Gildan: Stock of the Week

Canada’s t-shirt leader faces off against the underwear king.

Andrew Willis 22 January, 2024 | 4:49AM
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Key Takeaways for Gildan Stock:

  • Gildan (GIL)’s contract win with Walmart in 2019 to supply store-brand underwear put the company in a position to undercut Hanes in price. These products, however, compete with Gildan’s own branded basics product line.
  • Turmoil at the executive level and a new CEO saw investors selling Gildan stock, but the cyclicality of the company’s printwear business may be a bigger concern.
  • It is difficult to build a competitive moat in the printwear market, where costs are key. Meanwhile, recent investments have helped Gildan establish an 80% market share in the U.S.
  • Andrew Willis: Last Friday, we featured Hanes with its stock sitting around a 70% discount and a 60% share of sales in the underwear segment. But that market share could be under threat as Canada’s t-shirt king Gildan takes aim.

    Gildan’s strategy, which involves an agreement with Walmart to supply store-brand underwear undercuts prices from Hanes. The move was initially made in 2019, but wholesale demand for innerwear was disrupted by COVID and then the sector faced supply chain issues. However, in a category aptly named ‘replenishment products’, Gildan likely believes consumers can’t avoid buying new underwear for long and the company wants exposure. Does that make Gildan stock a buy?

    Many investors sold Gildan stock recently after turmoil at the executive level that saw the appointment of a new CEO. We like the replacement, however, and after a 10% drop on the news we now see the stock as fairly valued. And while they compete in underwear, investors should keep in mind that Gildan has other core businesses to consider including their printed tees – which is a highly cyclical business and prone to a drop in a recession.

    Gildan’s King of Printed Tees Today, but There’s No Guarantee Tomorrow

    Another big consideration for Gildan stock investors is the prospects for sustainable growth at the company. Senior equity analyst David Swartz notes that the company now owns its factories in Central America and Bangladesh, and has invested significantly in improving its machinery and automation. But has it been enough for a moat?

    Not yet. And given how labour-intensive the printed tees sector may be, it may be difficult for any producer to gain an efficiency edge through technology alone. Otherwise, the best measure of success is market share, which for Gildan speaks for itself, as in the U.S. for example, they still have about 80% of it.

    For Morningstar, I’m Andrew Willis.

bulls Gildan Bulls Say

  • Gildan has dominant market share in printwear basics and has invested in a low-cost production and distribution process to maintain its position. Demand for imprintables has recovered since a significant drop during the pandemic.
  • In 2019, Gildan won a contract with Walmart to supply men’s underwear for its in-house brand called George. Gildan’s apparent success with this contract is due to its ability to manufacture at low cost.
  • Gildan’s strategic plans should allow it to hold operating margins around 18%, an improvement from prepandemic levels of about 15%.

bears Gildan Bears Say

  • Limiting its gross margin expansion potential, Gildan’s hosiery and underwear segment has become partially dependent on private-label products as its attempts to build a branded basics business have largely failed.
  • Gildan’s position in printwear is based on low costs and prices, so higher expenses put this business and the company’s margins at risk.
  • Gildan’s printwear business is cyclical and highly correlated to consumer spending and social activity. Demand slowed in 2019 and then declined sharply during the pandemic. It could drop again in a recession or virus-affected economy.

 

Image credits:

1- Associated Press

2- Associated Press

3- Associated Press

4- Associated Press

5- Wander Fleur on Unsplash

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Gildan Activewear Inc47.49 CAD3.74Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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