Gildan Equity Research

DRAFT

June 2012 | Summum Capital | Mo Yang

The blank t-shirt company.

Equity research done for:

DRAFT


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


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


Textile/apparel IndustryGildan Brands Strategic partners Competitors

Privately held:

Public:

DRAFT


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


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


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


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


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


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


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


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


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


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


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


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


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


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

Gildan Equity Research

Documents

Transcript of Gildan Equity Research