Improving Macro-Economic Evironment Can Send Gildan Activewear Inc (USA) (GIL) Soaring

Gildan Activewear Inc (USA) (NYSE:GIL) is a vertically-integrated manufacturer of branded basic family apparel, including T-shirts, fleece, sport shirts, socks and underwear. It possesses a vastly diversified portfolio of company-owned brands such as Gildan Activewear Inc (USA) (NYSE:GIL), Gold Toe and Anvil brands. In addition, it is also under licensing arrangements for Under Armour Inc (NYSE:UA) and New Balance.

Gildan Activewear Inc (USA) (NYSE:GIL)

The company primarily operates in two segments, printwear and branded apparel. The  branded apparel segment deals predominantly in subtle fashion or plain T-shirts, fleece and sport shirts, which are sold to wholesale distributors and subsequently sold to screen printers that print logos and designs on them.

The company distributes print wear to the U.S. and Canada, where Gildan Activewear Inc (USA) (NYSE:GIL) is the industry-leading brand. The company is gradually shifting focus from existing markets in order to increase its international footprints. Moreover, Gildan is trying to incrementally develop and grow its presence as a consumer brand distributed through U.S. retailers.

It must be noted by potential investors that Gildan Activewear Inc (USA) (NYSE:GIL) holds a leadership position with approximately 70% share of the print wear market. The company’s manufacturing facilities are strategically located in Central America and Caribbean. Additionally, it also owns a small manufacturing center in Bangladesh (textile hub of the south Asian region) in order to address its markets outside the United States and Canada.

Gildan Activewear Inc (USA) (NYSE:GIL) outperformed market expectations during the second quarter of 2013. Beating the earnings estimates, it reported an EPS of $0.59, compared to the earlier forecast figure of $0.57. Furthermore, the company clocked a staggering growth rate of 168% in earnings. Revenue figures posted an 8% growth over the previous year quarter. The impressive growth exhibited by the company can be attributed to key acquisitions made during the period.

Key Acquisitions

In an effort to increase its market penetration, the company acquired a 100% stake in Gold Toe Moretz for $345 million. The acquisition was completed to prop up the sales growth of socks and capitalize on Gold Toe Moretz’s sourcing network to introduce new products within its existing channels of distribution.

Gildan Activewear Inc (USA) (NYSE:GIL) also acquired Anvil for $88 million in order to grab a larger share of the printwear market. The synergies gave a giant push to the company, which allowed it to successfully sustain its leadership position in the printwear segment.

The world market for branded apparels is expected to reach the $600 billion mark by 2015; moreover, the share of the US is estimated at approximately 30%. Gildan with its focus on the US market has a huge growth potential. With APAC expected to grow at an estimated CAGR of 2.5%, the company should make deeper inroads into large emerging economies and gradually increase its global market share.

Potential roadblocks

Cotton prices have a direct impact on the firm’s operating margins and overall profitability. Steep rises in the global cotton price during 2010 and 2011 had a direct impact on the company’s earnings, as the firm reported a loss of $46.1 million during the firstquarter of fiscal year 2012. Investors should note that it was only its second quarterly loss since the company went public in 1998.

Although cotton prices have receded to normal levels for now, any fluctuations in the future could have an adverse impact on the firm’s earnings and margins.

Cotton is an agricultural commodity, hence climate plays a crucial role in global harvest. Any significant climate changes could hamper production levels and impact prices of cotton bales.

Gildan reported net sales of $1.94 billion during fiscal 2012, out of which international sales stood at $141 million. With the U.S. economy in a recovery phase it is important for the company to enhance its global presence and diversify into new emerging markets to bolster its earnings.

Post the 2008 subprime crisis, the U.S. economy tanked, giving rise to massive unemployment and credit squeezes, which led to a steep decline in consumer spending. To deal with this issue, the Federal Reserve introduced quantitative easing, which is an unconventional tool to increase monetary supply and subsequent credit availability. Post-QE the U.S. economy marginally stabilized with the unemployment rates falling and growth picking up. However, these are still testing times, as massive budget cuts still loom around the corner.

A poor macroeconomic environment in the North American markets still poses a massive threat to the company, as a large percentage of its sales are generated from this region.

Competitive landscape

Gildan’s primary competitors across segments are Hanesbrands Inc. (NYSE:HBI) and Berkshire Hathaway Inc. (NYSE:BRK.A). Hanesbrands Inc. (NYSE:HBI) has been one of the best performing in its segment. It reported a profit of $54 million during the first quarter of fiscal 2013, which is a huge improvement from the same quarter the previous year, where the company reported a loss of $27 million.

Although revenue decreased by 2.8%, increases in gross margins at around 8% provided the necessary impetus for strong earnings growth. With the Innovate-to-Elevate strategy the company aims to further penetrate the market and challenge Gildan’s leadership in North American. Its recent jump in earnings has resulted in several investors keeping a highly bullish view on its stock.

Berkshire Hathaway Inc. (NYSE:BRK.A)’sFruit of the Loom and Russell Corporation are other key competitors.  A legal battle between the two has led to Gildan settling the issue with a $1 million compensation to Russell over the trademark infringement issues.

The rivalry between the companies has been ongoing for decades, and in spite of the acquisition of Fruit of the Loom and Russell Corporation by Warren Buffett’s Berkshire Hathaway, Gildan has been able to outperform its competitors and sustain its leadership position in the North American markets.

Why this stock could be a good buy

Gildan’s fundamentals are strong, and coupled with strategic acquisitions recently made, Gildan is becoming the largest sock producer in the world. The company controls almost 70% of the North American market, which is indicative of its true dominance.

In addition, the company has strategically located production facilities, which allow it to maintain competitve pricing. It is a leader in its segment, and going forward even a marginal increase in consumer spending could send its share price soaring.

Kiran Gulati has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
Kiran is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Improving Macro-Economic Evironment Can Send Gildan Soaring originally appeared on is written by Kiran Gulati.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.