No-Moat Gildan Facing Softer Printwear Demand but Its Profitability Holds

No-moat Gildan GIL recorded mixed results in 2022′s fourth quarter as sales of its activewear fell more than anticipated due to weaker retail point-of-sale trends and destocking by distributors. However, the impact of the sales miss on profit margins was partially mitigated by higher selling prices and cost containment. Moreover, although subpar retail demand has continued into 2023, Gildan’s EPS outlook for the year aligns with our forecast. Thus, we do not expect to make any material revisions to our fair value estimates of $31.50/CAD 42, leaving shares fully valued.

Gildan’s total sales declined 8% in the fourth quarter, short of our forecast for a 2% drop. Activewear sales (83% of the quarter’s total) fell 5% versus our 3% growth estimate as retailers have cut inventories and demand for imprintables has slowed. However, the company highlighted some new retail programs that should provide a boost. Meanwhile, hosiery and underwear sales (17% of total) plummeted 21% in the quarter, close to our forecast of a 20% decline. As reported by narrow-moat Hanesbrands and others, the market was very tough in the quarter, but we think Gildan’s problems run deeper. Its hosiery and underwear sales remain below prepandemic levels, and we do not expect it to regain lost share. The firm recognized a $62 million write-down related to its hosiery business in the quarter.

Gildan’s adjusted gross and operating margins came in at 29.1% and 18.8%, respectively, eclipsing our estimates by 30 and 80 basis points. We believe it can hold margins around these levels in the long run as it continues to implement its strategic plans, which include investments in capacity increases, innovation, and ESG. Supporting its growth, its new manufacturing complex in Bangladesh is scheduled to begin production by the end of this quarter.

We plan to adjust our Morningstar Uncertainty Rating for Gildan to High from Medium based on our quantitative model and the rising challenges in global apparel.