Mike has been kind enough to put his thoughts forward on Gildan (GIL). This is a nice job of Rule One analysis. I like it that he Red Flagged some issues for us. In particular I like it that he nailed down the moat. See if you see what it is (and my comments follow):
Hi Phil,
I have been unable to post to your blog for some reason, so I am e-mailing my blog post in hopes that you could review it and have it posted for the community to comment on my analysis. I have been investigating a basic apparel company called Gildan (Ticker: GIL). This appears to be a great company that is growing and taking market share…and at the current price, it might be a buy. Here is my analysis:
Background: According to its 2010 annual report:
“Gildan is a vertically-integrated marketer and manufacturer of quality branded basic apparel. The Company is the leading supplier of activewear for the screenprint market in the U.S. and Canada. It is also establishing a growing presence in Europe, Mexico and the Asia-Pacific region. The Company sells T-shirts, sport shirts and fleece in large quantities as undecorated “blanks”, which are subsequently decorated by screenprinters with designs and logos. Consumers ultimately purchase the Company’s products, with the Gildan label, in venues such as sports, entertainment and corporate events, and travel and tourism destinations.”
In my view, Gildan is a t-shirt company; however, in reality it is much more than that (see Gold Toe socks, underwear, and they are implementing a “strategy to become a major full-line supplier of basic family apparel in the U.S. mass-market retail channel.”). Its core business is the U.S. screenprint market, and Gildan-branded products are now sold in over 5,000 retail outlets across North America.
Management: Glenn Chamandy is the current CEO, one of the founders of the company, and one of the largest shareholders. His base salary of $752,371 and was awarded a performance bonus of $1.5 million. Laurence G. Sellyn is the executive VP and CFO. His cash compensation is $463,500. Michael R. Hoffman is the current President and has been since 2004. His cash compensation was approximately $314,505. Based on my Google searching, I could not find any negatives regarding the corporate officers or the company.
Meaning: It must be the kid in me, but I personally love high quality t-shirts. There is nothing worse than losing an old trusty t-shirt that you enjoy wearing (kind of like Golden Boy on Seinfeld!), especially after wearing dress shirts and ties all week! Plus, understanding a t-shirt business has to be easier than say a Rimm (yeah, I bought it like a sucker because I was too focused on the view out the back window!)
Moat: Hmmm. This is one of the points on which I have struggled. Gildan is a well-regarded brand in the industry that produces quality t-shirts, but not well known by consumers. Heck, my friends wear Gildan products all of the time and have no idea. Indeed, their name-brand recognition is not as great as some competitors such as Hanes and Fruit of the Loom. Make no mistake though, Gildan is the dominate player in its markets and it seems poised to continue it growth. Its U.S. wholesale distributor channel has generally been increasing (e.g., from 56.6% in 2009 to 64.1% in 2010; however, in 3Q of 2011 market share did slide to 61.1%).
Some of its competitors include Hanesbrands Inc., Berkshire Hathaway Inc. through its subsidiaries Fruit of the Loom, Inc. and Russell Corporation, and smaller U.S.-based manufacturers, including Anvil Knitwear Inc., Alstyle Apparel, a division of Ennis Corp., and Delta Apparel Inc. Many of these are well-known brands, so competition is surely stiff, but Gildan seems to have a greater share of the market.
Margin of Safety:
Gildan almost meets the requirement of having growth rates in excess of 10% for a 10 year period. The one miss is in free cash flow, which stems largely from 2001. (this number will not be factored into the equation once we get into 2012).
ROIC: 13.5% (10yr);
BVPS: 18.6% (10yr);
EPS: 206% (10 yr); 26% (5yr)
Sales: 12% (10yr)
Cash Flow: -52% (10 yr); 32% (5yr)
The analyst’s 5-yr growth rate is 20.62%. The 10-yr PE values range from 12 to 28, with the historical average PE being 19.2%.
Using the more conservative 18.6% growth rate (i.e., BVPS %) as opposed to the analyst’s rate of 20.62%, and a PE of 19.2%, we get a Sticker Price of $53.05, so our Margin of Safety is $26.53. Gildan is currently selling for $26.62, and has recently been trading between the $25-$27 range. (On a more conservative note, we could use the lower 2010 PE of 15.8 which lowers the sticker price to about $43, with a MOS of $21. Hence, this company would be slightly too expensive to buy right now, but still very close to being a buy).
Possible Red flags:
The main red flag that I saw was that Gildan is in a business that relies heavily on offering the best/lowest price. The 2010 annual report states: “Competition is generally based upon price, with reliable quality and service also being critical requirements for success.” I believe Phil has warned us to be wary of companies that compete on price to win customers. Unlike the Ralph Laurens of the world that can charge and get top dollar, Gildan is much more limited in this regard (as is a Jos A. Bank – a company that I really like, but have never bought because they rely so heavily on sales and discounts such that they have trouble getting anyone to ever pay retail for their goods. But that’s a post for another day because I do believe Jos A has a brand moat and is worth a closer look).
Part of Gildan’s profitability is tied to the cost of cotton, which recently has been very high – Gildan’s cost of cotton in the third quarter was approximately U.S. $1.25 per pound, compared to U.S. $0.64 per pound in the third quarter of fiscal 2010). However, the company reported “the impact of higher net selling prices on percentage gross margins offset the impact in the quarter of the higher cost of cotton.” On the plus side, the company expects cotton cost during Q1 and Q2 of 2012 to be lower than in 2011, which will be good for the company’s margins and bottom line.
The current economic uncertainty has also caused the company to lower 4Q (2011) guidance slightly, but it has also announced a dividend to show its confidence in its future growth.
The company ended the recent 3Q with $252 million in debt because they recently acquired the Gold Toe brand. This should not be a problem because Gildan was carrying no debt prior to the acquisition, and has sufficient cash from operating activities to pay down the debt (the company generated $95 million in the first 3 quarters of 2011).
So, is Gildan a Rule One buy? Or am I making a mistake because this is too much of a commodity business with low margins that competes on price, such that Gildan should only be traded rather than stockpiled? I would love to hear your thoughts.
-Mike
MY COMMENTS:
Looking at the Moat and Management numbers from my tools, its easy to see why Mike is attracted to this company. These are really spectacular numbers that score 100% across the board. Not many companies do that well. So far, this is definitely Rule One material.
Sometimes the overall numbers get skewed by having a great last year. We check for that by looking at the raw data, which in this case is fairly consistent with the past and moving up at about 16% per year:
I used a bit lower Growth Rate because it conforms more to what the Tools tell me.
Here's a view of the value using that 16% growth rate. Note that I used a 25 PE because its the high average PE (that ranges as high as 39 - see below) and my assumption for the sake of setting the value is that we will sell this business in a good to great bull market hence the higher end of its historical PE:
The Payback Time at the Margin of Safety Price is 8 years and the MOS price is right at the current stock price. In fact, the current price is where it was 5 years ago with some massive volatility in between. Clearly this stock suffers in a recession and hopefully that is what accounts for the low price to value that we're seeing.
Okay, so now what? Let's dig in on that Moat question. Is this a durable business model? The fact that its a Price Moat is fine with me. So is WalMart. What I want to know is how they make this advantage durable. I think they explain it pretty well in their quarterly report but I'd like to know more and that will take some digging. Mike? Come on back with as much on why they can beat out Berkshire's companies. And why this is the ONE company I should buy.
Now go play.
