Expect Gildan's Q3 to Be Subdued - UBS

| About: Gildan Activewear (GIL)

With Canadian clothing company GIldan Activewear Inc. (NYSE:GIL) set to report its third quarter results in August, investors should keep an eye out for a drop in sales growth on lower unit volumes and a weaker mix.

Vishal Shreedhar, UBS analyst, forecasts a stabilizing quarter for the company, but not necessarily a good one.

"We believe [the third quarter] will demonstrate stabilizing industry growth trends ... negative unit growth trends which are not becoming more negative," he said in a note to clients. "Investors who are looking for signs of revenue recovery will find little solace in this quarter."

Mr. Shreedhar projects a 25% drop in sales growth year-over-year, while gross margins are expected to drop by 200 basis points to 24.6% on lower operating efficiencies and production downtime. The loss of one selling week in the quarter will impact sales by 8%.

"We believe Gildan's third-quarter unit growth trends will remain subdued," he said.

There are also concerns about the impact of political instability in Honduras, where Gildan has 70% of its operations.

"The bigger issue that emerges is Gildan's risk management given its concentrated manufacturing footprint," he said.

Mr. Shreedhar still forecasts earnings per share of 29 cents in the quarter, slightly higher than industry consensus of 27 cents. He maintains a Buy rating on Gildan while bumping up the target price to C$21 from C$20.