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Inventory management is still dogging some companies — and investors could profit as everything sorts out.

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“Best Buys Now” Pick #1:

Gildan Activewear (TSX:GIL)

One lesson we all learned as consumers during the pandemic is that inventory management can be quite tricky.

Now, as investors, we’re still learning how to deal with that challenge. Supply chains remain in a state of disarray, and many companies continue to report bloated inventory levels on their balance sheets.

Wholesale apparel manufacturer Gildan Activewear (TSX:GIL) is a prime example, finishing its most recent fiscal year with inventory of US$1.2 billion, up considerably from the US$774 million that it began the year with.

Not only does an elevated inventory level tie up a company’s cash, but it also introduces the risk that the business won’t be able to normalize its inventory through traditional sales. Significant discounting, which eats into margins (or worse, writing off the inventory entirely) could enter the fray.

The flip side of this is that if the company is able to work that inventory down in an orderly fashion, cash flow benefits rather nicely.

To be clear, we don’t know how this will play out at Gildan. (The company is set to report Q1 results on May 3.) In our opinion, though, investing in Gildan today looks like an opportunity to own a high-quality company at a multiple that’s very attractive.

The market foresees a rocky road ahead for Gildan. In the short term, that may indeed play out as the company wrestles with its inventory and the challenging market dynamics. However, in the long term, we’re very much of the mind that the risk/reward balance tilts heavily towards reward here.

“Best Buys Now” Pick #2

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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 Iain Butler has positions in Gildan Activewear. The Motley Fool recommends Gildan Activewear. The Motley Fool has a disclosure policy.

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