gildan equity research
DESCRIPTION
Equity research done in end June 2012 for Summum Investment Fund.TRANSCRIPT
DRAFT
June 2012 | Summum Capital | Mo Yang
The blank t-shirt company.
Equity research done for:
DRAFT
June 2012 | Summum Capital | Mo Yang
Business model
• Vertical integration and international operations.
• manufacture basic, non-fashion, frequent-replenishment products:– T-shirt– Fleece– Sox
• Cost leadership based on high volume, capacity and supply chain efficiency.
DRAFT
June 2012 | Summum Capital | Mo Yang
Global T-shirt companyManufacturing plant :PakistanBangladeshCaribbeanHonduras (Rio Nance)Nicaragua
Head office: MontrealSales and marketing: Barbados Retail distribution centre: South Carolina
Distribution:AustraliaAustriaBelgiumBrazilCanadaChina CyprusCzech RepublicDenmarkDominican RepublicFinlandFrance
GermanyGreeceGuadeloupeHollandHong KingHungaryIcelandIrelandItalyJapanMexicoNew Zealand
NorwayPolandPortugalPuerto RicoSpainSurinameSwedenTaiwanUnited KingdomUSA
Heavy CAPEX in Honduras to refurbish existing plant. GIL has shifted production to low cost geographics to ensure cost advantage.
DRAFT
June 2012 | Summum Capital | Mo Yang
Textile/apparel IndustryGildan Brands Strategic partners Competitors
Privately held:
Public:
DRAFT
June 2012 | Summum Capital | Mo Yang
What do they sell?
T-Shirt SoxFleece Underwear
Cost effective, unbranded, frequently changed clothing. Average retail price of items ~ $10. Most business are generated through
screenprinter which are really t-shirt decorators.
At 1.7B of sales, that represents 170M items sold yearly.
DRAFT
June 2012 | Summum Capital | Mo Yang
Retail and print wear has more potential for growth but also a lot smaller market than screen print
Sox fabricated under license
Distribtion/wholesaler Gildan direct web site
Decorate the white label
productRetail stores
Corporate (uniform, organization brand apparel, sportswear )
Consumer
Licensor
Screenprint business (75%) The bigger higher margin business
Retail / print wear business (25%)The smaller, less profitable business
DRAFT
June 2012 | Summum Capital | Mo Yang
1726
1311
1037
1920
0
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012E
Sale
s in
milli
ons
of $
Europe and other
Canada
United states
Customer A19%
Customer B12%
Other69%
Main customer 2011
PPE per region 2011
Honduras59%Caribbean Basin21%United States15%Bangladesh2%Canada 1%Other2%PPE per region 2011
Higher Capex in Bangladesh expected to remain competitive.
Sales per region 2009-2011
Performance highlight
12% growth
Gildan sales dependant on the economic situation of their big accounts.
DRAFT
June 2012 | Summum Capital | Mo Yang
Historical results
(in millions of $) 2012 2011 2010 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1Sales 483 304 482 530 383 331 369 395 327 220COS 397 297 383 380 274 250 268 288 236 155Gross margin 86 7 99 150 109 81 101 107 91 65% 18% 2% 21% 28% 28% 24% 27% 27% 28% 30% Selling and admin 56 51 35 36 51 42 27 25 23 20 Earning before tax 28 -47 40 91 57 38 54 63 50 29 EBITDA adjustment Interest 3 2 2 1 0 3 0 0 0 0Depreciation 21 18 22 22 39 15 17 17 16 16 EBITDA 51.54 -26.52 63.58 113.92 96.2 56.1 71.28 79.73 66.07 45.14% 11% -9% 13% 21% 25% 17% 19% 20% 20% 21% Average gross margin 23.4% Average EBITDA margin 16%
Sales of T-shirt fabricated with high cost cotton purchased in 2011 when cotton reached plateau of $200 cents per pound and decrease in selling price due to adjustment to current price of ~100 cents per pound.
DRAFT
June 2012 | Summum Capital | Mo Yang
Stock risk
Risk are anything that can reduce earnings:• Cotton price;• Economy /consumption;• Foreign currency risk exposure;• Transportation cost, petroleum price;• Defined benefit plan;• Negative publicity caused by sweatshop
practice.
DRAFT
June 2012 | Summum Capital | Mo Yang
The one single biggest production cost risk: Cotton price
• Cotton and polyester fibers are the primary raw materials used in the manufacture of Gildan’s products.• Chemicals, dyestuffs and trims purchased from a variety of suppliers also affect directly production cost.
Cotton fibers is affected by:– Consumer demand;– Weather;– Speculation on the commodities market;– The relative valuations;– Fluctuations of the currencies of producer the one of the purchaser.
• Operations are also affected by fluctuations in crude oil and petroleum prices, which can also influence transportation costs and the cost of related items used in our business, such as polyester fibers, chemicals, dyestuffs and trims.
Jan/0
9Apr/
09Ju
l/09
Oct/09
Jan/1
0Apr/
10Ju
l/10
Oct/10
Jan/1
1Apr/
11Ju
l/11
Oct/11
Jan/1
2Apr/
120
50
100
150
200
250
Cotton price
Stock price
Cot
ton
pric
e in
cen
ts p
er p
ound
Cotton price vs. GIL stock price
Cotton price correlation until July 10 2010
Cotton price and stock price uncorrelated due : 1- Forward on cotton 2- GIL ability to adjust selling
price3- Expensive cotton shirt only
sold much later due to inventory build-up. Impact is often delayed by 3-6 months.
DRAFT
June 2012 | Summum Capital | Mo Yang
Sales seasonality exist in the fashion clothing industry
Sales seasonality exist:• Low demand in Q1 due to lower demand for T-
shirt.• Highest demand in Q3. Client stock up for
peak summer season and back to school season stock up.
• Historical seasonality factor: Q1: Nil, Q2: 40%, Q3: 38%, Q4: -13%.
• Management guidance is 1.9B in sales for 2012.
Q1 (bottom) Q2 Q3 (peak) Q4
Nov Dec Jan Feb Mar April June July Aug Sept Oct Nov
+- 0% +40% +38% -13%
0
100
200
300
400
500
600
700
Q1 Q2 Q3 Q4
Sale
s in
mill
ion
of $ 2012
2011
2010
DRAFT
June 2012 | Summum Capital | Mo Yang
Lowest leverage but probably not the optional capital structure.
Gross Margin is 435bps below industry average
Co. Price Ticker Currency Sales Yield % Market cap Net debt/ total cap Gross margin P/S P/B ROE Trailing PE Trailing EPSGildan 27 GIL USD 1.80B 1.14% 3.22B 16.50% 27.0% 1.84 2.59 12.22% 26.34 1.00
Others:Delta 14 DLA USD 0.492B 0.00% 0.117B 113.50% 24.0% 0.24 0.89 0.95% 92.25 0.15
Hanesbrand 27 HBI USD 4.51B 0.00% 2.6B 82.30% 33.4% 0.57 4.02 30.00% 13.77 1.94Ennis 14.9 EBF USD 0.516B 4.80% 3.82B 22.20% 25.0% 0.76 1.09 6.67% 16.08 0.92
VF Corp 135 VFC USD 10.06B 2.10% 14.81B 17.00% 43.0% 1.51 3.4 21.08% 16.76 8.07Competitor Average 58.75% 31.35% 0.77 2.35 14.68% 34.715 2.77
Valuation and multiples
Strong balance sheet:• Enterprise value = ~ 3.53B• Revenue: 1.8B• Debt to equity: 26.12%• EV/EBITDA = 16.93• P/B: 2.53
Unspectacular yield with payout of 30%
Based on target PE 23x, stock should be trading at $30.
Attractive multiple:• EBITDA margin: 11.5%• EV/Revenue = 1.96• P/S: 1.80• EPS: 1.32$• PE: 20.57x
GIL vs. peers
DRAFT
June 2012 | Summum Capital | Mo Yang
What explain 2011 35% growth and is it sustainable?
• Acquisition of Golden Toe in Q2 2011, added 280$ of revenues. Organic growth was 10%.
• Goldentoe was acquired for $350M.
• Acquisition of Anvil Holding in Q2 2012 for $88M: – Reason for acquisition: solidify US distribution network and entry into the
organic and eco-responsible business;– Increase sales by $200M;– EBITDA margin of 8.5%;– Increase EPS by 20 cents, thus accretive.
DRAFT
June 2012 | Summum Capital | Mo Yang
Opportunity
• Improve margins by further improving vertical integration.
• Growth of direct consumer market.• Profit from lower commodities price in Q3 and
Q4.• Improved margin due to use of lower cost
cotton and decrease in transportation cost (overall bearish commodity market).
DRAFT
June 2012 | Summum Capital | Mo Yang
2012 Earning estimateQ1 Q2 Q3 Q4 Total
Mgmt guidance -.38 .23 .80 .66 1.31
Consensus EPS trend -.39 .21 .78 .80 1.40
Mo -.38 .22 .77 .68 1.29
Earning surprise none 9.5%
Peak cost cotton used in COGS and customer lower order (operating on lower level of stock) due to destocking season.
Mo’s assumption: Cotton price, lower fuel price, higher interest, higher Anvil sales at 8.5% margin. Organic growth of 8% and seasonality effect.
Management forecast growth of 12% yearly to boost sales from $1.7B to 1.9B.
DRAFT
June 2012 | Summum Capital | Mo Yang
Very positive outlook by Bay and Wall Street
Consensus
Mean consensus OUTPERFORM# of analysts 16Average price traget 30Last close price 27
Explanation:
EPS is strongly correlated with stock price, thus expected strong second half of the year will bring sales to $1.9B which represent growth of 12%.
Better growth perspective with acquisition of Anvil which will solidify US supply and sales channel and strategic t-shirt market.
DRAFT
June 2012 | Summum Capital | Mo Yang
Looking forward
• Gildan will have to continue to invest in manufacturing in low cost countries such as Bangladesh to remain competitive in the long-term.
• Bangladesh offers a capable labor force at a very lost cost as well as offers duty free access to Europe, Canada, China, Japan and Australia amongst others.
• Moreover negotiations are under way between the US and Bangladesh to import BGD goods into the US duty free.
• Also considering the increased operational costs in Central America, Gildan should pursue an aggressive investment plan in Asia notably in BGD, India and Pakistan.
DRAFT
June 2012 | Summum Capital | Mo Yang
Conclusion• We believe GIL.TO represent a solid stock priced correctly by the market
– Low leverage– Trading range should be between 24$ - 30$ based on PE and potential growth
of 12% yearly.– Overall, analysts are positive and consensus target is of $30
• How to increase current EP:– GIL has to increase margin its operating margin to match its peers ~33%– Profit from lower commodities cost– Develop European market and Asian market
• Q3 earning call : first week of August 2012. Q3 Mgmt guidance EPS: 0.80 and YTD sales of $1.9B