Company Reports

We are changing our moat rating on Gildan to a narrow moat from our prior no-moat rating based on a cost advantage. We believe it has built an efficient supply chain that differentiates it from competitors. Although it is difficult to attain a cost-based edge in the apparel industry, we believe that the firm’s investments in its vertically integrated supply chain have allowed it to gain one in the production and distribution of t-shirts and fleece for the US printwear industry. While this is a niche market in apparel, it has become highly profitable for Gildan as it has relentlessly lowered costs while gaining market share. Our view is that the firm’s advantages in production and distribution are strong enough that it will not face significant margin compression from competitive pressures for at least the next 10 years.

We assign a narrow moat rating based on a cost advantage to Gildan. We believe it has built and efficient supply chain that differentiates it from competitors. Although it is difficult to attain a cost-based edge in the apparel industry, we believe that the firm’s investments in its vertically integrated supply chain have allowed it to gain one in the production and distribution of t-shirts and fleece for the North American printwear industry. While this is a niche market in apparel, it has become a highly profitable one for Gildan as it has relentlessly lowered costs while gaining market share.

We think Gildan Activewear lacks a moat. Although the firm has leading share in the US printwear channel, this is a market characterized by limited branding and product differentiation, no switching costs, and low prices. In its smaller hosiery and underwear segment, the company has had a private-label men’s underwear contract with wide-moat Walmart since 2019 and rolled out some new offerings in 2023. However, we believe this product has largely replaced Gildan’s branded basics. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other key retailers for these products. Gildan acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales were only 16.5% of its total sales in 2023, down from 25.7% in 2017.

Gildan delivered second-quarter results that included many one-time items but were largely in line with expectations on an adjusted basis. The report was Gildan's first since Glenn Chamandy was reinstated as CEO in May. On the earnings call, Chamandy had little to say about the acrimonious proxy battle, but he did reiterate his support for the Gildan Sustainable Growth Strategy for growth through capacity expansion, sustainability, and product innovation. He also highlighted a three-year financial plan, which includes mid-single-digit percentage sales growth and rising operating margins. Our estimates (such as 2% sales growth and 19% operating margins) are generally below Gildan's targets as we rate it as a no-moat company. Although a low-cost producer, we think the firm lacks a strong brand and operates in a market with limited product differentiation.

Just days before the annual meeting, Gildan announced that Vince Tyra, who joined the firm as CEO in February, and all board members have resigned. Soon after Gildan’s release, activist shareholder Browning West issued its own statement to declare victory and confirm that Glenn Chamandy will return as CEO after its board slate is installed. Gildan framed the decision of its outgoing management to quit as a conciliatory gesture to institutional shareholders, while Browning West said that initial vote counts showed overwhelming support for the dissident board anyway. In either case, an acrimonious and costly proxy battle has come to an end.

We think Gildan Activewear lacks a moat. Although the firm has leading share in the US printwear channel, this is a market characterized by limited branding and product differentiation, no switching costs, and low prices. In its smaller hosiery and underwear segment, the company has had a private-label men’s underwear contract with wide-moat Walmart since 2019 and rolled out some new offerings in 2023. However, we believe this product has largely replaced Gildan’s branded basics. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other key retailers for these products. Gildan acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales were only 16.5% of its total sales in 2023, down from 25.7% in 2017.

No-moat Gildan confirmed its preliminary release on April 15 (see our note) with a first-quarter sales decline of 1%, a bit better than our estimate of a 3% drop. The firm also held to its prior 2024 guidance for flat to low-single-digit percentage revenue growth and adjusted earnings of $2.92-$3.07. Given the results and Gildan’s solid execution in printwear, we expect to lift our earlier $2.99 EPS estimate by about $0.10, which should result in low-single-digit percentage increases in our fair value estimates of $31/CAD 42, leaving shares slightly overvalued.

On April 15, Gildan held a call to allow CEO Vince Tyra to lay out his priorities for the next few years. Tyra, on the job for three months, highlighted supply chain initiatives (including the development of the Bangladesh facility), international expansion, management depth, and investments in brands, products, and retail relationships. Tyra also discussed areas in which Gildan has fallen short, including by adding complexity through its past brand-building efforts and by failing to serve markets outside of North America efficiently. While Tyra provided some new insight into Gildan’s strengths and weaknesses, his priorities align closely with those of the Gildan Sustainable Growth plan that has been in place for two years. Indeed, the firm held to its medium-term financial targets, including mid-single-digit compound average annual sales growth and 18%-21% adjusted operating margins. As we rate Gildan as a no-moat firm without a competitive advantage, our estimates remain at the low end of these goals.

According to the Globe & Mail newspaper and subsequently confirmed by a company release, no-moat Gildan has formed a special committee and engaged bankers to shop the company around after receiving a credible takeover offer. The midday report caused a sudden jump of about 10% in Gildan’s shares before both the Toronto and New York exchanges halted trading. At the time of the halt, the company’s shares were trading at roughly 20% premiums to our $31/CAD 42 fair value estimates. Presumably, a takeover (probably by a private-equity buyer) would occur at a price well above our valuation and, as such, would be an excellent outcome for shareholders. For now, however, we are not adjusting our fair value estimates or our Standard Capital Allocation Rating as it is uncertain as to whether a takeover will happen. We rate Gildan’s shares as overvalued on a fundamental basis.

We think Gildan Activewear lacks a moat. Although the firm has leading share in the US printwear channel, this is a market characterized by limited branding and product differentiation, no switching costs, and low prices. In its smaller hosiery and underwear segment, the company has had a private-label men’s underwear contract with wide-moat Walmart since 2019 and rolled out some new offerings in 2023. However, we believe this product has largely replaced Gildan’s branded basics. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other key retailers for these products. Indeed, Gildan no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales were only 16.5% of its total sales in 2023, down from 25.7% in 2017.

No-moat Gildan’s profitability aligned with our forecast in the final quarter of 2023, and it issued mixed guidance for 2024. The benign report contrasted with the controversy that has engulfed the company over the past two months since longtime CEO Glenn Chamandy was terminated and replaced by Vince Tyra, a move that led 5% shareholder Browning West to launch a proxy contest to reinstate Chamandy (see our notes of Dec. 11 and Jan. 22). We are still unclear as to why Chamandy apparently disagreed with the board’s vision for Gildan’s future. On the earnings call, Tyra, who joined about one month ago, stated that he is committed to the Gildan Sustainable Growth strategy. The key parts of this plan are innovation, capacity expansion, and sustainability.

On Dec. 11 (see our note of this date), no-moat Gildan announced that longtime CEO Glenn Chamandy was out and was to be replaced by Vince Tyra, a former executive at Fruit of the Loom and a wholesale imprintables company. Soon after, several institutional shareholders publicly derided Tyra’s qualifications and demanded Chamandy’s reinstatement as CEO. In the ensuing weeks, Gildan’s board has traded statements with these shareholders and Chamandy in which both sides have accused the other of wrongdoing. The loudest of the dissident shareholders is Los Angeles-based Browning West, which is now demanding a special meeting to replace Gildan’s existing board with eight of its nominees, including Chamandy. Meanwhile, Gildan’s board has dug in, moving up Tyra’s first day as CEO by a month (to Jan. 16) and, among other things, accusing Chamandy of colluding with Browning West prior to his firing. In its most recent attack, Gildan’s board claims that Browning West violated the Hart-Scott-Rodino Antitrust Improvements Act by not notifying the relevant government agencies before acquiring 5% of the firm. Unsurprisingly, Browning West dismissed this accusation as a tactic by Gildan’s board to prevent a proxy fight that it will lose.

On Dec. 11, no-moat Gildan announced that Glenn Chamandy, cofounder and CEO of nearly 20 years, had left the company and will be replaced in the top spot by experienced industry executive Vince Tyra. Gildan's release did not include any quotes from Chamandy or reasons for his unexpected exit. Soon after Gildan's announcement, Chamandy put out a short statement of his own, claiming that the board had terminated him without cause and that "my vision of the path forward has differed from that of other board members." This is a surprising statement, especially as Gildan's release specifically states that the company remains committed to the Gildan Sustainable Growth plan that Chamandy had led since it was introduced in 2022.

We think Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates a choppy demand environment for its core imprintables. Although Gildan has leading share in the U.S. printwear channel, this is a market characterized by limited branding and product differentiation, no switching costs, and low prices. In its smaller hosiery and underwear segment, the company has had a private-label men’s underwear contract with wide-moat Walmart since 2019 and rolled out some new offerings in 2023. However, we believe this product has largely replaced Gildan’s branded basics. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other key retailers for these products. Indeed, Gildan no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales were only 15% of its total sales in 2022, down from 26% in 2017.

No-moat Gildan’s efficient supply chain and market positioning allowed it to overcome uneven demand and post results that eclipsed our estimates in the third quarter. While demand trends will negatively affect its full-year results, its outlook is in line with our forecast. Thus, we do not expect to make any material changes to our fair value estimates of $31/CAD 41.50, leaving shares fairly valued.

We think Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates an uneven recovery from the pandemic in its core imprintables market. In its branded operations, while Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, we believe this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales accounted for only 15% of its total sales in 2022, down from 26% in 2017.

A mix shift toward lower-margin activewear led no-moat Gildan to cut its guidance for 2023. The firm now expects adjusted EPS of $2.55-$2.65 for the year, below our $3.05 estimate and down from $3.11 in 2022, on flat to slightly negative sales growth. We view this change as disappointing, especially since Gildan had claimed in May that a downturn in its fleece sales was due to timing. Even so, the outlook does not change our long-term view (including 2% annual sales growth and 18% operating margins), so we do not expect to make any material changes to our fair value estimates of $31.50/CAD 43, leaving shares fully valued.

We think Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates an uneven recovery from the pandemic in its core imprintables market. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, we believe this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales accounted for only 15% of its total sales in 2022, down from 26% in 2017.

Gildan’s 2023 first-quarter sales and earnings fell slightly short of our estimates, but management attributed this to the timing of orders for (higher-margin) fleece and reiterated its full-year guidance. Thus, we anticipate sales growth and margin improvement as the year progresses and do not expect to make any material changes to our fair value estimates of $31.50/CAD 43.00 per share, both of which are close to market levels at present.

We think Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates disruption from uneven demand and inflation. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, we believe this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales accounted for only 15% of its total sales in 2022, down from 26% in 2017.