Modernization In The US And Bangladesh Will Strengthen Competitive Advantage

Key Takeaways

• Modernizing operations and expanding in Bangladesh boost competitiveness and support long-term ring-spun product growth.
  
• Strategic focus on innovation, capacity, and ESG promotes efficiency and sustainability, enhancing margins and earnings growth.
  
• Geopolitical and macroeconomic challenges, along with operational disruptions and sales declines, threaten Gildan Activewear's revenue growth and margin stability.

Catalysts

Manufactures and sells various apparel products in the United States, North America, Europe, Asia-Pacific, and Latin America.

• Gildan's ongoing yarn operation modernization in the U.S. and the ramp-up of their new Bangladesh operation are expected to provide a competitive advantage and support long-term growth in ring-spun products. This is likely to impact future revenue growth positively.
  
• The introduction of new technologies, such as soft cotton, MVS technology for fleece, and plasma technology for printing, indicates a strong pipeline of innovation. These innovations could lead to enhanced product offerings and potentially improve net margins by reducing production costs.
  
• The company's focus on strategic pillars — capacity expansion, innovation, and ESG — is designed to improve operational efficiency and sustainability. This approach is expected to result in improved adjusted operating margins over the next three years.
  
• The anticipated mid-single-digit sales growth and mid-teen adjusted EPS growth between 2025 and 2027 are underpinned by strong market share gains in key categories and positive responses to new product introductions. This growth trajectory is expected to impact overall earnings positively.
  
• Continued strategic share repurchases, supported by the company’s strong balance sheet and free cash flow generation, are likely to enhance EPS growth, reinforcing the potential undervaluation driven by operational efficiencies and capital return strategies.

Gildan Activewear Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gildan Activewear's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $613.6 million (and earnings per share of $4.1) by about February 2028, up from $421.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $517.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 18.5x today. This future PE is lower than the current PE for the US Luxury industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Gildan Activewear Future Earnings Per Share Growth

Risks

• The phase-out of the Under Armour business significantly impacted Hosiery and underwear sales, contributing to a decline in that category, which poses risks to future revenue growth if not offset by other sales gains.
  
• Unfavorable product mix, particularly in fleece sales, which were lower compared to last year's performance, suggests potential strain on margins if the trend continues and impacts earnings.
  
• The possibility of new tariffs due to geopolitical factors, such as the upcoming U.S. election, could affect production costs and ultimately net margins if no competitive advantage can be leveraged.
  
• The ongoing civil unrest in Bangladesh could disrupt operations and contribute to unanticipated costs or delays, impacting revenue generation and operating margins.
  
• The macroeconomic environment remains weak across various market categories, which may constrain revenue growth and limit the company's ability to achieve its mid-single-digit sales growth targets.

Valuation

• The analysts have a consensus price target of CA$75.196 for Gildan Activewear based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$84.45, and the most bearish reporting a price target of just CA$62.11.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $613.6 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of CA$72.49, the analyst price target of CA$75.2 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.