply chain.

Moving down the income statement, we expect operating margins to come in around 16% in both 2019 and 2020, helped by carefully managed expenses and a recent restructuring.  
We project 2018 and 2019 operating earnings of $1.92 and $2.20, respectively, versus consensus of $1.86 and 2.09, respectively. Our long-term earnings growth rate is 14%.


Risks include higher than expected production costs and trade wars. Gildan’s supply chain is vulnerable to political tensions, new regulations and natural disasters. Competition in the apparel sector is fierce in the markets for private label and branded products. As a result of this competition, Gildan has little pricing power. It has had to share much of the benefit from lower manufacturing costs with customers through price cuts.


GIL is trading at a multiple of 15.6 times our 2019 earnings estimate. With an expected ROE in the low twenties, Gildan is solidly profitable and warrants a higher multiple. Multiplying our 2019 EPS estimate by 18.6 generates a price target of $41. Our target, if achieved offers investors the prospect of a 21% return, including the dividend.

Gildan Activewear. Inc. (GIL) 
Current Price: $34.26 
Target Price: $41 
Current Valuation: 15.6 times FY19 EPS 
Target Valuation: 18.6 times FY19 EPS 

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