Gildan Activewear

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A large, low-cost manufacturer and seller of basic apparel, including activewear, underwear, and hosiery, primarily sold through wholesale channels.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Gildan Activewear, a Canadian company based in Montreal, operates primarily as a global manufacturer of basic apparel. The company focuses on large-scale, low-cost manufacturing across a variety of textile product categories like activewear, fleece, underwear, and socks, offering products such as t-shirts, sweatshirts, and athletic wear. Gildan’s business model is oriented towards supplying large volumes of basic apparel to wholesale distributors and imprint markets, rather than direct-to-consumer sales.

Business Overview

Gildan’s operations are heavily reliant on manufacturing efficiency and scale. They are vertically integrated, controlling much of the production process from yarn spinning to finished garment, and utilize large and modern facilities. This helps to keep their costs low. Gildan sells its products primarily through two main channels: * Branded Apparel: Products sold under Gildan’s brand name in retail and wholesale channels, mainly in North America, but growing globally. This is also a part of where they do direct-to-consumer sales. * Activewear and Hosiery: These are typically sold to distributors who in turn sell them as private label or for print applications.

Their supply chain stretches across regions like Bangladesh, Honduras, and the Dominican Republic. This is where they have a lot of their manufacturing facilities. Gildan’s extensive production capabilities and global reach give it significant advantages with regards to cost, flexibility, and capacity.

The apparel manufacturing industry is marked by increasing costs, rising competition, and greater environmental concerns. There’s a general consumer shift towards higher quality products with an ESG tilt. This has forced players to look into ethical manufacturing processes. Also, the growth of e-commerce channels allows new entrants in the market to create competition.

  • Highly fragmented: The apparel industry is quite diverse and competitive, with numerous players ranging from small local firms to large multinational corporations. It takes a considerable amount of capital and expertise to become a large player.
  • Price Sensitivity: Most apparel sales, especially in the basic category, are heavily influenced by price, given how commoditized the product is. The customers are extremely price sensitive, given that there are a lot of available alternatives.
  • Fast-Fashion & Sustainability: The fashion industry is heavily influenced by trends, but there is also a growing trend of consumers focusing more on sustainability. This forces companies to focus on supply chain efficiencies and ethical manufacturing.

In this challenging landscape, companies are constantly battling to achieve both high-quality products and efficiency in order to cut costs and drive sales.

Gildan’s Competitive Advantages and Moat Analysis

Gildan’s competitive advantage comes from its low-cost manufacturing model. They use large manufacturing facilities and cheap labor to produce their products. However, this advantage is not hard to copy and is not as strong as other competitive advantages. They do have a narrow moat due to economies of scale and having an efficient supply chain.

Moat rating: 2 / 5

  • Economies of Scale: Gildan has developed a vast and efficient supply chain. This allows them to benefit from economies of scale. They benefit from lower costs as they produce higher volumes in their large factories. Their huge scale of manufacturing gives them flexibility and cost advantage, and is very difficult to replicate.
  • Manufacturing Expertise: Gildan has had decades of experience in the textile manufacturing sector. They’ve created a proprietary process for production. This efficiency is hard to replicate for a new company.
  • Brand recognition Gildan has created very good brand awareness in the North American market. The brand name provides them with good distribution channels, which are a type of structural moat.

However, there is nothing incredibly unique to their manufacturing process or product, and that makes this economic moat very narrow.

Financial Analysis

Gildan’s revenue model is highly dependent on the apparel market, with a significant portion of revenue coming from the basic and activewear products segment. The company generates about 80% of its sales in the US and Canada, though they are trying to expand globally. There are large fluctuations in the revenue due to seasonal demand. However, over a long-term time horizon, they continue to see increased demand for their products. Their net sales are approximately $3.2 billion with over 500 million units sold.

Margins: Net profit margins at Gildan have been consistently above 10% and often close to 15%, demonstrating their ability to control expenses and operate efficiently. The management has stated they are focusing on improving margins.

Operational efficiency: The company has improved efficiency in the way it operates. For example, in the latest earnings calls, they mentioned that their global production capacity has grown 10% in 2023 without any increase in infrastructure.

Capital expenditure: They have been spending approximately 4% of their revenue on capital expenditure, but with very little debt.

Balance Sheet Health: 4/5

The balance sheet is quite healthy, and they have strong liquidity. This has been quite consistent over the last few years. The company doesn’t have much debt at all, which is a very positive point. Most of their capital expenditures are funded by existing cash flows. In the last few years, they had an increasing amount of inventory, but this has come down. Their cash balance has grown from $60 million to over $700 million in the last 5 years. This cash balance can be used to fund the company’s future growth. They do have large goodwill from acquisitions and this is something to watch. However, they seem to have very good control over their finances and have managed debt well.

Controversies and Risks

  • Controversies in operations: Gildan has been a target of accusations relating to worker rights and working conditions. However, they have been taking efforts in improving the working conditions in their supply chain.
  • Cotton Prices and Supply Chain: Raw material (cotton) prices can significantly affect the company’s margins and ability to maintain low prices. Their reliance on a global supply chain also makes them vulnerable to geopolitical and logistical risks. Any disruptions in the supply chain will greatly affect their profitability.
  • Customer Concentration: A big chunk of sales is derived from the large distributors like Walmart, which makes them susceptible to price changes by the buyer.
  • Competition: The commoditized nature of basic apparel means that competition is always going to be a big factor for Gildan. Therefore they will always face intense price competition.
  • Limited pricing power: Given the generic nature of the products they sell, they do not have much pricing power, and their performance will likely correlate with the underlying demand.

Understandability Rating: 2/5 The business model of the company is easy to understand because they are a manufacturer of essential goods in the clothing sector. But the complexities of operations make it harder for most average investors to understand.

Conclusion

Gildan is a well-established, low-cost producer of basic apparel with a narrow economic moat derived from its manufacturing scale and cost efficiency. While they have good financial metrics, and low debt, they must face challenges from the competition. Despite these issues, the company is well-positioned to survive in a competitive sector. However, the company might struggle to obtain high valuations.