a growth strategy for gildan activewear

A new way forward for Gildan

Team President’s Choice

November 10, 2013

Logic Summary

Audience : Board of Directors

Assumptions : Formal; friendly; action bias primary decision maker; limited knowledge- need reminding likely will agree

Goal : Decision to go ahead with 3 point programme

Background • Gildan is a leading supplier of low-cost, quality branded basic family

apparel• Gildan has grown at a CAGR of 19% in the last 10 years• Gildan has three sources of long-term sustainable competitive

differentiated advantage (LTSCDA)• Low-cost position of high quality apparel products• A highly integrated and effective global supply network• A strong management team focused on creating value for the

customer

Complications: • Gildan has saturated its key wholesale distribution market with a 70%

market share.• Gildan’s branded apparel is still developing and is currently weaker than

its competitors.

Question : How will Gildan sustain its growth in the next 5 years?

2

Gildan must take 3 steps to drive future growth

1. Increase penetration of printwear segment in Europe and Asia-Pacific

• Gildan currently has limited penetration in Europe and Asia-Pacific printwear markets

• Printwear in Asia-Pacific and Europe is expected to grow at a faster rate than the U.S.

• Gildan can leverage its cost advantage in producing printwear to achieve international market leader position

2. Expand licensing agreements with other brands and build Gildan’s own brand to grow its branded apparel segment in the U.S.

• Gildan has significant room to grow in US branded apparel as it currently only has a 6% market share

• Gildan is well-positioned to build its own brand as it can leverage its existing core strengths of cost, quality and distribution

• Increased sales volumes achieved through expanding brand licenses and Gildan’s own brand will result in economies of scale and higher profit margins

3. Invest in fabric R&D to develop a differentiated next generation of Gildan active wear products

• Gildan’s vertically integrated manufacturing capabilities allow it flexibility to incorporate textile innovations

• Active wear segment is a growing market that Gildan should penetrate to ensure its long-term, sustainable growth

• As innovative materials are valued in active wear, Gildan’s cost advantage allow it to uniquely position an innovative product line-up within this market

Executive Summary

Background: Gildan is a leading supplier of low-cost, quality branded basic family apparel. Its competitive advantage stems from its low cost, high quality products, integrated supply chain, and strong management team. It has grown at a CAGR of 19% for the last 10 years.

Complication: Gildan has captured 70% of the US wholesale distribution market for printwear segment with little room for further growth and its branded apparel is weaker than its competitors.

Question: How can Gildan sustain its growth in the next 5 years ?

Recommendation: In order for Gildan to sustain its growth in the next 5 years, it must

1. Increase penetration of printwear segment in Europe and Asia-Pacific.

2. Expand licensing agreements with other brands and build its own brand.

3. Invest in fabric R&D to develop a differentiated next generation of products.

BACKGROUND

Gildan is a leading supplier of low-cost quality basic apparel

• Gildan has two core business segments: (1) Branded Apparel with a diversified portfolio of company-owned and licensed brands and (2) Printwear

• It is one of the largest suppliers of branded athletic, casual and dress socks for a broad spectrum of retailers in the U.S.

• It has 70% market share in the wholesale T-shirt category in the U.S.

BACKGROUND

-

500

1,000

1,500

2,000

2,500

2009

2010

2011

2012

2013

E

$mill

ions

Fiscal Year

Revenue

-

50

100

150

200

250

300

350

400

2009

2010

2011

2012

2013

E

$mill

ions

Fiscal Year

Earnings Before Interest & Taxes (EBIT)

Gildan has consistently grown its revenues and profits

+12% / year+19% / year

Source: RBC Capital Markets Research – Gildan Activeweat Inc - July 28, 2013

BACKGROUND

Gildan’s stock has returned 19% CAGR over the past 10 years compared to 5.5% for the TSX

Source: Bloomberg

BACKGROUND

LTSCDA

Gildan has three sources of long-term sustainable competitive differentiated advantage (LTSCDA)

Operational excellence to produce low cost high quality apparel products

A highly effective and integrated global supply network

A strong management team focused on creating value for the customer

LTSCDA

• High gross margins achieved through owned and operated vertically-integrated manufacturing facilities

• Substantial CAPEX into modernizing and refurbishing existing and newly acquired manufacturing facilities to achieve cost efficiency

Lean vertically integrated manufacturing facilities improve cost efficiency

Hig

h m

anu

fact

uri

ng

ef

fici

ency

Lo

w p

rod

uctio

n co

st

Economic returns

Operational excellence to produce low cost high quality apparel products - LTSCDA 1

LTSCDA

• Installation of biomass facilities for steam generation to lower energy costs and reduce reliance on high-cost fossil fuels

• Innovations in manufacturing process and technology innovations to advance product performance via features such as moisture management and anti-microbial properties

Investments in technological innovations reduce costs and advance product quality


LTSCDA

• The Gildan Quality System uses quality controls to promote best practices to improve operational efficiency at all its manufacturing plants

• Basic apparel allows flexibility to respond to changes in consumer preferences and demand and to achieve economies of scale

Gildan’s quality system and focus on basic fashion supports efficient production

LTSCDA


Strategically-located manufacturing hubs world wide support an effective global value chain

A highly effective and integrated global supply network - LTSCDA 2

• Central America and Caribbean Basin facilities support North American sales; facilities in Bangladesh support sales in Asia and Europe

• Benefits gained from low transportation, wage, tax rate, and trade costs

LTSCDA

The global supply network supports efficient replenishment programs with short production/delivery cycle time

A highly integrated and effective global supply network - LTSCDA 2

• The Company has control over backward linkages with raw material and forward linkages into distribution and retailing to support industry leading replenish turnaround time

• Worldwide distribution channel enables Gildan to better positioned to meet the service requirements of the target markets

• Information system investments and economies of scale support Gildan’s efficient supply chain organization

Component global

networks

Production global

networks

Export global networks

Marketing global

networks

LTSCDA

Gildan has built strong relationships with global wholesale distributors, consumer brands, and retailers to create integrated supply network

A highly integrated and effective global supply network – LTSCDA 2

• Whole sale distributors in 30 countries across North America, Europe, and the Asia-Pacific region

• Leading supplier of socks in the U.S. mass-market retail channel such as Walmart, Target, Kohl’s and JC Penny

• Supply chain partner to global consumer brands

LTSCDA

Stable management team ensures leadership continuity with a high level of expertise in apparel industry

A strong management team creating value - LTSCDA 3

• Senior executives have unique talents and expertise derived from a long tenure with the Company and apparel industry

• Succession planning with a focus on promoting internally ensures leadership continuity

Glenn J ChamandyPresident & CEOFounder of Corporation 1984

Michael R. HoffmanPresident, International salesJoined company 1997Prior experience: fruit of the loom

Benito MasiExecutive Vice PresidentManufacturingJoined company 1986

Laurence G. SellynExecutive Vice-presidentJoined company 1999

Eric LehmanPresident, Retail SalesJoined company 2008Prior experience: major apparel brands supply chain

Peter IliopoulosSenior Vice-PresidentPublic and government affairsJoined company 2002

LTSCDA

Management has executed key strategic initiatives to achieve Gildan’s market leader position in U.S. printwear


Years

Mar

ket

shar

e (

%)

U.S. printwear market share 1998-2012

LTSCDA

Management focuses on being socially and environmentally responsible at all of its manufacturing facilities

• Implements industry-leading labour & environmental practices in all of its facilities

• First to report social and environmental results on an annual basis

• Gildan’s commitment to being socially and environmentally responsible valued by the market


LTSCDA

COMPLICATION

Gildan has saturated the printwear market in the U.S.

Wholesale Distributer Market Share

Gildan70%

Other brands30%

Source: Desjardins Capital Markets Research – Gildan Activeweat Inc - April 15, 2013

COMPLICATION

Gildan’s branded apparel is still developing and is currently weaker than its competitors

…

Hanes Brands Inc.

…

Gildan

COMPLICATION

HOW WILL GILDAN SUSTAIN ITS GROWTH OVER THE NEXT 5 YEARS?

In order to sustain future growth Gildan must focus on following three horizons

Time

Pro

fit Horizon 1

Protect printwear segment via

international expansion

Grow branded apparel in US market

Horizon 2Invest in R&D for

innovative products

Horizon 3

ACTION

• Gildan currently has limited penetration in Europe and Asia-Pacific printwear markets

• Printwear in Asia-Pacific and Europe is expected to grow at a faster rate than the U.S.

• Gildan can leverage its cost advantage in producing printwear to achieve international market leader position

Action 1: Increase market penetration of printwear segment in Europe and Asia-Pacific

Gildan must take 3 steps to drive future growth – Action 1

Gildan currently has limited market share in Europe & Asia-Pacific printwear segment

Gildan15%

Other brands85%

Europe printwear market share in 2013

Gildan1%

Other brands99%

Asia-Pacific printwear market share in 2013

Total market size $US 2.5B Total market size $US 3.2B


ACTION

Printwear in Asia-Pacific and Europe is expected to grow at a faster rate than the U.S.

8%

2%

10%

5%

Annual growth rate (2013) of printwear market by geography


ACTION

Gildan can leverage its cost advantage in producing printwear to achieve international market leader position

Series10

1

2

3

4

5

6

Gildan

Other leading brand

Ave

rage

pri

ce (

US

$)/u

nit

$5.00

$1.50

Comparison of Gildan’s average T-shirt price to its competitors


ACTION

• Gildan has significant room to grow in US branded apparel as it currently only has a 6% market share

• Gildan is well-positioned to build its own brand as it can leverage its existing core strengths of cost, quality and distribution

• Increased sales volumes achieved through expanding brand licenses and Gildan’s own brand will result in economies of scale and higher profit margins

Action 2: Expand licensing agreements with other brands and build Gildan’s own brand to grow its branded apparel segment in the U.S.


Branded apparel sales, U.S. 2013

Other brands 94%

Gildan 6%

Total market size $US 11.5B

Gildan has significant room to grow in US branded apparel as it currently only has a 6% market share


ACTION

Cost Quality Distribution

The three pillars of Gildan’s advantage

Gildan is well-positioned to build its own brand as it can leverage its existing core strengths of cost, quality and distribution


ACTION

2013 2014 2015 2016 2017 2018 2019 20200%

5%

10%

15%

20%

25%

30%

35%

40%

$-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

Increasing market share versus unit cost

Average unit cost

Year

Ma

rke

t S

ha

re P

erc

en

t Av

era

ge

un

it co

st ($

/item

)

Branded Market Share

Increased sales volumes achieved through expanding brand licenses and Gildan’s own brand will result in economies of scale and higher profit margins


ACTION

• Gildan’s vertically integrated manufacturing capabilities allow it flexibility to incorporate textile innovations

• Active wear segment is a growing market that Gildan should penetrate to ensure its long-term, sustainable growth

• As innovative materials are valued in active wear, Gildan’s cost advantage allow it to uniquely position an innovative product line-up within this market

Action 3: Invest in fabric R&D to develop a differentiated next generation of Gildan active wear products


Gildan’s vertically integrated manufacturing capabilities allow it flexibility to incorporate textile innovations


ACTION

Component Networks

integrated and controllable

Cotton, wool, silk,

etc

Oil, natural gas

Yarn (Spinning)

Petro-chemicals

Fabric (weaving, knitting, finishing)

Synthetic fibers

Production Networks

Export Networks

Marketing Networks

The Apparel Global Value Chain

Active wear segment is a growing market that Gildan should penetrate to ensure its long-term, sustainable growth


ACTION

2010 2011 2012190

200

210

220

230

240

250+7.5% / year

Year

Mar

ket

Siz

e ($

bn

)Performance Activewear

$US

244

B

As innovative materials are valued in active wear, Gildan’s cost advantage allow it to uniquely position an innovative product line-up within this market


ACTION

Castelli Tight: $355(+) High innovation(+) High margin(-) High cost(-) Niche market

CombineGildan Activewear: $100

(+) Multiple materials(+) High innovation, margin(+) Mass market(+) Value priced

Combine

Valued

High End

MEC Tight: $35(-) Low innovation(-) Low margin(+) Low price(+) Mass market

Low End

FINANCIAL SUMMARY

Assumptions

•Increase in market share & annual international market growth modeled at 15% overall in next 5 years

•Branded apparel growing at 5% over the next 5 years

•A YoY growth rate of 5% for CoGS

•A constant 11x EBITDA multiple for the share price

2013 2014 2015 2016 2017 $-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

EBITDA

North American Printwear

International Printwear

Branded Wear

Projected Financials ($ mm)

Year

Tota

l $

mm

Gildan share price is expected to grow at 10.5% CAGR over the next 5 years based on the recommendation assumptions

a growth strategy for gildan activewear

Documents

branded apparel segment

gildans branded apparel

us branded apparel

gildans cost advantage

growing market

market sharegildan

high quality products

low cost