Earnings Analysis: Gildan Activewear

| About: Gildan Activewear (GIL)

Gildan Activewear Inc. (NYSE:GIL) reports preliminary financial results for the year ended Sept. 30, 2012.

Gildan Activewear Inc. recently reported its preliminary financial results, based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Gildan Activewear Inc.'s analysis vs. its peers uses the following group of companies: VF Corp. (NYSE:VFC), Michael Kors Holdings Ltd. (NYSE:KORS), Under Armour Inc. (NYSE:UA), Abercrombie & Fitch Co. (NYSE:ANF), Hanesbrands Inc.(NYSE:HBI), and Warnaco Group Inc. (WRC). The table below shows the preliminary results along with the recent trend for revenues, net income, and returns.

Annual (USD million) 2012-09-30 2011-09-30 2010-09-30 2009-09-30 2008-09-30
Revenues 1,948.3 1,726.0 1,311.5 1,038.3 1,249.7
Revenue Growth % 12.9 31.6 26.3 (16.9) 29.6
Net Income 148.5 239.9 198.2 95.3 144.6
Net Income Growth % (38.1) 21.0 108.0 (34.1) 11.2
Net Margin % 7.6 13.9 15.1 9.2 11.6
ROE % 10.8 19.7 19.6 11.1 19.6
ROA % 7.8 14.9 16.5 8.7 14.6

Valuation Drivers

Gildan Activewear Inc.'s current Price/Book of 3.0 is about median in its peer group. The market expects Gildan Activewear Inc. to grow earnings about as fast as the median of its chosen peers (P/E of 29.3 compared to peer median of 35.4), but not to expect much improvement in its below peer median rates of return (ROE of 10.8% compared to the peer median ROE of 16.2%).

The company's asset efficiency (asset turns of 1.0x) and net profit margins of 7.6% are both median for its peer group. Gildan Activewear Inc.'s net margin is its lowest relative to the last five years and compares to a high of 15.1% in 2010.

Economic Moat

Changes in the company's annual top line and earnings (12.9% and -38.1%, respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

Gildan Activewear Inc.'s current return on assets is around peer median (7.8% vs. peer median 7.8%). This contrasts with its higher than peer median return on assets over the past five years (12.5% vs. peer median 8.9%), suggesting that the company's relative operating performance has declined.

The company's comparatively low gross margins of 25.2% versus peer median of 48.0% suggests that it has a non-differentiated strategy or is in a pricing constrained position. However, Gildan Activewear Inc.'s pre-tax margin of 7.3% is around the peer median, which, when combined with the gross margin, suggests lower operating costs relative to peers.

Growth and Investment Strategy

While Gildan Activewear Inc.'s revenues have grown faster than the peer median (23.3% vs. 7.4% respectively for the past three years), the market gives the stock an about peer median P/E ratio of 29.3. This suggests that the market has some questions about the company's long-term strategy.

Gildan Activewear Inc.'s annualized rate of change in capital of 20.6% over the past three years is higher than its peer median of 7.8%. This investment has generated an above-peer median return on capital of 15.7% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Earnings Quality

Gildan Activewear Inc.'s net income margin for the last 12 months is around the peer median (7.6% vs. peer median of 6.4%). This average margin combined with a level of accruals that is around peer median (3.7% vs. peer median of 3.7%) suggests there possibly isn't too much accrual movement flowing into the company's reported earnings.

Gildan Activewear Inc.'s accruals over the last 12 months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Company Profile

Gildan Activewear, Inc. is a vertically integrated marketer and manufacturer of quality branded basic apparel and also produces hosiery for the retail market. It sells t-shirts, sport shirts, and fleece in large quantities to wholesale distributors as undecorated blanks that are subsequently decorated by screen printers with designs and logos. Gildan's Wholesale division is the leading supplier of activewear for the screen-print market in the United States, Canada, and Europe. Its products are also utilized for work uniforms and other end-uses to convey individual, group, and team identity. Its Retail division supplies private label and Gildan branded socks primarily sold to mass-market retailers. The company was founded Glenn J. Chamandy & H. Greg Chamandy on May 8, 1984, and is headquartered in Montreal, Canada.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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