Ruth Saldanha: It's been an active few weeks for Canadian athletic wear company, Gildan Activewear (GIL). In the latest news of the ongoing boardroom drama, the company has accused a U.S. investment fund of breaking U.S. antitrust rules. Browning West wants a special shareholder meeting to replace eight of the company's 11 board members and reinstate Gildan co-founder, Glenn Chamandy, as chief executive. So, what does all of this mean for the stock and for investors in Gildan? Morningstar analyst, David Swartz, covers it and is here today to talk about the stock. David, thank you so much for being here today.
David Swartz: Thank you for having me.
What's Happening to Gildan's Board?
Saldanha: So, explain to us what's happening at the board level at Gildan and what does it mean in terms of how we view governance at the company.
Swartz: In December, Gildan's board unexpectedly terminated longtime CEO, Glenn Chamandy and named Vince Tyra, a former industry executive as his replacement. Soon after, several institutional shareholders publicly demanded that Chamandy be reinstated as CEO. In the ensuing weeks, Gildan's board has traded statements with these shareholders and Chamandy, in which both sides have accused the other of wrongdoing. The most vocal of these shareholders has been Los Angeles-based Browning West, which now owns about 5% of Gildan. Browning West has become increasingly more aggressive over the past few weeks and now demands that Gildan call a special meeting so that it can replace eight of its existing board members with its own nominees. Meanwhile, Gildan's board has fought back, having moved up Tyra's start date to last week and accusing Chamandy of conspiring with Browning West before he was let go. Gildan is also trying to prevent the special meeting by accusing Browning West of violating U.S. antitrust law. Unsurprisingly, Browning West counters that Gildan's board is just trying to stop a proxy fight that it will lose.
Why Hasn't Gildan's Stock Fallen?
Saldanha: Gildan has been overvalued for some time in the past. Does all of this uncertainty in management mean that that could change?
Swartz: Despite all the noise, Gildan's shares are down only slightly over the past month. However, this situation has escalated to such a degree that one must question the impact on Gildan's business and capital allocation plans, especially as there does not seem to be a resolution in sight. Moreover, the public statements from Chamandy and the board suggest that Gildan's future is perhaps less certain than everyone thought. According to Gildan's board, one of the main reasons that Chamandy was fired was that he lacked confidence in the company's path and was looking to make a major acquisition. Thus far, we have not heard anything from new CEO, Vince Tyra, who is in the unenviable position of leading a company which many of the major shareholders want him to be fired. Tyra needs to protect Gildan's relationships with key wholesale and retail partners such as Walmart. Right now, we see no evidence of changes in Gildan's operations. Moreover, we have no reason to think that its dividend or share repurchase policies have changed. Gildan has scheduled to report its Q4 earnings and hold a conference call on February 21st, so we hope to learn more at that time.
Gildan Stock Fair Value is Unchanged, It Has No Moat
Saldanha: How are you reading the stock right now? Are you changing your fair value estimate or even granting it an economic mode?
Swartz: We have not changed our fair value estimates on Gildan, which are $43 Canadian on the Toronto exchange and US$31.50 on New York shares. As the current market prices are close to our fair value estimates, we don't rate Gildan as over or undervalued right now. We have rated it as overvalued in the past, especially when it was trading at all-time highs back in 2021. It traded at a P/E of about 16 or 17 times back then, but it is currently trading at more modest 12 or 13 times now. We currently rate Gildan as a no moat company as we do not believe it has achieved a competitive advantage. The company does not have a strong brand name and retail basics having failed to elevate the Gildan name. It is the market leader in commercial printwear basics in North America, but this is largely an unbranded business in which it is difficult to achieve pricing power. Gildan's primary strength lies in its low-cost production model. The company operates factories in Latin America and is building out its new plant in Bangladesh. However, we do not think this is enough to provide a competitive advantage given that competitors like HanesBrands, which we rate as narrow moat, and Fruit of the Loom also have low-cost production.
Investors Should Wait Before Buying Gildan Stock
Saldanha: Finally, what should investors do about Gildan's stock right now?
Swartz: As we do not rate Gildan as undervalued presently, we would wait for a better entry point to buy. We would not want to be too aggressive given that demand for apparel has been uneven over the past couple of years. One of Gildan's biggest problems is that it has limited visibility on future demand for printwear. There is also heightened uncertainty given the management situation. Even so, there could be an opportunity to invest if the controversy drives Gildan's stock lower or if there is a market downturn.
Saldanha: Well, that makes sense. Thank you, David.
Swartz: Thank you for having me.
Saldanha: For Morningstar, I'm Ruth Saldanha.
Gildan Bulls Say
- Gildan has dominant market share in printwear basics and has invested in a low-cost production and distribution process to maintain its position. Demand for imprintables has recovered since a significant drop during the pandemic.
- In 2019, Gildan won a contract with Walmart to supply men’s underwear for its in-house brand called George. Gildan’s apparent success with this contract is due to its ability to manufacture at low cost.
- Gildan’s strategic plans should allow it to hold operating margins around 18%, an improvement from prepandemic levels of about 15%.
Gildan Bears Say
- Limiting its gross margin expansion potential, Gildan’s hosiery and underwear segment has become partially dependent on private-label products as its attempts to build a branded basics business have largely failed.
- Gildan’s position in printwear is based on low costs and prices, so higher expenses put this business and the company’s margins at risk.
- Gildan’s printwear business is cyclical and highly correlated to consumer spending and social activity. Demand slowed in 2019 and then declined sharply during the pandemic. It could drop again in a recession or virus-affected economy.
