No-Moat Gildan Is Investing in Operations Amid a Nasty Dispute Over Management

Senior Equity Analyst

David Swartz

We think Gildan Activewear lacks a moat. Although the firm has leading share in the US printwear channel, this is a market characterized by limited branding and product differentiation, no switching costs, and low prices. In its smaller hosiery and underwear segment, the company has had a private-label men’s underwear contract with wide-moat Walmart since 2019 and rolled out some new offerings in 2023. However, we believe this product has largely replaced Gildan’s branded basics. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other key retailers for these products. Indeed, Gildan no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its hosiery and underwear sales were only 16.5% of its total sales in 2023, down from 25.7% in 2017.

We attribute Gildan’s leading share in imprintables to its investments in the category and its cost-efficient production model. The firm has approximately 80% market share in printwear basics in the U.S. and acquisitions have made it a stronger player in fashion basics. We estimate its total market share in the U.S. printwear market is about 60%. We think this business line benefits from Gildan’s strong supply chain as most of its clothing is manufactured in company-owned factories in Central America and Bangladesh. Moreover, Gildan, unlike rivals, owns yarn-spinning factories in the U.S. that may improve its efficiency. While we believe Gildan’s investments have lowered its production costs, we do not think a permanent cost advantage has been created as its processes can be replicated by competitors and cost savings may be lost to lower prices.

Some of Gildan’s institutional shareholders have demanded the reinstatement of Glenn Chamandy as CEO. The acrimonious dispute adds some uncertainty, but we believe new CEO Vince Tyra intends to follow the Gildan Sustainable Growth Strategy that was laid out by the board and management in 2022.

Business Strategy & Outlook

We maintain our no-moat rating on Gildan, as we see little to suggest the firm has established an intangible asset or cost-based edge. The firm competes in the printwear and branded basic apparel markets. The branded market for underwear, socks, and bras is intensely competitive, and we believe Gildan's attempts to build a brand name have largely failed. The firm competes with established producers like Hanesbrands, wide-moat Berkshire Hathaway's Fruit of the Loom, no-moat PVH's Calvin Klein, Jockey, and many others in this space. Gildan's hosiery and underwear sales exceeded $700 million in 2017 but totaled $528 million in 2023. Its sales in this segment dropped due to private-label competition in socks and inventory reductions of branded basic apparel at Walmart and others.

Gildan reports lower gross margins than competitors with superior brands. As evidence, we forecast its long-term gross margins at 29%, well below those of Hanesbrands (39%) and PVH (60%). That said, apart from the pandemic year of 2020, Gildan’s adjusted returns on invested capital including goodwill (14% on average over the past five years) have exceeded our 9% weighted average cost of capital estimate. However, absent clear evidence of a durable cost advantage or brand-driven intangible asset, we do not have enough confidence that Gildan’s economic profit generation will persist to otherwise award the company with a moat.

Gildan generates most of its revenue and operating income from imprintables, a largely brand-free market in which blank apparel is sold to other apparel manufacturers and printshops. Demand in this business is correlated with the business cycle and social activity and, as such, dropped off during the pandemic. The imprintables market is characterized by high volume and low prices with little in the way of switching costs or product differentiation. The key competitive factor is price. Gildan’s large volume provides economies of scale that allow it to undercut others on price. However, we do not believe the company’s production model provides durable cost advantages. Numerous market participants already own factories in low-wage and low-tax countries with easy access to the U.S. market. Most of the reduction in costs has been passed onto consumers in the form of lower prices. Gildan’s management has indicated wholesale pricing has declined by about half over the past two decades. Indeed, some competitors have exited the basic imprintables market because of low pricing and inconsistent demand. 

Regardless, low costs remain the key to Gildan’s success in imprintables. The company has spent a significant percentage of its revenue on capital expenditures to improve its machinery and automation and avoid capacity constraints. Its capital spending has been as high as 14% of revenue (in 2014) and has totaled $1.6 billion over the past 10 years. Moreover, Gildan’s capital expenditures are expected to remain relatively high at 5%-5.5% of sales due to ongoing supply chain investments. Most significantly, the company is ramping up production at its new production complex in Bangladesh.

Despite Gildan’s capital investments, we do not believe its cost structure provides it with a defensible moat. Like Gildan, Hanes and Fruit of the Loom operate company-owned facilities in the Caribbean and Central America that achieve economies of scale. Moreover, Gildan faces competition from many low-cost manufacturers based in Latin America, China, and Southeast Asia. Although automation plays an important role, much of basic clothing production remains labor-intensive, making it difficult for any producer to gain an efficiency edge through technology investments.

None

Economic Moat

Gildan Activewear

Gildan Activewear, Inc. is engaged in the manufacturing and sale of printwear and branded apparel. Its products include activewear, underwear, socks, hosiery, and legwear. The firm operates under the brand name Gildan, Alstyle, American Apparel, Comfort Colors, GOLD TOE, Anvil, Secret, Silks, and Peds. The company was founded by Glenn J. Chamandy and H. Gregory Chamandy on May 8, 1984 and is headquartered in Montreal, Canada.

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Gildan Activewear, Inc. engages in the manufacture and sale of print wear and branded apparel. Its products include activewear, underwear, socks, hosiery, and legwear. The firm operates under the brand names Gildan, Alstyle, American Apparel, Comfort Colors, GOLD TOE, Anvil, Secret, Silks, and Peds. The company was founded by Glenn J. Chamandy and H. Gregory Chamandy on May 8, 1984 and is headquartered in Montreal, Canada.

Gildan Activewear Inc. stock plummeted 26.1% in Friday trading after the apparel company issued a profit warning, cut its guidance, and was downgraded to hold from buy at Stifel.

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(1) Please refer to "Non-GAAP financial measures" in this press release.

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