Silver Linings - Gildan
New COVID-19 lockdowns around the globe mean more days of working from home. We explain our investment thesis on how leisure apparel is here to stay.
Many of us have traded in our button-up shirts for more comfortable clothes while working from home. Let’s admit it, leisure wear is much more preferable than dress shirt tucked into belted slacks. One of our investments that is benefiting from this work-from-home trend is our holding in Gildan. This Montreal-based company is one of the world’s largest vertically-integrated manufacturers of basic apparel. In other words, they manufacture comfortable white-label activewear, underwear and socks and sell them in bulk to printers and apparel companies, who then customize the products.
Ever bought a band hoodie from your favourite concert? Or maybe you received a team shirt for that charity 10K run. Even if you haven’t heard of Gildan, there is a good chance you own at least one of their products. Like most companies, Gildan was impacted by COVID-19 due to store closures and social distancing. However, Gildan was further impacted because a large part of its business is tied to sporting events, concerts, tourism, and corporate promotional spend which slowed significantly. What we are looking for in Silver Linings are businesses like Gildan that can use this downturn as an opportunity to grow market share, expand their total addressable market, and lower costs to emerge in a stronger competitive position when demand normalizes.
One of Gildan’s largest competitive advantages is its low-cost manufacturing base, where it has invested $2 billion over the 10 years with operations in Central America and Bangladesh. During difficult times in the market, they can leverage their lower pricing to capture market share from higher cost competitors that are struggling with the industry slow down and bloated balance sheets. Another advantage from the current environment is that Gildan has seen a significant increase in its e-commerce channel, as direct-to-consumer businesses buy Gildan’s products to customize and sell online. There is even a fashion term of this popular clothing trend: merch. CEO Glenn Chamandy noted this on their Q3 2020 call in October when he said “…the market is growing because channel distribution is expanding. And so when travel does come back, corporate promotional spending does come back, definitely we will have a bigger market than we had before COVID.”
Since 2019, Gildan has undertaken significant cost cutting measures under its “Back to Basics” strategy. This includes consolidating facilities and rationalizing the number of products it sells to improve its already low cost base and achieve higher gross margins. We believe this will widen its low cost competitive advantage versus peers.
The company was founded in 1984 by current CEO Glenn Chamandy and his brother Greg with the acquisition of a knitting mill in Montreal, Quebec to supply their family’s childrenswear business. Glenn has since built the company into a $5 billion market cap company with 15% global market share. We appreciate that Gildan is a founder-led company and Glenn’s significant ownership stake of over $100 million helps ensure that management is aligned with shareholders. It is also positive that Glenn has been adding to his position opportunistically, buying an additional $5 million of shares in August of this year. The company has a solid balance sheet, generates significant free cash flow, has improving margins, and trades at a high-teens earnings multiple on a forward basis, which we believe has considerable upside once large events and tourism normalize. We also expect that shareholder-friendly actions like resuming its dividend and buyback will be welcomed by investors as these were put on hold during the depth of the crises. With Gildan’s focus on growing its market share, increasing its total addressable market, and structurally lowering its costs, we believe that Gildan will emerge from this downturn with higher earnings potential than before COVID-19.