Gildan Gains by Challenging Buffett’s Fruit of the Loom

Billionaire Warren Buffett
Baltimore, Maryland-based Under Armour Inc. was second in the peer group behind Gildan with a 52 percent rise, and Hanesbrands, based in Winston Salem, North Carolina, was third with a 46 percent gain, Fruit of the Loom, based in Bowling Green, Kentucky, is a unit of Berkshire Hathaway, run by billionaire Warren Buffett. Photographer: Scott Eells/Bloomberg

Gildan Activewear Inc.’s drive to take market share from Berkshire Hathaway Inc.’s Fruit of the Loom and Hanesbrands Inc. has made it the best performing North American underwear stock this year.

Gildan, the biggest supplier of blank tops to makers of printed clothing such as T-shirts, has soared almost 70 percent this year, the most among 23 North American apparel, footwear and accessories makers with market values of more than $1 billion, according to data compiled by Bloomberg. The shares are trading at 36 times earnings as investors back the company’s move into the retail market for socks, underwear and undershirts.

“Why this year will be a major breakthrough for us is we’ve taken our low-cost manufacturing and enhanced it with quality features at the same time as giving the retailers better margins than Fruit or Hanes,” Glenn Chamandy, chief executive officer, said last week by phone from Montreal, where the company is based. “That’s how you win shelf space.”

Gildan won 70 percent of the North American wholesale screenprint market with a shorter supply chain based in Central America instead of China and steady investment in manufacturing, the company said in a presentation last month. A new $100 million factory in Honduras will begin production by the end of the year that will be $20 million cheaper to run annually and increase production 50 percent by the end of 2013, said Sophie Argiriou, Gildan spokeswoman.

Gold Toe

“Gildan’s got a better manufacturing and supply chain,” said Andrew Burns, an analyst with D.A. Davidson & Co. in Lake Oswego, Oregon. “So they can actually go in and offer a lower price point and capture greater margin than the smaller competitors they’ll be taking share from.”

Gildan shares rose 3.3 percent to C$33.53 at the close in Toronto today, the highest since July 13, 2011, for a market value of C$4.1 billion ($4.2 billion). Apparel makers have outperformed the 21 percent gain in the S&P 500 Consumer Discretionary Index this year through yesterday, as cotton prices declined since March.

Baltimore, Maryland-based Under Armour Inc. was second in the peer group behind Gildan with a 52 percent rise, and Hanesbrands, based in Winston Salem, North Carolina, was third with a 46 percent gain. Fruit of the Loom, based in Bowling Green, Kentucky, is a unit of Berkshire Hathaway, run by billionaire Warren Buffett.

Brand Loyalty

Gildan’s Chamandy said underwear is one of the hardest consumer markets to break into because people are often loyal to their brands. He said aggressive pricing will overcome this.

In an Oct. 3 investor presentation, one of Gildan’s competitors, Hanes, cited data from market research firm NPD Group which identified 62 percent of men’s underwear consumers as brand loyalists. This is one reason Gildan will find it difficult to win away customers, said Hanes spokesman Matt Hall by phone from Winston Salem.

“We are the dominant underwear brand and consumers are very loyal to our brand,” he said. Hall said Hanes estimates it has 45 percent to 50 percent of the market among mass retailers.

John Shivel, a spokesman for Fruit of the Loom, said in an e-mailed statement the company accepts “the fact that competitors will continue to challenge us.”

Gildan’s retail push is being helped by its purchase of Newton, North Carolina-based sock supplier Gold Toe Moretz Holdings Corp. for $350 million in 2011, which gave it relationships with major retailers across the U.S. After the Gold Toe acquisition Wal-Mart Stores Inc., Target Corp., J.C. Penney Co. Inc. and Kohl’s Corp. are all distributors. The company also acquired contracts to make socks for New Balance Athletic Shoe Inc. and Under Armour Inc..

Cross Sell

“They’re going to use that brand name and the retail relationships to leverage their Gildan products and to cross-sell as well,” said Martin Landry, an analyst with GMP Securities LP in Montreal. “So that’s going to bring some opportunities.”

To develop its own label, Gildan is increasing its marketing effort, Chamandy said. It hired New York ad agency Devito/Verdi to create a brand strategy and has sponsored ESPN’s coverage of college basketball and Triple-A baseball.

Little Experience

Marketing to consumers is one area in which Gildan has relatively little experience and it’s the key ingredient to making sure the company’s retail play is a success, said Landry. “When you’re going into retail you need a marketing plan and the marketing budget was quite limited up to now for their product at retail,” he said.

The U.S. wholesale screenprint market is worth about $4 billion, compared with combined retail sales of $7 billion at Hanes and Fruit of the Loom, which Gildan is targeting, Chamandy said.

That makes retail a considerable growth opportunity, said Scott Rattee, an analyst at Stonecap Securities Inc. “I’d certainly say there’s room to run on the company,” he said by phone from Toronto.

Hanesbrands had sales of $4.64 billion in 2011, according to data compiled by Bloomberg. Berkshire, which had 2011 sales of $143.7 billion, does not break out Fruit of the Loom separately.

Branded Sales

Russell Brands LLC, an affiliate of Fruit of the Loom, filed a lawsuit against Gildan alleging trademark infringement and unfair competition on Oct. 12, Gildan said in a statement today. Gildan said it mistakenly shipped Russell product bearing the Gildan brand to a retailer. Gildan values the product at about $100,000 and said the amount was “not material.” The company said it is conducting an internal review to determine how the shipment occurred and is taking the matter seriously.

John Shivel, the Fruit of the Loom spokesman, did not immediately return a phone call and an e-mail seeking comment.

Gildan-branded clothes will climb to half its retail sales by the end of this year, from 25 percent in 2011, Chamandy said, according to the transcript of a conference call with analysts Sept. 3. Gildan, which began breaking out its retail business in January, has reported a profit in the segment in the last three quarters.

Total sales at the company rose 13 percent to $600 million in the third quarter ended July 1 from a year earlier as profit fell 11 percent to $78.6 million, or 64 cents a share.

Factory Upgrade

Gildan will invest $1 billion over the next five years to upgrade or expand its 15 plants and maintain the low-cost manufacturing its sees as its main advantage over its competition, said Chamandy. He said the oldest plant it operates is eight years old, and once the new facility in Honduras is at full capacity that will be shut down for an upgrade.

“They have the most modern footprint by a very, very wide margin and that is a function of their consistent investment and reinvestment and best in class facilities,” said Kenric Tyghe, an analyst with Raymond James Securities by phone from Toronto. “And that really has been the advantage.”

Chamandy said it was investment in manufacturing that allowed Gildan to win 70 percent of the wholesale market from Fruit of the Loom and Hanes, and continued investment will help the company do the same in retail.

“We don’t really view them as competitors,” he said. “They’re just renting the shelf-space we’re trying to get.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE