Gildan: Falling Victim to Soaring Cotton Prices

| About: Gildan Activewear (GIL)
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By David Berman

Gildan Activewear Inc. (NYSE:GIL) delivers a nice example of how tricky and overly complex investing can be. Let’s say you like Gildan’s stock because you’re a fan of the company’s T-shirts. They fit well, they look pretty good, the price point is right. Well...did you factor in cotton prices and inventory levels? What about the impact of terrible floods in Pakistan, one of the world’s largest cotton producers, and rising cotton demand?

Suddenly, Gildan starts to look like a confluence of a lot of moving parts, most of which are tough to predict. The stock has risen an impressive 9 per cent this year, and is up about 36% over the past 12 months. However, over the past five weeks – a period that coincides with the Pakistan flood – the shares have fallen 15% and are closing in on a five-month low.

As Hugues Bourgeois, an analyst at National Bank Financial, points out, cotton prices represent about 30% of Gildan’s costs, which is why investors have grown nervous. Cotton has surged 25% over the past seven weeks to a 15-year high of more than $1 (U.S.) a pound.

However, analysts are sticking by Gildan. According to Bloomberg, the average price target on the stock is $37.15, up nearly 50% over the past year. As for Mr. Bourgeois, he reiterated his “outperform” recommendation based in part on the company’s ability to pass along the higher cotton costs to distributors.

“In response to higher cotton price levels, Gildan has announced a 3.5% price increase effective at the beginning of October...,” he said in a note. “Gildan had already increased prices [about] 3% in early July. These recent price increases are expected to more than offset higher cotton prices during the next two quarters.”

With the stock struggling amid soaring cotton prices, it seems that investors aren’t so sure. Or, perhaps they’re just awakening to the fact that their simple T-shirt play isn’t so simple.

Disclosure: None