A Florida firm is accusing Gildan Activewear Inc. of botched acquisitions, including that of the once Los Angeles-based American Apparel, and “channel stuffing” to dress up its quarterly financials for Wall Street.
Jehoshaphat Research said in a report released Tuesday it’s short on Gildan as it accused the Montreal-headquartered basics brands owner of pumping certain customer accounts with product to give the appearance of growth. The report is partly based on information from interviews with seven anonymous employees, distributors and customers. It said the “channel stuffing” worked by offering customers incentives for accepting more product so that Gildan could pump up the performance of the current quarter and make it look like it was hitting targets to investors.
“If there was a sense that we might not hit the sales numbers that we had communicated to the market, the sales team would offer incentives to the distributors to take on more weeks of supply than they normally had, or rebates at the end of the quarter, or more favorable payment terms,” one former Gildan employee told Jehoshaphat.
This “pull-forward” scheme would “move sales from Q2 to Q1, then they’d repeat the same song and dance in Q2,” the employee said.
A distributor also interviewed by Jehoshaphat, which is helmed by forensic accountant and former hedge fund manager Victor Bonilla, confirmed the former employee’s experience. The distributor said net 30, or payment in 30 days, was standard from Gildan. However, if a customer agreed to pull forward inventory, Gildan offered net 90.
Ultimately, the short seller’s report said Gildan has exhausted this strategy and “maxed out any ability it may have had to force excess product into this channel or is extremely close to doing so.” In such case, the firm alleged, the company is likely to miss analyst projections of pro forma revenue growth of 9 percent in the second half of the year and is instead facing a potential $800 million in revenue declines.
Gildan said Tuesday it has provided investors with “accurate and comprehensive information” on its “financial information and governance practices.” It declined further comment.
The company also reiterated its full-year projections. That includes revenue in the range of $6 billion to $6.2 billion. It is also forecasting 20 percent to 25 percent year-over-year growth in adjusted diluted earnings per share, which would equate to $4.20 to $4.40 a share.
String of Bad Buys?
Gilden owns its namesake line of basics, in addition to American Apparel. Goldtoe, Peds, Bali, Playtex and Hanes. It’s also the U.S. and Canadian licensee for Champion.
While the report predominantly focused on the channel-pumping scheme, one of the former employees interviewed also criticized the company’s acquisition strategy and its ability to grow brands. That included the purchase of American Apparel, which once had a factory and headquarters in downtown Los Angeles at what now operates as the Row DTLA.
Gildan acquired the troubled American Apparel out of bankruptcy in 2017 for $88 million. Post-sale, the communications out of the company was that American Apparel would continue to have a presence in Los Angeles. However, the local operations were shuttered, and manufacturing moved to Honduras.
“After Gildan turned American Apparel into Honduran Apparel, it’s no wonder the old board [of directors] didn’t want the CEO doing any more acquisitions,” the Jehoshaphat report said.
The former employee told the research firm Gildan reduced the number of stock-keeping units in the American Apparel line and it “was no longer a cool brand anymore.” The employee also said that while Gildan rightfully shuttered Gildan’s American Apparel stores, it was to the detriment of the brand and “now you didn’t have a retail presence for what was really a retail brand,” the employee told the firm.
“They spent a lot of money on that brand, and I don’t think they’ve had a lot of success with it,” the report said the employee stated.
It went on to detail other challenged purchases, including Doris Hosiery and Peds.
To be fair, not all purchases failed. The former employee said the purchase of Comfort Colors has gone well.
Shares of Gildan closed down nearly 19 percent to $50.34 on Tuesday. The company had a recent market capitalization of $9.3 billion.
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