Gildan Activewear

Gildan's pro forma second-quarter sales fell 8% due to intentional inventory reduction and demand weakness late in the period. Due to Hanesbrands' impact, Gildan's adjusted gross margin rose 3 percentage points to 34.5% but its adjusted operating margin declined 40 basis points to 22.3%.

Why it matters: Gildan continues to cut costs while integrating the retail operations that it acquired from Hanesbrands. We think the firm remains on track to achieve USD 250 million in annual cost savings and reach durable adjusted operating margins of 24% in 2029, up from 21.5% in 2025. With retail demand soft, Gildan's 8% sales decline was slightly worse than our estimate for a 7% fall. However, its adjusted operating margin beat our 19.8% forecast by 250 basis points, and we lift our full-year forecast to 21.8% from 20.1% based on this result and a more favorable outlook. Specifically, although we cut our 2026 sales guidance to $6.05 billion from $6.11 billion, Gildan's profitability is boosted by an expected $220 million in tariff refunds (about half of which is to be reinvested), lower duties going forward, some price increases, and reduced costs.

The bottom line: We lift our fair value estimate to CAD 134 from CAD 130 on Gildan's Canada-listed shares due to US dollar appreciation but maintain our USD 95 fair value estimate on its US shares. We think shares do not reflect the benefit of Hanesbrands and are undervalued. Although the acquisition brings more exposure to volatile retail demand, we believe Gildan's manufacturing cost edge (the source of its narrow moat), profitability, and sales growth prospects have improved.

Key stats: Gildan announced the sale of Hanesbrands Australia to a financial buyer for USD 490 million. Although this price is about USD 200 million lower than we had expected, free cash flow is trending higher, so our expectations on debt reduction hold. We still project Gildan will reach its net leverage target of 1.5-2.5 times by the end of 2026.

Gildan's management provided more information on its accounts receivables, which were the focus of a recent short-seller report (see our note of June 16). Gildan attributed its higher receivables to Hanesbrands, customer support, and product introductions (including Champion and other new printwear brands), and expressed confidence in the improvement. We find these explanations to be credible and do not believe that the company has an incentive to oversupply its distributors. However, it is concerning that Gildan's factored receivables appear high (USD 871.5 million at the end of June, up from USD 667.3 million at the end of March), so we will be watching to see if the firm is able to take receivables and inventory down as it expects.

We maintain our USD 95 fair value estimate on Gildan’s US shares.

Gildan's pro forma second-quarter sales fell 8% due to intentional inventory reduction and demand weakness late in the period. From the impact of Hanesbrands, Gildan's adjusted gross margin rose 3 percentage points to 34.5% but its adjusted operating margin declined 40 basis points to 22.3%. Although it was down, its adjusted operating margin beat our 19.8% forecast, and we lift our full-year forecast to 21.8% from 20.1% based on this result and guidance.

For 2026, with a full year of Hanes, we project adjusted EPS of USD 4.73, up from USD 4.28 previously and USD 3.51 in 2025. There is likely to be some impact on inventory availability due to the shift of production from Hanes’ factories to Gildan's, but this should be temporary. Between 2025 and 2030, we forecast Gildan’s adjusted earnings per share will increase at a compound average annual rate of 17%.

We forecast Gildan’s adjusted EBITDA margin to fall to 24% in 2026 from 26% in 2025, driven by the addition of lower-margin Hanesbrands and disruptions from the combination. However, we expect this margin to rise to nearly 27% in 2029 once the full annualized cost synergies of USD 250 million are realized.

In the long run, we project 3.5% annual sales growth, driven by 4% wholesale growth and 3% retail growth. Although apparel basics retail is not a high-growth business, it brings the potential for higher gross margins than printwear. As Gildan returns to steady growth and implements its cost savings measures, we forecast long-term gross margins of about 38% (up from about 27%-30% historically) and operating margins of about 24% (up from less than 22% in 2024 and 2025).

We assign Gildan a Morningstar Economic Moat Rating of narrow based on a cost advantage. We believe it has separated itself from competitors by building an efficient supply chain. Although it is difficult to attain a cost-based edge in the apparel industry, we believe that the firm’s investments in its vertically integrated supply chain have allowed it to gain one in the production and distribution of T-shirts and fleece for the US printwear industry. While this is a niche market, it has become a highly profitable one for Gildan as it has lowered costs while gaining share.

Supporting our moat rating, Gildan’s profitability and returns on investment have improved. Specifically, its adjusted gross and operating margins averaged 27% and 15%, respectively, in the five years before the pandemic but averaged 30% and 20% between 2021 and 2025. Moreover, its adjusted ROICs, including goodwill, have consistently exceeded our 8% weighted average cost of capital estimate, averaging 18% over the past five years.

The 2025 acquisition of Hanesbrands does not change our narrow moat rating on Gildan. The firm’s consumer operations benefit from the deal, and its manufacturing efficiency should improve as it moves production of acquired apparel into its factories.

Gildan’s advantage lies in its ownership of manufacturing facilities. The firm owns and operates facilities for sewing, knitting, garment-dyeing, and final assembly in Honduras, Nicaragua, Bangladesh, and the Dominican Republic. In addition, it owns seven yarn-spinning facilities in North Carolina. Over the past 20 years, Gildan has spent over USD 2 billion on capital expenditures and made several acquisitions to operate as efficiently as possible. In contrast, nearly all other multinational apparel firms outsource much or all their production to third-party factories.

In its wholesale segment, which accounts for just under half of its revenue, Gildan supplies blank shirts to distributors which sell them to printshops. End users include corporations for promotions, colleges, sporting-event giveaways, independent designers, and more. Although market share data is scarce, we estimate that Gildan has 60%-80% of the US market for printwear basics and roughly a 30%-40% share in fashion printwear.

Gildan’s competitors in the basic printwear market in North America include Next Level Apparel, Bella+Canvas, and others. At the time of its initial public offering in 1998, Gildan’s share of printwear basics was only about 10%. In the ensuing years, Gildan made investments to reduce labor, electricity, waste disposal, and other costs, while Hanes and Fruit of the Loom focused on selling branded products to retailers. In addition, Gildan bolstered its market position by acquiring former printwear competitors Alstyle, Anvil, and Comfort Colors.

Gildan’s vertical integration allows it to operate more efficiently while increasing scale. According to the company and outside estimates, its cost to produce a T-shirt has roughly halved over the past 25 years. The company has achieved savings by owning and operating all stages of shirt production: yarn-spinning, weaving, dyeing, cutting, and sewing. It also owns electricity generation and water treatment facilities at its plants in Central America. While some of its competitors also operate facilities, none of them do so for every stage of the process. For example, Gildan is the only printwear company that owns US-based yarn-spinning factories (where raw cotton is spun into yarn). The company has invested in yarn-spinning for more than 20 years, but has stepped up its efforts since 2012, having acquired, built, and modernized several facilities. The firm has invested about USD 850 million in these plants, and they now supply about 90% of its Western Hemisphere yarn needs.

The combination of Gildan’s capital investments and acquisitions allows it to offer its shirts at prices and in volumes that competitors struggle to match. Depending on the item, Gildan’s cost to produce and sell shirts may be 15%-30% lower than that of competitors. Since these products are largely commoditized, the important factors for buyers are price, quality, speed, and delivery. In the basic T-shirt category, Gildan sells shirts for roughly USD 1.30-USD 1.50 per shirt to distributors, which then sell them to printers for about USD 2.40-USD 2.80 per shirt. Although one competitor, Bella+Canvas, has a section of its website devoted to explaining why its USD 3 T-shirt is supposedly better than its competitor’s USD 2.50 T-shirt, printers usually maximize their profit on an order by paying as little as possible for blank shirts.

As such, there are signs that Gildan’s cost advantage in printwear is reducing others’ ability to stay in the market. For example, former printwear competitor Delta Apparel filed for bankruptcy in July 2024. The history of the printwear industry over the past 25 years suggests that subscale producers cannot remain competitive. The US-based firms lack Gildan’s production volume and low costs, and Asian factories cannot deliver quickly enough. Regarding the latter, it takes about 30 days via ocean freight for garments produced in Asia to reach the US, while Gildan can receive products from its factories in Central America in less than a week.

Meanwhile, Gildan’s recent investments stand to increase its cost advantage. In 2019, the company spent USD 45 million to purchase land in Bangladesh and proceeded to build a new production facility. This complex is now running at total capacity and will be complemented by a second expansion phase in late 2027. Consequently, Gildan is shifting some less time-sensitive production from Central America to Bangladesh, where electricity costs and wages are lower.

We think a narrow moat rating is more appropriate than a wide moat rating. Although we think Gildan can hold its cost-based competitive advantage, the apparel market is very competitive, and barriers to entry are low.

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.

The addition of the Hanes brand makes Gildan a legitimate player in the retail space. The deal should also increase its dominance in printwear.

Gildan’s cost advantage and efficiency improvement efforts should enable it to raise its long-term adjusted operating margins to around 24% from recent levels of about 20%-21%.

The Hanesbrands deal is the largest in Gildan’s history and brings execution risks. Hanesbrands has had inconsistent results over the years, and the branded basics market is competitive.

The acquisition has greatly increased Gildan's debt and financial expenses. Although the firm plans to reduce debt rapidly, its ability to do this depends on meeting cash flow projections.

The printwear business is cyclical and highly correlated to consumer spending and social activity. Inflation due to higher oil prices and tariffs could lead to a recession and lower demand.