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Canada-based Gildan (GIL) is the leading supplier of T-shirts, fleece apparel, and sport shirts to  screenprint markets in the United States and Canada, and it  is in the process of expanding its presence in Europe, Latin America , and the Asia/Pacific region. The company sells these products in large quantities as undecorated “blanks”, which are then decorated with designs and logos. It also produced 600 million pairs of socks last year and, in far less quantity, manufactures  men’s and boys’ underwear. Gildan’s two main manufacturing hubs are in Central America and the Caribbean Basin. In order to more effectively target T-shirt  markets in Asia and Europe, it acquired a vertically integrated manufacturing facility in Bangladesh.

Manufacturing and Site Advantages

Gildan began moving its production outside the United States in 2002, with the opening of facilities in the Dominican Republic and Honduras. It was one of the first North American apparel producers to establish operations in that region. Since then, the company has built three more factories in Honduras, and another is slated to begin production in August. Gildan’s factories are equipped with state-of-the-art equipment. For example, thanks to  new, proprietary  technology, many of its T-shirts and some other apparel are  being produced with fabrics as thick and soft as relatively expensive “ring spun” yarn, generally imported from Asia. Another current focus is on energy efficiency. To that end, Gildan is in the process of installing biomass-steam generation systems at all of its plants. Meanwhile, T-shirt production capacity at its  Bangladesh operation (acquired for just $16 million in 2010)  is slated to double, to five million dozen per annum, by the close of 2011.
 
Provided the garments incorporate yarn constructed in the United States, a trade agreement allows them to be imported duty free; most of Gildan’s yarn is produced by joint ventures located in two southern states. Another advantage is that the proximity of Honduras relative to southeast Asia meaningfully reduces lead times and transportation costs. Although wages are about 15% lower in, say,  Guandong, China than Honduras, Gildan’s relatively high degree of automation lessens the impact of the difference. Finally, since its manufacturing takes place in tax-free zones and almost all sales and service staff are located in Barbados, where the tax rate is extremely low, the company’s effective tax rate averaged less than 3% during the past five years.

Market Share Gains

Thanks to its competitive cost advantage and excellent reputation regarding product quality, reliability, and technological innovation, Gildan has increased its market share considerably in three core categories over the past four years. Indeed, its share of the U.S. screenprint T-shirt market jumped over 20 percentage points, to 64.7%, while its share of the sport shirt and fleece markets  increased by somewhat lesser amounts, to 49% and 62%, respectively, during this period. Two of the company’s largest competitors, Hanesbrands (HBI) and Fruit of the Loom, a Berkshire Hathaway (BRKB) subsidiary, have apparently ceded market share by focusing on their retail supply business.

Moreover, the manufacturer’s sales of private-label socks, shirts , and underwear to retailers stand to substantially  increase over the coming three years. Gildan has been providing Dollar General (DG) with these products for a while and, last year, it received a sizable contract from Wal-Mart (WMT - Free Wal-Mart Stock Report) for private-label men’s and boys’ socks and underwear. This program has recently been extended to crafts, i.e, blank T-shirts. Likewise, management expects its relatively small business with Target (TGT) and several other domestic retailers to start to  ramp up shortly. The same prospects hold true for sales to wholesale screenprint markets outside North America. The company’s retail and international sales accounted for 22% and 12%, respectively, of the fiscal 2010 (ended September 30th)  $1.3 billion total.
 

Financial Prognosis

Gildan’s sales and share earnings have both doubled during  the past five years and, as indicated above, solid upward momentum is  likely over the next 3 to 5 years. Indeed, despite a considerable jump in the price of cotton since September, Gildan’s earnings increased 26%, year to year, in the December period. Thanks to selling price increases, cotton price hedging, new operating efficiencies, and leveraging benefits from rapidly rising sales,  the operating margin should  be little changed in fiscal 2011. Earnings, though, may well increase about 15%. The company has a strong financial structure, with $572 million in working capital and no debt as of January 2, 2011. Gildan also recently initiated a dividend at an annualized rate of $0.30 a share, and the board authorized the repurchase of one million GIL shares.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.