What’s Next for Gildan Activewear Stock?

Gildan Activewear stock has lost 2% in the last 12 months, underperforming its peers.

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Rising costs and declining financial growth has been the theme in this earnings season. Thanks to adamant inflation and rapid rate hikes, many companies saw higher costs, squeezing their margins. Canadian apparel maker Gildan Activewear (TSX:GIL) reported higher sales but a drop in margins last month. As inflation still remains hot, how corporate earnings growth gets impacted in the upcoming earnings remains to be seen.

Gildan Activewear and its 2022 earnings

For 2022, Gildan reported record sales of US$3.24 billion — an increase of 11% year over year. Higher sales were due to increased activewear sales and a price increase.

Gildan operates through three segments — activewear, hosiery, and underwear. Its gross margin for the year came in at 30.6% — a drop from 32.2% in 2021. The company saw an increase in raw material and labour costs that weighed on its gross margins last year. Gildan reported an adjusted net income of US$575 million last year compared to US$538 million in the earlier period.

Gildan is an $8 billion vertically integrated, low-cost apparel manufacturer. Over 90% of its revenues come from its 30 owned manufacturing facilities spread globally. It sells its products to wholesale distributors, screenprinters, and embellishers worldwide.

A majority of its sales are derived from activewear sold to wholesale distributors in imprintables channels. Its manufacturing facilities are located in hubs like the United States, Central America, the Caribbean, and Bangladesh.

Growth prospects

In the last decade, Gildan has managed to grow its revenues by 5% and its net income by 13% compounded annually. The stock has returned 10% compounded annually in the same period, including dividends, notably beating the TSX Index.

For 2023, the company management expects pressure on margins mainly due to the inflationary environment. It sees low-single-digit growth in revenues and adjusted earnings per share in line with 2022. Moreover, its adjusted operating margin is expected to be within the 18-20% range this year, representing flattish growth year over year.

Almost all apparel makers saw pressure on margins, as raw material costs swelled since last year. However, Gildan seems well placed, driven by its scale, efficient supply chain, and vertically integrated operations. In late 2021, it acquired a yarn producer, Frontier Yarns, expanding its yarn manufacturing base. Moreover, it has a diversified customer base, and the largest customer contributes 16% of total sales.

Gildan announced a 10% dividend increase last month. For 2023, it will now pay a total dividend of $0.68 per share, implying a yield of 1.5%. It also intends to buy back 5% of its total outstanding shares as a strategy to increase shareholder returns. Buybacks and higher dividends indicate the company’s sound financial health and earnings growth visibility.

Conclusion

GIL stock has lost 2% in the last 12 months, underperforming its peers. Higher cost pressures and rate-hikes woes might weigh on GIL stock in the short to medium term. It is currently trading at a forward price-to-earnings ratio of 11 and looks discounted compared to its historical average. Gildan looks like a decent long-term bet with stable total-return prospects.   

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.

The Motley Fool recommends Gildan Activewear. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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