Gildan Activewear May Reactivate Growth Potential

Summary

• The sustained performance of Gildan Activewear Inc. shrank with the contraction of its operations and dropping of net income.
• Dividend payments suddenly stopped and may not resume as long as the current situation persists.
• Despite the unimpressive financial report, the optimism of investors and analysts remains evident with the bullish pattern of the stock price.
• The reopening of the economy will play a big role in reinvigorating and restabilizing its operations and of the whole sports and sportswear industry.

Photo by Justin Sullivan/Getty Images News via Getty Images

Gildan Activewear Inc. (NYSE: NYSE:GIL) did not thwart the adverse effects of the pandemic as its financials slumped and dividend payments stopped and became uncertain. Despite this, hopes for its swift recovery and a comeback once the economy reopens remain high. This jives with the upward momentum of the stock as many investors continue to show optimism about its performance this fiscal year.

Company Financials

Operating Revenue and Operating Costs

Gildan Activewear Inc. has shown a continuous expansion of operations since its foundation in 1984. From its main headquarters in Montreal, Quebec, Canada, it extended internationally and competed with other domestic and foreign companies. Having factories in Honduras and Haiti where wages are relatively lower remains advantageous and allows it to set competitive and even predatory pricing, especially against Chinese manufacturers.

At $100 million-$200 million revenues, the increased operating size and capacity became evident in 2011-2013. It started to invest in a Bangladeshi company to support its planned growth in Asia and Europe. The expansion continued with its acquisition of Anvil Holdings, Inc. in 2012 that led to another increase in revenues from $330 million to $420 million before reaching $450 million in 2013. Its drastic growth was seen in 2014 when revenues rose by more than five times to $2.33 billion when it acquired New Buffalo Shirt Factory and Doris Hosiery and its planned major investment in the US for two yarn-spinning facilities. Since then, its size remained as it continued its expansion and acquisition to sustain its increased capacity, and in 2019, revenues amounted to $2.84 billion. Meanwhile, the operating costs were still managed effectively to maintain the viability of the core operations. From about $100-$200 million gap, it widened to $600 million and eventually amounted to $700-$800 million. The gross profit margin was generally increasing despite the ups and downs. It has changed dramatically from 3% in 2011 to 26% in 2012 and remained at 24%-28% for the next fiscal years. Although growth did not change substantially since then, one can observe the stability of the operations and financials despite the drastic changes over the past decade. It was able to manage its costs and efficiency well while meeting its demand to sustain its increased capacity and remain adequate to cover the whole operation.

However, things were not easy for Gildan as it failed to thwart the unfavorable effects of the pandemic. Despite its popularity and size, it was not spared as sports and other outdoor activities were prohibited at the height of disruptions. From its problems with its supply chain and decreased demand, it had a hard time coping with the changes, especially in 2Q when restrictions were strictly implemented. But in 3Q and 4Q, as the company started to adjust, the easing of restrictions started and further helped it with its supply chain and drove the increase in demand. Moreover, although the gross profit margin was halved, one could see that Gildan did its best to optimize its costs and improve its efficiency to maintain the adequacy of the core operations. The company did not have a fruitful FY 2020, but with its resilience amidst a more challenging market environment, it started to adapt and stabilize its financials during the second half of the previous fiscal year.

Meanwhile, the continuous vaccination may help in the gradual reopening of the economy in the second half of the current FY. With that, sports, physical, and other outdoor activities may resume. The pent-up demand for the sports industry and gyms and fitness activities will be one of the catalysts for Gildan's recovery to reinvigorate itself and resume its growth plan. This is reasonable as the company produces mostly sportswear and clothes that fit outdoor activities. Remember that professional games and matches and even those for leisure were stopped. Given this, either the return to the old normal or adapting to the new normal, the resumption of outdoor activities will stimulate growth. These activities were allowed but remained limited and discouraged. Although the transition will not be swift, the fact that the increased demand is anticipated with its capacity to adjust its operations, it will be easier for it to do so and push its revenue and margin upward for the following fiscal years.

Taken from Macrotrends

Taken from Macrotrends

Taken from Macrotrends

Net Income

Net income followed the exact pattern of the key accounts in the core operations, suggesting consistency and coordination with the non-core transactions. Non-operating expenses, particularly interest expenses, have been increasing as the operations continued to expand but remained manageable and had no sharp changes. With that, the overall viability of the company has been generally increasing over the past decade. Moreover, its gap with EBITDA remained reasonable which shows its capacity to handle its interest expenses and depreciation and amortization well. Even after the dramatic changes in 2012-2014, the viability of the company remained generally moving upwards. It may convey that after its substantial increase in operating size and capacity, Gildan Activewear Inc.'s growth potential remained quite evident.

Although its sustained vigor did not protect the operations from the disruptions of the pandemic, especially in 1Q and 2Q when net income plunged, it started to regain its footing during the second half. Net income became a positive value and doubled in 4Q but was not adequate to offset the decrease in the previous quarter as the annual value plunged to -$225 million. Nevertheless, the resilience of the company was observed as it did not have to file for bankruptcy and assistance, and recovery started when the quarantine measures were eased. With the gradual yet continuous reopening of the economy, it may speed up as increased outdoor activities and demand in the industry with a more efficient supply chain may be possible this FY.

Taken from Macrotrends

Taken from Macrotrends

Liquidity and Growth

Gildan has maintained ideal liquidity over the past decade as its current assets are about three to five times larger than current liabilities. Despite its voracious expansion and acquisitions in 2013-2014, the company has managed its borrowings and liquidity well. Although the ratio slightly fell, it remained high and still exceeded 3. For the next fiscal years, the ratio remained within the range of 3-5. Even if it slightly decreased to 3.99 and 3.54 in 2018 and 2019, respectively, it increased again in 2020 to 4.24. This is a good indicator that shows how Gildan remains capable of meeting its current financial obligation amidst a more challenging and disruptive market environment. The only thing that the company must watch out for is the 17% increase in borrowings in FY 2020. It may be reasonable as it tried to maintain its liquidity despite the unfavorable effects of the pandemic on its operations and cash increased by almost eight times. The market environment may get better in the second half, which may help the company enhance and sustain its operations and liquidity.

Free Cash Flow ("FCF") verifies the company's liquidity as it has also been moving in a generally upward pattern. Fixed assets in the Balance Sheet and Capital Expenditures ("CapEx") have been generally increasing and confirm the continuous expansion of Gildan. From 2014 to 2018, FCF's increase has been consistent which shows the higher cash inflows as it continued to expand and acquire other companies. It also shows the effect of non-cash accounts aside from depreciation and amortization and interest expenses and agrees with the upward movement of EBITDA. With that, the overall consistency of the whole operations and financials of the company have been observed. Given the most recent FCF of Gildan at $368 million, it remains sufficient to sustain operations and cover its borrowings. It also gives high hopes of stimulating growth and resuming dividend payments once the economy reopens.

The ideal trend of growth and stability of Gildan's operations can be confirmed using Return on Assets ("ROA") and Return on Equity ("ROE"). From 2010 to 2019 has always been above the ideal level, which shows its ideal growth and potential to sustain or even increase it. Although after the voracious expansion both ratios have been almost unchanged, one can't say that it has been stagnant or torpid since growth has been stable and ideal over the past decade. Things only changed when the pandemic came and disrupted its operations that resulted in a net loss. But given the fact that the company started to regain its footing in 3Q and 4Q 2020, the gradual reopening of the economy may accelerate and stimulate its recovery and growth.

Taken from Macrotrends

Taken from Macrotrends

Taken from Macrotrends

What's in Store for the Investors?

Dividends Per Share

Since its first dividend payment, Gildan Activewear Inc. has consistently raised the value it distributes to the investors. With an average annual growth rate of 8%, it has been reasonable how it almost quadrupled from $0.146 per share in 2011 to $0.536 per share in 2019. During 1Q 2020, the quarterly value was promising at $0.154 per share compared to $0.134 per share in the previous year. With that, it has reached $0.616 had the pandemic not spread and disrupted the economy of most countries. For the next three quarters, no dividend payments were distributed or at least declared by the company. This may be normal as net income slumped to -$225 million although FCF remained increasing. Another factor to consider is the 17% increase in borrowings to maintain liquidity. Although it is evident that the company has regained its balance during the second half of the previous FY, it had to focus on restabilizing its operations and continue its recovery. If the current situation persists, dividend payments may not be expected. But given the increased vaccination, the reopening of the economy may speed up. Once herd immunity is achieved, policy-makers will become more lenient and fear in most people may subside. The increased appreciation of a healthy and active lifestyle may boost the hype in the sports industry, gyms, and other outdoor activities. With Gildan as one of the popular providers of popular brands such as Under Armour (UA) and New Balance, it may start to rejuvenate its operations and performance during the second half of this FY. Given this potential event and Gildan's growth, dividend payments may be expected in FY 2022 at the earliest.

Taken from Nasdaq

Taken from Macrotrends and Nasdaq

Stock Price

There have been some ups and downs, but the stock price has increased continuously since its IPO. In 4Q 2019, the price had a noticeable downtrend and sped up in 2020 and hit $10.14 last March 20, 2020. Although it was not its all-time low, it has been the lowest price in five fiscal years. But after it bounced back on the next trading day, the stock price took over and became unstoppable. With that, the bullish trend continued and the stock price tripled its value last month. At $33.21, the upward pattern remains evident despite the potential overvaluation, given the net loss and the PB Ratio of 4.24. But with the reopening of the economy, the optimistic view of many investors and analysts to its performance this FY outweighed it. Moreover, the Dividend Discount Model adheres to it even though the company did not pay dividends in three-quarters of the previous FY. At $34.84, the derived value of the stock price using the model is a numerical factor that supports the uptrend of the stock price. Despite this, one must consider the release of the 1Q Report that may have an impact on the stock price. This is most applicable to short-term traders, especially to those who buy and sell for a very short time. Being keen on details, company press releases, and industry news will help formulate an ideal investment decision.

Catalysts for Further Growth

The Reopening of the Economy

The reopening of the economy is one of the primary sources of hope for the company. The increased vaccination and easing of restrictions will pave the way for less restricted sports, fitness, and other outdoor activities. Improvement in the labor market and higher purchasing power of consumers is also expected. In just a short period, the domino effect of this event will be reflected in its operations and performance. Its supply chain will gradually go back to normal with a more strategic pricing and less disruptive market environment.

The Hype in the Sports Industry and Other Physical and Outdoor Activities

The hype in the sports industry, gyms, and other physical and outdoor activities are expected but also depends on the reopening of the economy. This potential hype is due to the pent-up demand for these activities as quarantine measures and the fear of the pandemic restricted most people in their homes. This change affected the lifestyle of many individuals which increased their longing for their activities before the pandemic. It also caused a paradigm shift to many, especially those who were infected or lost their loved ones due to this. Even without doing a survey, many started to crave an active and healthier lifestyle. Aside from a balanced diet, exercises, training, and sports became a favorite and may continue once safety is guaranteed. With the continuous vaccination which may eventually reopen the economy and dispel the agitation, things are expected to get better during the second half of FY 2021 or the first half of the next FY. Gildan Activewear Inc. as one of the key producers of activewear of popular brands such as Under Armour and New Balance, will benefit from this and may observe improvement in operations and performance.

Conclusive Thoughts

Gildan Activewear Inc. has shown stable and ideal performance despite its voracious expansion and acquisition over the past decade. With its sound and intact fundamentals, its growth potential remained evident. Despite the adverse effects of the pandemic, it regained its footing during the second half and started to recover which showed its resilience. With its focus on recovery and the gradual reopening of the economy, things may get better this FY although dividend payments are not assured yet. Nevertheless, recovery may speed up and growth may be reinvigorated as the hype may push its operations and financials upwards. It continues to speak growth and security and remains ideal to long-term investors. Meanwhile, the stock price continues to show a bullish pattern and agrees with the optimistic view of its performance and the derived value using the Dividend Discount Model. With all the opportunities expected once the economy reopens, the recommendation of a long position is logical given the upward pattern.

Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.