Gildan Hopes to Take Advantage of New Free Trade Deal

Honduras and Canada prepare to put pen to paper, as Gildan posts record profits.

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The Motley Fool

Canadian clothing manufacturer Gildan Activewear (TSX: GIL)(NYSE: GIL) is coming off one of its best quarters ever with a 9.5% growth in profits. The company is riding high and plans for a brand expansion in Canada are in place.

No longer contend with hiding its name on the tags of clothes, Gildan is looking to recreate its U.S. branded collection back at home. This plan hinges on an upcoming free trade deal between Canada and Honduras.

Record profits

This was a rather impressive quarter for Gildan with sales climbing 4.9% to U.S. $548.8 million compared to $523 million in Q2 2013. Net income rose 8.9% to US $79.2 million or $0.64 per diluted share, beating analysts’ and Gildan’s predictions.

Gildan attributes these increased results to strong growth in underwear sales in the U.S. and increased sales of printwear to other brands. These gains in sales were more than enough to offset lower t-shirt demand because of the long winter and a higher costs of cotton.

New Canadian strategy

While Gildan is based in Canada, much of its production happens in Honduras where it employs 24,000 people in four facilities. This puts the company in an excellent position to take advantage of the upcoming free trade deal between the home of its headquarters and the home of its products. The trade agreement would eliminate all duties currently in place on clothing made in Honduras.

Gildan is looking to use this opportunity to expand its own branded products in Canada; a similar expansion was launched in the U.S. and has led to this record quarter. While Gildan’s goods are currently sold in Canada, most are blanks for screenprinters. Gildan currently only sells its own branded socks in Target Canada (NYSE: TGT) stores.

Costa Rica expansion

Gildan has also announced that it is preparing to begin production on a new textile factory in Costa Rica. This will be the seventh nation Gildan has operations in, and was chosen because products can be shipped to the U.S. duty-free. Once completed in late 2016, the facility is expected to produce 350 million t-shirts a year.

This is just the first expansion into Costa Rica as the property purchased has enough space for three facilities, with the second facility earmarked to produce underwear. The first facility is expected to employ 1,200 people directly, and will create an additional 8,000 lower wage jobs in its Nicaragua finishing facility.

Is it time to buy?

Following the record numbers, analysts have readjusted their price targets for Gildan, some rising from $60 to $64, and the more conservative rising from $56 to $62. The stock hit a 52-week high of $60.75 Friday afternoon before closing at $60.38, indicating there may still be some upside despite the recent jump.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway does not own any shares in the companies mentioned.

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