No-moat Gildan cuts 2019 guidance

Cites weakness in activewear and innerwear as the cause, we believe the shares are shares overvalued

Morningstar Analysts 18 October, 2019 | 1:32PM

No-moat Gildan (GIL) on Oct. 17 announced preliminary results for the third quarter and cut guidance for the fourth quarter. We still view the shares as significantly overvalued even as they dropped approximately 12% in postmarket trading. Gildan cut its third-quarter sales forecast to $740 million based on activewear sales of $620 million and hosiery and underwear sales of $120 million. We had expected sales of $785 million based on activewear sales of $643 million and hosiery and underwear sales of around $143 million. Gildan attributed the activewear shortfall to weak imprintables in all regions. The innerwear shortfall was blamed on inventory reductions.

Gildan expects both trends to continue in the fourth quarter and guided to shortfalls versus prior guidance of $70 million and $100 million on imprintables and inventory destocking, respectively, for the quarter. This guidance suggests we may reduce our fourth-quarter sales forecast of $841 million by approximately 20%. The severe underperformance in Gildan’s hosiery and underwear category is especially disappointing as its private-label men’s underwear deal with wide-moat Walmart just launched in the spring. However, we had previously highlighted that this product was primarily replacing Gildan-branded underwear. We believe Gildan is losing shelf space in socks and underwear to private-label competitors. We think its branded strategy has largely failed and believe its brand is too weak to support a moat.

Gildan reduced its adjusted earnings per share outlook for the third quarter to $0.53, $0.06 below our forecast. Further, it reduced its 2019 adjusted EPS guidance to $1.65-$1.70 versus our forecast of $1.86. We expect that the soft sales will negatively affect gross and operating margins. Gildan did not hold a call to discuss the new guidance but will report full third-quarter results Oct. 31.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Gildan Activewear Inc36.37 CAD-0.14

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