Morningstar DBRS Assigns an Issuer Rating of BBB with a Stable Trend to Gildan Activewear Inc.

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BBB with a Stable trend to Gildan Activewear Inc. (Gildan or the Company).

KEY CREDIT RATING CONSIDERATIONS
Gildan's credit rating is supported by its strong free cash flow (FCF) generation and conservative financial management; efficient, vertically integrated manufacturing platform; and limited sensitivity to changing fashion trends. The credit rating also considers the Company's exposure to commodity and input cost volatility, the intense competitive environment in which the Company operates, its customer and supplier concentration, and the geographic concentration of Gildan's manufacturing platform.

Revenue in the last 12 months (LTM) ended September 29, 2024 (Q3 2024), remained relatively stable at the 2023 level of approximately $3.2 billion as volume growth was partially offset by lower net selling prices in Activewear. Furthermore, the phasing out of the Company's Under Armour business negatively affected volumes in Hosiery and Underwear. EBITDA margins increased to 25.1% in the LTM ended Q3 2024 compared with 21.1% in 2023, attributable to lower raw material and manufacturing costs, operating leverage gains, and the benefit of the jobs credit introduced by the Government of Barbados, which significantly more than offset lower net selling prices. Consequently, EBITDA increased to more than $800 million in the LTM ended Q3 2024 from $675 million in 2023.

Notwithstanding the increase in EBITDA, cash flow from operations declined to approximately $560 million in the LTM ended Q3 2024 from approximately $630 million in 2023, because of higher tax expenses driven by the implementation of the Global Minimum Tax Act in Canada and tax legislation enacted by the Government of Barbados. Furthermore, costs associated with the proxy contest and leadership changes also contributed to the decline in operating cash flow in the LTM ended Q3 2024 compared with 2023 levels. The lower operating cash flow, combined with (1) capital expenditure (capex) that decreased to $145 million from approximately $210 million in 2023 and (2) a cash dividend outlay that remained relatively flat on 2023 levels of around $135 million, resulted in FCF (after dividends but before changes in working capital and principal lease payments) declining to approximately $280 million in the LTM ended Q3 2024, from approximately $290 million in 2023. The Company applied its FCF (after changes in working capital and principal lease payments), coupled with available liquidity and incremental debt, toward share repurchases of more than $740 million in the LTM ended Q3 2024. Consequently, debt-to-EBITDA increased to 2.2 times (x) in the LTM ended Q3 2024 from 2.0x in 2023,but remained well within the range considered appropriate for the current BBB credit rating category (i.e., debt-to-EBITDA not more than 2.5x).

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action should key credit metrics deteriorate to a level no longer considered appropriate for the current BBB credit rating category in aggregate (i.e., debt-to-EBITDA rising above 2.5x, along with a corresponding decline in the Company's other key credit metrics) because of weaker-than-expected operating performance for a sustained period and/or more aggressive financial management. Furthermore, Morningstar DBRS notes that weaker-than-expected operating performance for a sustained period resulting in a more permanent shift in the Company's business risk profile could also result in the requirement to maintain stronger key credit metrics to support the same credit rating.

Conversely, Morningstar DBRS could take a positive credit rating action should Gildan's business risk profile meaningfully strengthen, combined with a commensurate improvement in key credit metrics on a normalized and sustainable basis.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS projects revenue of approximately $3.25 billion for full-year 2024, and forecasts revenue to subsequently grow toward $3.5 billion and $3.7 billion in 2025 and 2027, respectively. These projections are driven by Morningstar DBRS' expectations of volume growth attributable to market share gains, new product lines, and retail customer programs in Activewear. Morningstar DBRS expects EBITDA margins to increase to approximately 26.0% for full-year 2024 and in 2025, and to stabilize at modestly higher levels thereafter, attributable to normalizing fibre and manufacturing costs; a change in product mix; improving operating efficiencies as the Bangladesh capex project ramps up, combined with benefits from the Company's yarn investments and the optimization of its Central American operations; and operating leverage gains. Consequently, Morningstar DBRS projects EBITDA of approximately $840 million in 2024, and forecasts EBITDA to subsequently grow to approximately $870 million 2025, and to more than $950 million in 2027.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts FCF (after dividends but before changes in working capital and principal lease payments) of approximately $385 million for full-year 2024 and in 2025, and to grow to more than $400 million in 2027, as (1) operating cash flow trends in line with earnings growth, (2) capex aggregates to approximately 5.0% of revenue per year, and (3) the Company modestly grows its cash dividend outlay. Morningstar DBRS anticipates that Gildan will continue to apply its FCF (after changes in working capital and principal lease payments) and incremental debt in a balanced manner, including for share repurchases, such that the Company maintains its key credit metrics within the range considered appropriate for the current BBB credit rating category (i.e., debt-to-EBITDA not more than 2.5x).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) In the analysis of Gildan, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Gildan, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Gildan, the BRA carries greater weight than the FRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Consumer Products Industry (August 14, 2024)
https://dbrs.morningstar.com/research/437890.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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