Last time when GIL reported earnings on Dec 10, Credit Suisse issued the following note:
"While Gildan’s 4Q09 adjusted EPS of $0.35 came in 2¢ above consensus on improving gross margin (-150 bps vs. -320 bps last quarter), the real excitement was management’s concrete guidance for $70 million of incremental retail sales next year – a development many years in the making – driven by new underwear and sock programs in the mass channel. Also, sales improved sequentially (-7% vs. -19% last quarter) and Gildan continues to take share in the screenprinting market (+370 bps). We are raising our 2010 EPS estimate to $1.25 from $0.82, introducing a 2011 EPS estimate of $1.15, and raising our target price from $14 to $20, 17x our 2011 EPS estimate.
While +17% top-line guidance for 2010 is bound to get investors excited after this year’s high-teens decline, there are a few lingering issues that came up on the call worth considering: 1) management toned down
expectations for potential restocking and industry growth next year; 2) both the planned 5% price reduction planned for 2010 and the fact that Gildan gave a special discount to customers on product already purchased may help drive further market share gains, but it also raises potential concerns about industry pricing stability; 3 2010 gross margin guidance of +400 bps seems like it could be aggressive given the impact of price reductions (-600 bps) and cotton and commodity cost pressures in 2H10; 4) SG&A leverage could be difficult given Gildan’s expansion into the retail and consumer markets, which generally require more salespeople, account managers, and product management than screenprint; and 5) there is still a lack of visibility into the specific retail programs Gildan has won. Details, details, details. We believe the market would like to hear greater details about the new retail programs as well as more granular discussions of the long-term retail opportunity across various channels and categories on the 1Q and 2Q earnings calls as the first wave of shipments go out and sell-through data trickles in. While we believe earnings have most likely bottomed, market expectations for the recovery seem lofty with the stock trading at 17x peak earnings, and we would wait for greater visibility, more specifics, and actual sell-through results on the new retail programs before chasing the shares."
My takeaway from the note above is even if the beats estimates and re-iterates guidance, the stock is most likely fully valued at forward PE multiple of 17x. I am neutral going into earnings. If there is a sell-off, I expect $20 to provide support which was the breakout level previously when the company announced earnings. If it runs after earnings, I expect short sellers to knock it back down from $25, which is previous 52-week high.
The implied volatility is sharply elevated in Feb at 71 vs. 48 in March. I like the following calendar spread:
- Buy to open March $22.50 calls
- Sell to open Feb $22.50 calls
I have been able to fill half of my order this morning for a net debit of $0.33 for the above calendar. If unsuccessful, I'll go for $0.35 but no more. The break even range (see attached P&L) is $20 on the downside and $25 on the upside which coincides almost perfectly where I expect support and resistance to come in. I like the odds.
Good luck!
