Description

Summary Thesis: GIL is a dominant, low-cost basic apparel manufacturer whose long-term normalized earnings power of about $2.25/ per share in FCF should become more apparent to the market over the next 18-24 months. After building out its manufacturing capacity over the past few years, GIL can create value by growing share in new product categories such as socks and underwear and should see margins expand due to SG&A leverage on its branded apparel. CapEx will decline in 2016 after 3 yrs of heavy investment in manufacturing. Their upgraded facilities will create $100M of cost savings by 2017. Lastly, GIL can return capital to shareholders with its 5% buyback authorization put in place last quarter. With their levearge tager raised to 1x - 2x, I expdct them to return more cash to shareholders. If not for their high investment mode to expand capacity (which will not last forever), they could generate normalized FCF >$500M. GIL deserves an above-market multiple 18x because it has demonstrated consistently for almost two decades that it can use its low cost manufacturing dominance to steal market share from competitors in the underwear industry. I think shares are worth at least $40 for a return of over 30%. 

Business Overview: This business is fairly simple. GIL manufactures basic family apparel, such as T-shirts, underwear, fleece, and socks. It is vertically integrated and the low-cost industry leader. It has two segments: 1) Printwear: 2/3 of revenue with ~20%+ operating margins. Its growing by mid-single digits by volume. GIL supplies distributors who then sell the products to screenprinters, who imprint them with logos. 2) Branded apparel, which GIL sells under its proprietary Gildan and Gold Toe labels, among others. Branded sales are growing between 20%-30%. Margins have been in the high single digits, but I expect them to eventually gain SG&A leverage in 2017 as they get closer to >$1 billion in sales in this segment.  

Long-term, cash-generating compounder: I know it might sound cliché, but as much as the label “compounder” often gets bestowed upon companies mere had a lucky few years, Gildan is the real deal. I would as far as to say Gildan might be one of the best companies that you haven’t heard of. (Well, maybe not the VIC community, but certainly the broader investing population). Most people would understandably yawn or lose interest when they hear socks and underwear are a good investment, because these articles of clothing are some of the most commoditized goods. The fact that GIL has been so dominant, for so long, in such a commoditized industry, is frankly a case study that I think deserves to be in the mandatory curriculum of business schools around the country.

GIL is a vertically integrated apparel manufacturer. In their Printwear segment they sell undecorated activewear (t-shirts, fleece, etc) to a relatively consolidated group of wholesale distributors. These wholesale distributors then sell these t-shirts in batches to a fragmented group of screenprinters. Screenprinters then embellish or embroider the product and sell it to a wide range of end users.  End-users include educational institutions, athletic dealers, event merchandisers, promotional product distributors, charity organizations, entertainment promoters, travel and tourism venues, and retailers.

Dominance in Printwear: In North America, this is an approximately >$2 billion market. Since its IPO in 1998, Gildan grew its market share from 10% to about 60% - 70% share today.

In the early 2000’s, Hanes was dominant. Over the years, both companies have moved in opposite directions. Hanes and Fruit of the Loom pulled back from the wholesale screenprinting market and decided to focus more on the higher price point branded retail market.

While others cut CapEx, Gildan was the only manufacturer to invest capital in creating advanced garment manufacturing. They were a market leader in establishing production in Hondouras which saved in shipping costs and shipping time. Their facilities are state-of-the-art and far and away more advanced than any of their competitors. GIL has demonstrated there is long-term sustainability to their cost advantage. They spent over $1.7B in capital investments since 2002. None of their competitors can afford that.

GIL basically used their cost advantage to driver others out of the market.

Branded Apparel has successfully transitioned from a private label to a branded business: In 2011, GIL was about 65%/35% in mix in terms of retailer private label vs. Gildan brand. Today, they are 96% Gildan brand and only 4% private label. GIL has been successful at driving growth by attacking categories one product at a time. After conquering in printwear, they have turning their sights on branded apparel. While their overall market share in this category is just in the single digits, the branded apparel channel is FAR larger than the printwear market. I estimate the market for underwear and socks are estimated to be about $8.5 billion alone. With the acquisition of Doris in Canada, GIL now has a platform to one day enter the bra market – estimated to be worth over $5 billion.

Getting into more retailers: Gildan was in approx. 18K retail doors by the end of 2015. Put in context, that is almost 2x compared to 2014. Launched in 2013, their branded men’s underwear program has quickly achieved #3 market share position, with about ~7% share today. The top two competitors have 45% and 30% share respectively. GIL has a long track record of steadily stealing market share, and I don’t see any particular reason why that should stop.

Acquisitions of Comfort Colors and Doris have been good strategic platforms to reach adjacent markets: Comfort Colors (Feb 4, 2015) – At the time, this deal reinforced Gildan's strategy to increase its penetration of the growing fashion basics segment of the North American printwear market. The company had previously been growing ~20% revenue CAGR for about 4 years prior to the sale. I believe 2015 was all about integrating the brand into GIL. Therefore, 2016 is about expanding CC’s capacity.

Doris Inc. (July 7, 2014) – As the 3^rd largest basic apparel manufacturer of women’s hosiery, legwear and shapewear, Doris gives GIL an entry into a new adjacent market. Since Doris is Canadian, it also gives GIL much needed platform and retail relationships to also sell their t-shirts and other items into the Canadian market. (Ironically, GIL has not be competitive in Canada because their favorable tax laws with Honduras didn’t apply to Canada.) I expect GIL to do well in this category over time as well.  

Still growing manufacturing capacity: I estimate that GIL is expanding its manufacturing capacity by at least a low double-digit CAGR over the next few years based on their public comments on their Honduras expansion. Their newest textile facility, Rio Nance 6, is being built in 2016 in Honduras. RN6 is slated to be able to produce approx. 40M t-shirt equivalent dozens, which could potentially expand capacity by ~20%.

Strong management – Consistent history of outperformance and smart strategic choices: Glenn Chamandy (CEO/President/Co-Founder) is widely regarding by the investor base and within his industry as being an excellent manager who works with an owner-operator mindset. He manages the business conservatively; consistently working with far less leverage than Hanes Brands. Berkshire Hathaway Director, and all-around super-investor Meryl Witmer has been a long-term bull for years. For what it’s worth, while she usually flies very under-the-radar, she unexpectedly appeared on Gildan’s Q4 earnings call back in Feb-2016 to ask management questions about how much they were growing their last large acquisition – the Comfort Colors brand.  The first time I owned the stock was after she pitched GIL at the Ira Sohn charity conference a few years back. She shared with the audience some quotes from her channel checks, which were some of the most positive I’ve ever heard. Luckily, I saved my notes from that day: (Quotes below)

“I personally own the stock” – (Real quote from someone who worked at a distributor familiar with GIL)

“Management is unbelievable, most proactive in the industry.”

“Gildan is focused on making sure I am profitable. I am very loyal to them.”

(As much as I have no shame mimicking a good idea, I have periodically performed my own customer calls and have gotten a very similar reaction.)

The U.S. sell-side community pays FAR more attention to HBI (Hanes) than they do Gildan. A lot of hedge funds often crowd into the few long-term compounders out there, but not Gildan. The fact they are a relatively sleepy Canadian company makes me like them even more.  

Structurally low tax rate is a competitive advantage (Don’t worry – this isn’t Valeant!): Gildan has about a very, very low tax rate, about ~5% on a normalized basis. This fact not central to the thesis, but I believe it is an underappreciated aspect of the long-term value creation story here. For obvious reasons, it really helps having a structural tax advantage when you are a long-term compounder. They are duty-free and quota-free access to essentially all markets. When dealing with commoditized products like t-shirts and underwear, every bit of margin helps. GIL’s low tax rate makes their acquisition targets all the more accretive, and every dollar of share they steal from competitors all the more valuable to GIL.

Competitive Threats: Competitors here are all the well-known retail brands. Hanes, Fruit of the Loom, Russell, Jockey, etc. Hanes is the leader of this group, but have interestingly employed the opposite strategy as GIL. HBI has explicitly stated they aim to generate higher price premiums at retail and drive margin expansions with more innovate product. Recent innovations are Tagless, Flexible Fit, and ComfortBlend. HBI and others spend considerably more in branding than GIL. GIL believes they can slowly take share by undercutting them on retail prices and offering retailers higher margins to gain shelf space. GIL has plans to one day close the price gap to Hanes, but they aim to first secure far more market share. This should take a long time to play out. However, as a long-term holder, this will be a large tailwind to branded margins.

Conclusion: I think I have a very good idea of what this business will look like in 10 years. They will still be the low cost manufacturer. They will have significantly more market share, and probably a much lower share count. I think the risk of the business becoming impaired is quite low over any reasonable time horizon. Deprecation is materially higher than maintenance CapEx so the stock almost never screens “cheap”. While they spend a lot on growth CapEx, that is going towards expanding capacity and lowering costs, which will serve to only strengthen their competitive advantage and fuel long-term growth. I have typically done very well with high-quality, cash generative businesses. This stock has been my favorite long-term holding. 

Catalyst

Long-term growth and taking market share in branded apparel.