In his book, One Up on Wall Street, legendary investor Peter Lynch told us one of the secrets to his success was finding companies that have successfully penetrated our daily lives. He calls it The Power of Common Knowledge.
One example he cites is L’eggs stockings, found not through his own sophisticated market research, but by his wife Carolyn near the checkout counter in a grocery store.
Chances are, the T-shirt or socks you’re wearing today also come in under the heading of The Power of Common Knowledge. Gildan Activewear Inc. (GIL, Financial), the company that makes and sells so many clothing basics is publicly traded on the New York Stock Exchange. Some of its products display the Gildan brand, but most carry the logos of other companies, including a number of companies Gildan has bought.
Gildan came to our attention because of its appearance on the Buffett Munger screener last week, a screener that helps us find companies with highly predictable earnings at a reasonable price.
History
1984:　Textiles Gildan, Inc., is founded by brothers H. Greg and Glenn Chamandy, a ‘refashioning’ of the family business created by their grandfather
1992: arrival of the North American Free Trade Agreement prompts the company to eliminate intermediaries and focus on just two product lines: plain T-shirts and sweatshirts
1995:　renamed Gildan Activewear; product line expanded to include golf-styled collar shirts
1999:　begins trading on the New York Stock Exchange (symbol GIL)
2001:　The company begins selling outside North America
2002: tries to buy Fruit of the Loom but is outbid by Berkshire Hathaway (BRK.B, Financial)
2004: opens its own state of the art manufacturing plant, aiming for vertical integration and becoming a low-cost producer of apparel
2005:　Gildan begins selling its own branded shirts
2006:　Gildan buys Kentucky Derby Hosiery Company and starts selling socks
2007: acquires V.I. Prewett & Sons Inc., which manufactures basic family socks for U.S. mass-market retailers, opening a new distribution channel in North America.
2010: acquires Shahriyar Fabric Industries Limited in Bangladesh
2011: buys Gold Toe Moretz Holdings Corp., another sock company
2012: acquires Anvil Holdings, Inc. (high quality, basic T-shirts and sport shirts), which includes a textile manufacturing facility in Honduras
2013: initiates a "license arrangement with New Balance Athletic Shoe, Inc." to sell its branded activewear products
2014: acquires Doris Inc., a marketer of branded ladies legwear.
History Sources: Reference for Business, Reuters, Bloomberg, and the company website.
Takeaways: Something of a contrarian company, Gildan entered the garment business as most money was exiting; similarly, it geared up and grew rapidly after implementation of NAFTA while many other companies gave up. Company has been traded publicly for 15 years now, and during that time has been a busy acquisitor.
Gildan’s Business
The company describes itself as "...a leading supplier of quality branded basic family apparel, including T-shirts, fleece, sport shirts, underwear, socks, hosiery and shapewear."
And, "...sells its products under a diversified portfolio of company-owned brands, including the Gildan®, Gold Toe® and Anvil® brands and brand extensions, as well as the recently acquired Secret®, Silks® and Therapy Plus™ brands.
Some keywords to associate with the company: vertically-integrated, large-scale manufacturing, low cost.
Most of its manufacturing takes place in Central America, the Caribbean Basin and Bangladesh; it currently has about 40,000 employees.
It operates in two segments. The first segment is Printwear, which designs, manufactures, sources and distributes undecorated activewear. One of the key words in this description is ‘undecorated’; this segment focuses on high volume deliveries to wholesale distributors in some 30 countries.
The second segment is Branded Apparel, which designs, manufactures, sources, and distributes branded family apparel, primarily to U.S. retailers. The company is also going after sales of underwear and activewear products in the U.S. retail market.
Revenues
Revenue by segment, and operating income by segment, is shown in the following excerpt from the 2013 Annual Report:
As we can see, Printwear brings in about twice the sales of Branded Apparel. Turning to operating income, Printwear brings in the lion’s share, about 82%.
Drilling down another level, we get product group breakouts:
Also, we note that the biggest slice of revenue, geographically, comes from the United States:
The company also advises that two customers account for more than 10% of revenue, one at 17.9% and the other at 11.3%.
Competitors
In its Report to Shareholders for fiscal 2013, the company describes its environment as being ‘highly competitive’ and names the following as its main competitors: Fruit of the Loom (owned by Berkshire Hathaway); Hanesbrands (HBI, Financial); Jockey International, Inc. (private); Russell Corporation; and VF Corporation (VFC, Financial). Further, "Competition is generally based upon price, with reliable quality and service also being critical requirements for success."
It attributes its success to several competitive strengths, including:
- expertise in building and operating large-scale, vertically-integrated, strategically-located manufacturing hubs
- capital investments in manufacturing that allow it to operate efficiently and reduce costs
- continued innovations in manufacturing processes that allow it to deliver enhanced product features
Takeaways: Gildan makes staples, products that require relatively regular replacement; being staples, they’re also subject to price competition that they can withstand because of vertical integration, productivity, and new product features. Three product lines: activewear, underwear, and socks - represent most sales, and Printwear (blank, or undecorated) products sell more than branded products.
Growth
The following GuruFocus chart shows Gildan’s growth over the past 15 years (blue line is Net Income, green line is share price)
The company plans to continue growing rapidly. According to an investor presentation on June 17, 2014, it expects to:
- Increase the volume of unit sales in both segments
- Upgrade the product mix to more higher-valued items
- Take $100 million out of manufacturing costs by 2017
- Use acquisitions to complement organic growth
Looking more specifically, at the Printwear segment, it expects:
- Modest growth within the industry
- Greater penetration of the U.S. market (it currently holds 30% of the North American market)
- To introduce new high value products
- More international expansion, particularly in the Asia Pacific region
Takeaways: Gildan has a strong history or growth, and realistic plans to continue that growth.
Management
President & Chief Executive Officer: Glenn J. Chamandy, one of the co-founders of the modern Gildan, and grandson of the founder of the original company; CEO and President since 2004;
Executive Vice-President, Chief Financial and Administrative Officer: Laurence G. Sellyn has held the CFO position since 2005; joined Gildan in 1999
Chairman of the Board: William D. Anderson, an accountant with extensive experience at KPMG LLP and BCE Inc. (BCE, Financial) (Chief Financial Officer at the latter)
Board of Directors: A nine-member board, including Charmandy and Anderson; areas of expertise and experience include: management consulting, human resources, retailing, investor and public relations, engineering and construction, and investment banking.
Takeaways: Long-serving senior officers of the company and a broad range of relevant expertise and experience at the board level. Given the longevity of the senior officers, succession plans would be of interest, but are not provided in filings nor at the website.
Ownership
Gurus: seven investors followed by GuruFocus own shares of Gildan: PRIMECAP Management (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Private Capital (Trades, Portfolio), Jim Simons (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Manning & Napier Advisors, Inc, and Meridian Funds (Trades, Portfolio). The largest holding belongs to Jeremy Grantham (Trades, Portfolio) with 441,373 shares.
Institutions: 184 different institutional investors have holdings in GIL, according to nasdaq.com. They hold 122 million shares, which represents 71.7% of the outstanding shares. The biggest owner is FMR LLC, also known as Fidelity Investments, which serves 20 million individual and institutional accounts, as well as 5,000 financial intermediaries.
Short Interests: GuruFocus puts the current shorts position at 1.2%, which is at the low end of the range established over the past 15 years:
Insider Owners: While insider holdings are not available from our regular sources (perhaps because the company is based in Canada, but trades on the New York Stock Exchange and Toronto Stock Exchange), we can see a summary of insider buys and sells in this GuruFocus chart.
Takeaways: The ownership profile shows a company with good representation from the gurus, high institutional interest, and low interest by the shorts. And, looking at the insiders chart, we see an interesting cluster of buys in the first half of 2013 (but we cannot offer an explanation, except that one or more insiders obviously thought the stock underpriced at that time).
GIL by the Numbers
Takeaways: A solid return on equity, a very modest dividend, and no share buybacks.
Financial Strength
GuruFocus assigns Gildan a Financial Strength rating of 7/10, and a Profitability & Growth rating of 8/10:
We see warning signals for Cash to Debt, at least compared to the company’s previous ratios. As the following chart shows, Gildan does not have a lot of debt for a company of its size, but because it carried zero debt recently, the current Cash to Debt ratio does not look good (see the GuruFocus 10 Year Financials for more Year over Year specifics).
We also note a red signal for Earnings Growth - on an historical basis but not when compared to its industry. Again, we’ll look at the company’s 10 Year Financials, where we see an up and down pattern. In fiscal 2012, earnings fell to $1.22 per diluted share from $1.91 the previous year; then in 2013, they jumped to $2.61 and for the trailing twelve months they’ve reached $2.71.
Free cash flow: Again, the metric looks strong, but has had a bumpy ride in past years:
Takeaways: Overall, a strong financial position, but lots of variation on key metrics.
Valuation
GuruFocus gives us two objective measures for screening stocks through the Buffett Munger screener: predictability and a reasonable price.
Starting with predictability, we see on the Gildan Summary page that GIL earns a 4-Star rating (that’s 4 out of 5), a very good score. Predictability (and the rating) refer to a company’s ability to consistently generate revenue and earnings; it’s important because the more consistent the earnings, the lower the likelihood of the share price declining. According to GuruFocus research, only 8% companies with a 4-Star rating are expected to be in a loss position if held for 10 years, and that they average a gain of 9.8% year.
Buffett and Munger also look for a reasonable price; to establish that we look at the P/E ratio and the five-year EBITDA growth rate (EBITDA eliminates most short-term gyrations from earnings numbers). More specifically, we divide the P/E by the five-year EBITDA growth rate. For GIL, we divide the P/E of 23.0 by the earnings growth rate of 20.70%, to come up with a result of 1.11 (data in this paragraph as of closing, November 10, 2014). This latter number is known as PEPG or PEG.
At 1.11, the company sits at the low (attractive) end of the fair valuation range (0.00 to 1.00 represents undervalued, 1.00 to 2.00 represents fair value, and 2.00 or more represents overvalued).
Here’s how Gildan’s PEG ratio looks, on a quarterly basis, in chart form:
Notably, Gildan ranks higher than 91% of all 805 companies in the Global Apparel Manufacturing industry.
Takeaways: Gildan has two objective qualities that auger well for prospective investors: high predictability of earnings, and a reasonable price (when defined as the current P/E divided by the five-year EBITDA growth rate).
Opportunities & Risks
In its Annual Report for 2013, Gildan outlines four growth initiatives
- Printwear expansion, particularly targeted international markets through new distribution channels and leverage of its existing brands.
- Increased sales of branded products to U.S. retailers, by leveraging its "...current distribution with retailers, our manufacturing scale and expertise and our ongoing marketing investment...."
- Optimizing the cost structure by adding low-cost capacity, investing in cost-reduction projects, and further vertical integration.
- Reinvest cash flow from operations to generate free cash flow and organic growth.
Looking at the risk side of the equation:
- Fluctuating cotton prices affect margins: for example, the company has noted its 2012 results were adversely affected by an inventory of cotton bought at historically high prices.
- Price competition is intense, and may be magnified by economic conditions, both in producing countries and in consuming countries.
- As an international company, GIL faces currency exposures, as well as political, social, and economic risks over which it has little or no control.
- It depends on a handful of customers for the bulk of its business; in 2013, its biggest customer accounted for almost 18% of sales, and its top ten customers accounted for 57.5%.
- Negative publicity is always a factor for companies that have their manufacturing in emerging market countries; in Gildan’s case that involves not only its own plants, but also those of third-party suppliers.
Outlook
Opportunities and risks certainly exist, but there appears to be nothing foreseeable that would suggest the company will not continue to grow its top and bottom lines as it has done in the past.
The following chart shows Gildan’s historical and projected earnings (blue line), along with the price per share (green line):
Note the vertical yellow band, a new GuruFocus feature showing analysts’ earning estimates for the next two years (for more information on this feature, click here).
As the chart’s history and projections show, and our review of the opportunities and risks suggests, there’s no reason to think GIL’s fortunes will shift negatively in the short- or medium-term.
Conclusions
Gildan had a place on the Buffett Munger screener because it met a couple of important criteria: predictability and a reasonable price.
While it is not on the list this week, it still merits consideration. With a dividend yield of only 0.70% it will not attract much attention from income investors, but could go on the short list of investors looking for capital appreciation.
Consumers will continue to buy T-shirts and socks by the millions every day, and as long as Gildan can continue doing what it has done in the past, it should continue to grow its earnings and share price.
