The Good: In the apparel business but not the fashion business. The Bad: Valuation is high. The Beautiful: Very strong return on equity, replenishing the basics.
P/E: 34
PSR: 0.25
ROE: 22.8%
Debt/Eq: 0.03
Beta: 2.24
February 13, 2008 - Gildan Activewear Inc. (GIL-NYSE) has you covered. The company makes blank cotton and cotton/polyester T-shirts, tank tops, sweatshirts, and golf shirts for private-label use. Gildan makes its merchandise in Central America (with plans to expand its Honduran plant), Canada, and Mexico. Steadily gaining market share (while competitor Fruit of the Loom, which Gildan attempted to take over, works to keep its), Gildan sells its products to North American and European wholesale distributors, screen printers, and embroiderers.
This stock traded at $2.60 a share (split adjusted) in 2001. It recently hit an all-time high of $46.50 and is now about 15% below that. This is clearly one of the winners in the garment industry that doesn't even have a label. It's nonfashion sense is very fashionable with investors.
Profits have increased every year except one since it went public in 1998. They started at 13 cents a share, then went to 17 cents, followed by 31 cents, then slipped to 25 cents. In 2002, they improved to 36 cents, then 47 cents followed by 58 cents, jumped to 78 cents, and leaped to $1.05 in 2006. Last year, they hit $1.24. This year analysts look for $1.85. Over the next 5 years, they expect annual average growth to be 19% in earnings while revenues increase by 16.5% in the same time period. Sales last year were $964.4 million with expectations of $1.245 billion this year.
Cost savings and acquisitions are driving profits. The company closed plants in the U.S. and Canada, moved the production offshore to Honduras. They recently bought Kentucky Derby Hosier and V.I. Prewett which will increase GIL's presence with the U.S. mass merchandisers. In fact, this spring first shipments of underwear with a national retailer should commence. That's on top of an agreement with Dollar General for branded boys and men's socks that slip right into their 8000 stores.
The cost of cotton is going higher. That along with about one or two quarter's worth of inventory produced at higher cost plants will hurt profit margins for a little while. However, price increases in the screen print channel will help alleviate some of these higher costs.
Basic is beautiful, especially when it comes to apparel. This company has successfully taken market share from Fruit of the Loom and other, well known names. It's a company whose brand you'd never know because it doesn't any. It leaves that to the end seller. It's more than happy to take the profits and give the branding to someone else.
Some numbers: This is a large cap stock with $4.4 billion in market cap on 120.419 million shares. Current assets dwarf current liabilities by 3 to 1. Net profit margin is 15.7%. Return on Equity is a healthy 22.8%. There is no dividend. Debt is only 2% of capital.
The only concern here is valuation. Trading with a P/E (price to earnings ratio) of 34, it's well above the average annual p/e ratio for the last 10 years when the range was between 6.4 and 24. While growth prospects are very positive, it seems investors have already heard the good news and run the stock up to full valuation. This one deserves to be on some investors' watch lists, but buying it right now may be paying too much.
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