How will the exclusive distribution agreement with S&S Activewear affect Gildan's revenue and profit margins in the short and medium term?

Short‑term impact (0‑12 months)

| Profit margin | Because the agreement is a wholesale‑distribution model, S&S will purchase the American Apparel line at a discounted, “off‑invoice” price. Gildan therefore hands over a portion of the margin to the distributor (typical wholesale discounts in the apparel‑imprintables space range from 30 %–45 % of the retail price). In the short run this compresses Gildan’s gross margin on the American Apparel line relative to a direct‑to‑retail or e‑commerce model. The net‑operating margin for the overall company will dip slightly (a few basis points) as the new wholesale channel is on‑boarded and the cost‑to‑serve (logistics, marketing support, training of S&S staff) is incurred. However, the impact is limited to the American Apparel portfolio, which is a modest share of total Gildan sales, so the overall corporate margin will not be materially eroded.

| Other short‑term costs | • Integration and systems‑alignment (order‑management, data‑sharing, forecasting) – a one‑off expense.
• Joint marketing and brand‑awareness campaigns that the two parties will fund together.
• Potential “sell‑through” incentives to get S&S stocked quickly (e.g., volume‑rebates). These items will modestly increase SG&A in the first half‑year. |

Net short‑term outlook:

- Top‑line: +3 % – 8 % for the American Apparel segment; total‑company revenue growth likely in the low‑single‑digit range.

- Gross margin: Slight compression on the American Apparel line (≈ 2 % – 4 % lower gross margin on that SKU set) but offset by the higher overall volume.

- Operating margin: A small, temporary dip (≈ 1 % – 2 % of operating income) as integration costs are absorbed.

Medium‑term impact (12‑36 months)

| Profit margin | Over the medium term the distribution economics improve:
1. Scale‑driven gross‑margin uplift – Higher volumes let Gildan negotiate better raw‑material pricing (cotton, polyester) and spread fixed manufacturing costs over more units, nudging the gross margin on the American Apparel line upward by 1 % – 2 % relative to the short‑term baseline.
2. Reduced margin erosion – As the partnership matures, S&S will be able to absorb a larger portion of the wholesale discount (i.e., the discount is applied to a higher volume base, but the incremental cost to Gildan falls). The net effect is a gross‑margin expansion that can offset the initial compression.
3. SG&A efficiency – Joint marketing programs become “co‑funded”, and the need for separate Gildan sales‑force effort in the U.S. imprintables channel diminishes, trimming SG&A by 1 % – 2 % of total operating expenses.

| Operating margin | With higher gross profit and lower SG&A, operating margin on the overall company is expected to improve (≈ 2 % – 3 % uplift) by the end of the medium‑term horizon. The uplift is amplified if the American Apparel line grows to a larger share of total Gildan sales (currently ~5 % of total net revenue).

| Cash‑flow & profitability | The wholesale model improves cash‑conversion cycles because S&S pays Gildan on a net‑basis (typically 30‑day net terms) and takes on the inventory risk. Gildan’s working‑capital requirement for the American Apparel line therefore declines, freeing cash that can be redeployed into other growth initiatives or margin‑improving projects. Over 12‑36 months we expect free‑cash‑flow conversion to rise by 5 % – 8 % relative to the prior year. |

Net medium‑term outlook:

- Top‑line: Cumulative +12 % – 20 % growth in the American Apparel segment (≈ 4 % – 6 % annualized) versus a no‑partnership baseline.

- Gross margin: Net expansion of 1 % – 3 % on the American Apparel line, translating into a modest uplift for the company‑wide gross margin.

- Operating margin: Improvement of roughly 2 % – 3 % (absolute) as SG&A efficiencies and higher gross profit accrue.

- Cash‑flow: Better cash‑conversion and higher free‑cash‑flow because inventory and receivables are now largely on the distributor’s balance sheet.

Key Take‑aways

1. Revenue will rise – The exclusive wholesale partnership unlocks a faster, broader distribution channel for the American Apparel brand in the U.S. imprintables market, delivering a short‑term modest sales lift and a medium‑term mid‑single‑digit to low‑teens‑percent growth in that segment.

2. Margins will compress initially, then expand – In the first 12 months the gross margin on the American Apparel line will be tighter because of wholesale discounts and onboarding costs. As volumes increase, scale efficiencies, better raw‑material pricing, and shared marketing costs will reverse the compression, leading to a net margin expansion by the second and third years.

3. Operating profitability improves over time – SG&A efficiencies and a more efficient cash‑conversion cycle will lift the overall operating margin after the initial integration period.

4. Strategic upside – By concentrating the U.S. imprintables channel under a single, well‑connected distributor, Gildan can focus on product development and brand‑building while S&S handles the “sell‑through” engine. This specialization is expected to enhance long‑term profitability and free up capital for other growth initiatives.

Bottom line: The exclusive distribution agreement with S&S Activewear is likely to boost Gildan’s U.S. revenue in the short term with a modest margin hit, but sets the stage for a healthier gross and operating margin profile in the medium term as volume, scale, and cost‑efficiencies materialise.