With employees working from home, the trend of wearing casual clothing has increased during the pandemic. Gildan Activewear (GIL) is a very attractive Canadian company with structural advantages that should lead to outperformance.
Gildan is one of the world’s largest vertically integrated manufacturers of basic apparel used in everyday life, including activewear, underwear, socks, and hosiery products. The company sells its products to wholesale distributors, screen printers, and embellishers around the world.
In addition to wholesalers, Gildan also sells products to retailers in North America such as mass merchants, departments stores, national chains, specialty retailers, craft stores, and online retailers.
Notable competitors of Gildan include Fruit of the Loom, Russell Corporation, and Hanesbrands (HBI). Within socks and underwear, competitors include Renfro Corporation, Jockey International, and Kayser Roth Corporation.
The majority of Gildan’s sales are derived from customers in the United States with 86% of 2020 sales, followed by international at 10%, and Canada at 4%. I am bullish on Gildan. (See Analysts’ Top Stocks on TipRanks)
Growth Drivers in Various Markets
The company aims to grow within each of its four growth areas, which are: Imprintables brands, international growth, retail brands, and private brands.
Imprintables is a business where Gildan supplies basic T-shirts for businesses to purchase and design with its own printing technology. This may be education-based companies, tourism companies, and event-merchandising companies.
The increasing trend of casualization that is amplified in remote-work environments and private brand growth is a beneficial backdrop for Gildan. Gildan is looking to further expand into international markets with its Imprintables channels focusing on Europe, Asia-Pacific, and Latin America.
The company also plans to grow its retail brands which are Gildan, American Apparel, GoldToe, Peds, and Secret, as well as Under Armour, a licensed brand for socks. It expects to take advantage of e-commerce and growth in the online brand presence.
Lastly, the company will continue to grow its private brands business, which consists of supporting large-scale basic apparel programs within large corporations such as Adidas (ADDYY), Walmart (WMT), Costco (COST), and Nike (NKE). Gildan has demonstrated a five-year revenue compound annual growth rate (CAGR) of 4% from 2014-19.
Vertically Integrated Manufacturing Process
More than 90% of Gildan’s sales are derived from products that the company manufactures itself. This acts as a huge cost competitive advantage when selling products such as a blank T-shirt (i.e., largely commoditized product).
Gildan’s manufacturing operations are strategically located in four main hubs: the United States, Central America, the Caribbean, and Bangladesh.
In 2019, Gildan acquired land in Bangladesh for a multi-complex development that will have two large textile facilities and sewing operations.
This expansion is expected to further benefit Gildan in executing on low-cost methods of production. During the pandemic, having a vertically integrated manufacturing process has largely helped the company mitigate supply chain issues seen around the world.
Cost Optimization Plan
Gildan has been executing on a “Back to Basics” strategy that started in 2018, which is focused on simplifying the business operations and removing complexity from historical acquisitions.
This strategy involves: simplifying the product portfolio and SKU rationalization, increasing manufacturing cost advantages by consolidation of higher-cost textile, sock, and sewing operations into an existing manufacturing base, and optimizing the distribution network by leveraging the Imprintables network.
This is aimed at driving higher margins, which would ultimately result in a higher return on net assets. In 2021, the focus remains on streamlining SG&A infrastructure and reducing global sales, general and administrative expenses (SG&A) through this initiative.
Tax Rate Advantage
A key competitive advantage for Gildan is its low corporate income tax rate. The majority of the profits, marketing, and manufacturing operations are carried out in low-rate jurisdictions in Central America and the Caribbean Basin.
In 2020, the company had an average effective tax rate of 1.8%. Over the last five years, the average tax rate was 3.2%, which is very low considering that the corporate tax rate in the United States is 21%.
Gildan is able to take advantage of its low corporate tax rate and continue to manufacture at low-costs relative to its competition.
Bottom Line
The increased trend towards casualization that was accelerated by the pandemic positions Gildan well going forward.
Gildan has a large growth opportunity globally that is supported by its unique, vertically integrated model, which inherits a structurally lower tax rate.
As Gildan completes its cost optimization plan and supply chain challenges globally mitigate, the company stands to have a strong competitive advantage in a post-pandemic world.
Wall Street’s Take
From Wall Street analysts, GIL earns a Strong Buy consensus rating, based on seven Buy ratings and one Hold rating. Additionally, the average Gildan price target of C$52.51 implies 14.1% upside potential.
Disclosure: The author works as a manager at National Bank Financial and did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
