Gildan Tops in Socks with Gold Toe Moretz Acquisition

On a conference call with analysts, Gildan officials noted that Gold Toe Moretz had sales of over $280 million in 2010. The combination of Gildan and Gold Toe Moretz is expected to create one of the world's largest sock companies, if not the largest, with initial annual sales revenues for socks of approximately $500 million.

Gold Toe Moretz's owned brands include the Gold Toe and Silver Toe brands for national chains, the PowerSox athletic performance brand mainly distributed through sports specialty retailers, the Auro dress and casual brand for the mass market, and the All Pro athletic sock brand also aimed at mass. Both Under Armour and New Balance have formally approved the continuation of the exclusive U.S. sock licenses for their brands under Gildan ownership. In fact, Gildan officials noted on a conference call with analysts that Under Armour's sock deal was recently renewed until December 2014 while New Balance's ends December 2013.

Gold Toe Moretz’s senior management team, including company Chairman John Moretz and CEO Steve Lineberger, will stay on with Gildan. Lineberger was named president and chief operating officer in 2008. Gold Toe Moretz was formed in October 2006 when Gold Toe Brands Inc. merged with Moretz Inc.

The $350 million purchase price represents a multiple of approximately 7.2x Gold Toe Moretz's 2010 adjusted EBITDA of $48.6 million. Gildan noted that Gold Toe Moretz has been successful in passing through cost inflation into higher selling prices, due to the strength of its brands. In addition, although Gold Toe Moretz's management team and the majority of its supply chain relationships will remain unchanged post-acquisition, sourcing activities will be consolidated. Gildan's integration plan calls for $10 million to $15 million of total annual cost synergies, which are expected to be phased in over the next 24 months or so. Approximately 80 percent of existing Gold Toe Moretz's products are currently sourced from contractor relationships in Asia.

On the conference call, Glenn Chamandy, Gildan's  president and CEO, said besides positioning Gildan as the largest sock provider in the world, it significantly diversifies the company at U.S. retail. While Gildan's primary focus has been on mass as well as dollar stores, Gold Toe Moretz's focus has been on national chains, department stores, sporting goods retailers and the warehouse clubs. After the acquisition, Gildan's sales to Wal-Mart will represent 30 percent of its retail volume, down from 60 percent prior to the merger. He noted that there is “no overlap of distribution whatsoever.”

But Chamandy also said the acquisition provides Gildan with a platform to expand into other categories similar to the way that its past acquisition of V.I. Prewett & Son, a maker of family socks, enabled Gildan to expand into activewear and underwear sales.

He noted that part of Gildan's growth in retail has included pursuing private label brands to the bigger mass-market chains, such as securing the Danskin and Starter sock license for Wal-Mart. The second part is developing the Gildan brand at regional mass retailers. The third part is to look for brands or licenses in channels of distribution where Gildan has been not participating.

“This acquisition fills that void 100 percent,” said Chamandy. “We now have an opportunity to lever the success and the diversity of all the distribution and the brands with Gold Toe Moretz into basically, virtually every aspect of retail.”

Chamady elaborates, “So we could not sell Gildan, for example, to the price clubs, because they're looking for brands like Gold Toe, and brands that they are currently selling for example,” said Chamandy.” In sporting goods, they're looking to buy more sport athletic-type brands like Under Armour and New Balance, for example. So, the way we are looking at it is that we now have different brands for different channels of distribution, that's the beauty of it. So, a lot of these brands are primarily in socks now, but the question is as we go forward, how can we lever some of these brands to other categories, that will really be the growth engine for us as we go forward.”

He noted that the Gold Toe brand, which is the number-two most recognized brand in national chains, has launched an underwear program this year.

Finally, Chamandy said that the acquisition brings Gold Toe Moretz's brand management expertise, merchandising and design capabilities.
“The objective for us obviously, is to lever all their expertise as well as the Gildan expertise that we have been able to develop over the last five years, not only drive these brands, but as well as drive the Gildan brand, as we go forward and continue our momentum,” said Chamandy. “We think there is significant organic growth in every aspect of all the brands, and we are really excited about it.”

The acquisition, expected to close “imminently,” will be financed out of Gildan's cash balances and the utilization of its revolving bank credit facility.