Gildan Activewear Inc. slashed its financial outlook for the third quarter, sending the shares down sharply and raising concerns that the T-shirt maker’s revised outlook is a symptom of weaker global economic activity.
“This is a company that had been seeing strong trends and now suddenly is not, which makes us wonder if it could be a proverbial canary in the coal mine for something broader happening,” Paul Lejuez, an analyst at Citigroup Global Markets, said in a note.
Gildan’s share price plunged by as much as 35.5 per cent in early trading on Friday before regaining some ground. In Toronto, the shares closed down $11.96 or about 26 per cent to $34.53, marking the biggest one-day decline for the stock since the depths of the financial crisis in 2008.
The selloff appeared particularly shocking because a number of analysts had previously seen Gildan as a consistently strong performer that could improve its profit margins. As recently as mid-July, the shares were coasting at a record high of $52.73.
Now, analysts have cut their target prices (or where they expect the shares will trade within 12 months) by an average of 22 per cent, according to Bloomberg, with a murkier outlook for sales and profitability likely weighing on the stock’s valuation.
“Though Gildan remains fundamentally sound with a healthy balance sheet and asset base, we have limited visibility to 2020,” Mark Petrie, an analyst at CIBC World Markets, said in a note.
Mr. Petrie cut his target price by 25 per cent, to US$30 from US$40 previously.
The shares trade in New York and Toronto.
In its preliminary third-quarter results and full-year outlook, released after markets closed on Thursday, Gildan announced that its sales for the quarter ended Sept. 29 will be about US$50-million lower than expected.
It blamed the revision on significantly weaker demand for “imprintables,” which are T-shirts that corporations can emblazon with their logos and use to promote events.
Gildan expects that sales for the third quarter will be about US$740-million, down 2 per cent from the same quarter last year.
The company also reduced its outlook for fourth-quarter sales by US$170-million and expects that its full-year profit will be in the range of US$1.65 to US$1.70 a share, down from previous guidance of US$1.80 to US$1.85.
Gildan did not respond to a request for comment. The company will report its third-quarter results on Oct. 31, likely accompanied by more details from management during a conference call with analysts.
Until then, observers are left wondering whether this is a near-term setback for Gildan’s management or part of a broader trend as companies reduce spending amid declining global economic growth and uncertainty related to the trade war between the United States and China.
“The culprit appears to be broader economic activity,” Stephen MacLeod, an analyst at BMO Nesbitt Burns, said in a note.
He pointed out that a big source of Gildan’s pain emanates from weak sales through distributors that cater to corporate customers.
Keith Howlett, an analyst at Desjardins Securities, said in a note that it is possible that economic anxiety is causing some companies to reduce their discretionary spending – T-shirts being an easy place to cut.
But in reducing his recommendation on the stock to “sell” from a “buy” previously, Mr. Howlett (who could not be reached for comment) hinted that Gildan’s management may have some explaining to do, given their optimistic outlook just 2½ months ago, after the release of second-quarter results.
Despite overall slow international sales growth for imprintable T-shirts in the second quarter, management pointed to a pickup in June and July, and projected double-digit growth in the second half of 2019, the analyst said in the note.
“We have a high regard for Gildan’s manufacturing expertise and were encouraged that the proposed target of attaining a 30-per-cent gross margin rate by 2021 was not only chosen by management but largely within its own control,” Mr. Howlett said.
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