This Blue-Chip Just Reported Solid Numbers and the Market Yawned: Is it Time to Pounce?

Gildan Activewear Inc (TSX:GIL)(NYSE:GIL) just posted its Q2 results and the market yawned. Here’s why you should take a look.

| More on:
data analytics, chart and graph icons with female hands typing on laptop in background

Image source: Getty Images

Shares of apparel company Gildan Activewear (TSX:GIL)(NYSE:GIL) fell about 1% on Thursday after posting its Q2 results and guidance. GAAP earnings per share clocked in at $0.49 for the quarter — missing the consensus by $0.04 — as revenue improved nicely.

So what?

Overall, it was a pretty good quarter for the company. It maintained respectable top-line growth amid higher costs.

“Sales of $802 million in the quarter, which set another second-quarter record, were up approximately 5% over last year, setting us on track to deliver our full year sales target of mid-single-digit growth,” wrote the company. “Our growth drivers continued to perform well, including growth momentum in fashion basics, fleece, and global lifestyle brand sales.”

The stock had been on fire heading into the report, so investors shouldn’t be too concerned over the muted response from Bay Street.

Management cited a 6.5% jump in activewear sales for the higher revenue, which helped offset a 2.2% decline in its hosiery and underwear category. While international sales were up slightly, Gildan continued to see softness in Europe and slower growth in China.

What’s worth keeping an eye on is Gildan’s gross margin, which slipped 50 basis points year over year to 27.8%. The decline reflects higher raw material costs, inflationary pressures, and unfavourable currency changes. All of those factors more than offset the gains made from a favourable product mix and higher selling prices. On the bright side, Gildan expects the gross margin to recover in Q4 as raw material and other input costs subside. Moreover, SG&A expenses in Q2 declined 50 basis points as a percentage of revenue , suggesting that management is doing well to improve efficiency.

Gildan generated $26 million in free cash flow in Q2, down from $98 million in the prior year. The lower figure primarily reflects a $56 million purchase of land in Bangladesh as well as expenses related to its capacity expansion initiatives.

During the quarter, Gildan also repurchased about 2.62 million common shares at a total cost of roughly $97.4 million. The company ended the quarter with net debt of $989.2 million, representing 1.8 times its trailing 12-month EBITDA — largely in line with its target leverage range.

Now what?

Business is good at Gildan, and I wouldn’t bet on things to drastically change anytime soon. With results over the first half of 2019 tracking nicely within the company’s expectations, management reaffirmed its sales view — mid-single-digit growth — for the full year.

Moreover, the company bumped up the lower range of both its full-year EPS and diluted EPS guidance. Gildan now sees 2019 GAAP diluted EPS of $1.80-$1.85 and adjusted diluted EPS of $1.95-$2.00 versus its previous view of $1.75-$1.85 and $1.90-$2.00, respectively. Management also said it expects adjusted EBITDA of more than $615 million and continues to see full-year free cash flow of $300 million-$350 million.

For Q3, the company expects sales growth in the mid-single-digit range.

It’s obvious that Gildan has plenty of operating momentum on its side, but is the stock worth buying? Well, with the shares now up 55% over the past year and trading at a forward P/E of 20, I’d wait for some of the optimism to subside before jumping in.

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 Brian Pacampara owns no position in any of the companies mentioned. Gildan is a recommendation of Stock Advisor Canada.  

More on Dividend Stocks

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

person on phone leaning against outside wall with scenic view at airbnb rental property
Dividend Stocks

2 TSX Stocks Poised to Have a Big Summer

Restaurant Brands International (TSX:QSR) stock and another darling that could be too cheap to ignore this summer.

Read more »

Dividend Stocks

Forget Fortis Stock: Buy This Magnificent Utilities Stock Instead

Looking for high dividends and returns? Then I'm sorry, but Fortis (TSX:FTS) stock probably isn't for you.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye on

Have these top TSX dividend stocks finally bottomed?

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks I’d Buy if They Fall a Bit

Any near-term decline in these two top Canadian dividend stocks will make them look even more attractive.

Read more »