Earnings Analysis: Gildan Activewear Inc. (NYSE:GIL)

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Gildan Activewear Inc (NYSE:GIL) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Gildan Activewear Inc (USA) (NYSE:GIL)

Gildan Activewear Inc (NYSE:GIL)’s analysis versus peers uses the following peer-set: V.F. Corporation (NYSE:VFC), Michael Kors Holdings Ltd (NYSE:KORS), Under Armour Inc (NYSE:UA), Abercrombie & Fitch Co. (NYSE:ANF), Hanesbrands Inc. (NYSE:HBI) and Warnaco Group Inc (NYSE:WRC). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-09-30 2011-09-30 2010-09-30 2009-09-30 2008-09-30
Revenues 1,948.3 1,726.0 1,311.5 1,038.3 1,249.7
Revenue Growth % 12.9 31.6 26.3 (16.9) 29.6
Net Income 148.5 239.9 198.2 95.3 144.6
Net Income Growth % (38.1) 21.0 108.0 (34.1) 11.2
Net Margin % 7.6 13.9 15.1 9.2 11.6
ROE % 10.8 19.7 19.6 11.1 19.6
ROA % 7.8 14.9 16.5 8.7 14.6

Valuation Drivers

Gildan Activewear Inc.’s current Price/Book of 3.0 is about median in its peer group. The market expects GIL-US to grow earnings about as fast as the median of its chosen peers (PE of 29.3 compared to peer median of 35.4) but not to expect much improvement in its below peer median rates of return (ROE of 10.8% compared to the peer median ROE of 16.2%).

The company’s asset efficiency (asset turns of 1.0x) and net profit margins of 7.6% are both median for its peer group. GIL-US’s net margin is its lowest relative to the last five years and compares to a high of 15.1% in 2010.

Economic Moat

Changes in the company’s annual top line and earnings (12.9% and -38.1% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

GIL-US’s current return on assets is around peer median (7.8% vs. peer median 7.8%). This contrasts with its higher than peer median return on assets over the past five years (12.5% vs. peer median 8.9%), suggesting that the company’s relative operating performance has declined.

The company’s comparatively low gross margins of 25.2% versus peer median of 48.0% suggests that it has a non-differentiated strategy or is in a pricing constrained position. However, GIL-US’s pre-tax margin of 7.3% is around the peer median which, when combined with the gross margin, suggests lower operating costs relative to peers.

Growth & Investment Strategy

While GIL-US’s revenues have grown faster than the peer median (23.3% vs. 7.4% respectively for the past three years), the market gives the stock an about peer median PE ratio of 29.3. This suggests that the market has some questions about the company’s long-term strategy.

GIL-US’s annualized rate of change in capital of 20.6% over the past three years is higher than its peer median of 7.8%. This investment has generated an above peer median return on capital of 15.7% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

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