Gildan Activewear Inc.'s quarterly financial results and update on its recent American Apparel acquisition are giving investors a good reason to look again at this previous high-flying stock.
The shares rose 1.8 per cent on Thursday, after slumping to two-year lows earlier this month. The move follows the release of upbeat fourth-quarter results that suggest the apparel maker may be regaining some lustre.
Gildan reported that its profit rose to $74.3-million (U.S.), up 9.9 per cent from the previous year.
On a per-share basis, profit rose more than 14 per cent, to 32 cents. That beat analysts' estimates by more than 10 per cent and marked its biggest quarterly beat in more than four years. The company also raised its dividend, by 20 per cent, for the fifth straight year.
The Montreal-based company, which makes basic cotton apparel such as T-shirts, underwear and socks, has been diversifying.
It began as a wholesale manufacturer for other labels, but the company has been selling its own branded apparel to retailers in recent years. This transformation was punctuated by a risqué 2013 Super Bowl ad.
Early on, investors loved the journey: The shares surged 340 per cent from the start of 2012 to a peak in mid-2015, reflecting annual profits that swelled from $152-million to $346-million.
But while branded apparel raised Gildan's profile, it could also deliver headaches.
A little more than a year ago, Wal-Mart Stores Inc. was having trouble restocking Gildan products in its U.S. stores. As a result, Gildan's branded sales in the third quarter of 2015 missed expectations by $15-million and called into question the company's ambitious targets for U.S. market share.
By February, 2016, the shares were down more than 30 per cent from their 2015 peak as quarterly profits slumped and missed analysts' expectations.
Now, Gildan must convince investors that U.S.-based American Apparel, which it bought earlier this year for $88-million in a bankruptcy auction, is the right move.
On the face of it, it's an odd match. The deal brings American Apparel, a sexually-charged brand known for its sweatshop-free, "Made in the USA" marketing, under the control of a company that makes things such as kids' team softball jerseys and medical socks with American-spun cotton at highly-efficient plants in Central America and the Caribbean basin.
But the logic is there. American Apparel has a big wholesale business and Gildan has said it can quickly integrate this business into its promotional clothing unit, which sells T-shirts and other clothing to distributors for screen printing.
American Apparel also has cachet as a premium fashion basics brand, handing Gildan the opportunity to drive international growth, according to Garry Bell, Gildan's vice-president of corporate marketing and communications. Although Gildan sells its print wear into more than 50 markets around the world, American Apparel is under-represented outside Canada and the United States.
Gildan didn't buy any of American Apparel's manufacturing facilities in the purchase and none of its retail stores. But it plans to continue making the brand in the United States through contract manufacturers.
It is currently integrating all of American Apparel's wholesale business and expects to be finished by the end of March. The takeover will start contributing to earnings in 2018, management said Thursday.
Still, uncertainty remains. Gildan hasn't decided whether to sell American Apparel clothes directly to consumers. For now, the company will open an office in Los Angeles, where American Apparel was based, that will employ marketing and merchandising people familiar with the brand to work on a strategy.
Based on Gildan's valuation, though, the risks appear to be low. During the stock's better days, it would command a premium valuation of 20-times trailing earnings, leaving little room for mistakes.
Today, the stock looks relatively cheap. Its price-to-earnings ratio is below 17. And using expected earnings, the P/E ratio is below 15.
The best part: Everyone needs T-shirts and undies.