Gildan Loses Its Shirt

By Ryan C. Fuhrmann | December 02, 2011 AAA

T-shirt and related activewear and underwear manufacturer Gildan Activewear (NYSE:GIL) surprised investors with a weak outlook when it reported full year results on Dec. 1, 2011. The stock dropped precipitously as a result as the market digests the volatility its underlying operations are experiencing. Based on management's track record, the current woes could prove temporary.
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Full Year Recap
Total sales advanced a very healthy 31.6% to $1.7 billion. Management attributed the growth to higher selling prices, increased volumes and the purchase of Gold Toe Moretz, which closed on Apr. 15, 2011 for a purchase price of roughly $350 million. It also cited a 7.7% increase in unit growth of activewear and underwear sales, and boasted a 62.3% market share of the U.S. distributor sales channel.

Operating income reached $230.2 million and increased 14.6% to lag sales growth. Higher cotton costs dented margins as gross profits rose only 20.2%, though management was able to hold SG&A expense growth at 28.7% to slightly lag the top-line growth rate. Net income rose 21% to $239.9 million, or $1.96 per diluted share. Higher inventories helped send free cash flow down significantly to less than $22 million. (To know more about income statement, read: Understanding The Income Statement.)

Outlook
Gildan projects sales for the coming year of $1.9 billion, or 10% ahead of last year's levels. It expects earnings of $1.30 for a year-over-year decline of about 35%. Gildan said to expect free cash flow between $75 million to $100 million, or approximately 63 to 82 cents per diluted share, based on current shares outstanding.

The Bottom Line
Shares of Gildan were hammered after the earnings release because it significantly lowered its profit expectations for fiscal 2012. Specifically, it now expects an earnings loss in the first quarter while previous analyst projections called for roughly $2.27 in earnings. Previous sales growth expectations were more than double at 24%.

The change in guidance was certainly surprising, but may not be overly alarming given cotton prices have been extremely volatile over the past year. Unfortunately, Gildan is growing at a breakneck pace and has been significantly ramping up manufacturing capacity to keep up with its growth. It has also been very acquisitive and ended the year with $209 million to fund the Gold Toe acquisition. The company is also on a push to sell its own apparel to mass-market retailers including Wal-Mart (NYSE:WMT). This puts it in more direct competition with the likes of Hanesbrands (NYSE:HBI) and Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) Fruit of the Loom operations.

The stock now trades at 13 times the lowered earnings guidance for the year, which could leave plenty of room for upside should the near-term volatility to its business settle down. However, there is usually risk with firms that are aggressive in making acquisitions, though Gildan looks to have successfully balanced its rapid growth and finances so far. (To know more about acquisition, read: Analyzing An Acquisition Announcement.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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