Notwithstanding a 9% drop in first-quarter sales, Gildan Activewear (TSX:GIL) management remains confident that the apparel manufacturer will report record revenue for 2023. That’s possible. However, insiders recently sold shares — could it be that they have low confidence in the “promise?” Investors are taking profits this month and Gildan Activewear’s stock price is down 11% following a recent earnings release — a potential sign of low market confidence in the company’s revenue growth and stable earnings guidance.
Investors on the sidelines should watch the Canadian clothing stock closely this year.
Gildan Activewear is a $6.8 billion Canadian clothing manufacturer that posted double-digit revenue growth rates coming out of the pandemic. Full-year 2022 sales of US$3.2 billion were 11% higher year over year and printed a new revenue record for the company. However, sales receded during the fourth quarter, and the trend persisted during the first quarter of 2023. But management believes the best is yet to come.
What to watch Gildan Activewear stock in 2023
Investors that rely on fundamental analysis should watch Gildan Activewear’s revenue sources, margins, and cash flow-generation progress closely in 2023.
The company maintains a revenue-growth outlook for 2023 that somewhat defies current short-term trends in its market. It also maintains a stable margin outlook, despite weak gross margins and shrinking adjusted operating margins during the first quarter.
Gildan Activewear recorded a 12% year-over-year revenue drop in its largest revenue segment Activewear during the first quarter of this year. International sales underperformed, there were demand headwinds, while comparable sales were high, given record performance in 2022. Activewear comprised 85% of total sales in 2022.
The company saw a 7% growth in its Hosiery and Underwear sales segment. However, given that the segment contributed 16.4% of total corporate revenue last year, it may not undo any weaknesses in Activewear, if they persist throughout 2023.
Interestingly, following a 9% revenue decline during the first quarter, the company still maintained its outlook for low-single-digit revenue growth this year. If achieved, Gildan Activewear could pull off another record sales performance in 2023. Its U.S. sales remain resilient and point-of-sale (POS) sales are still going strong.
Watch margins and cash flow
Gildan Activewear’s gross and adjusted operating margins shrank during the first quarter. The first-quarter gross margin contracted by 430 basis points to 26.7%. Adjusted operating margins (adjusted for a sale and leaseback of a U.S. distribution facility) were 14.6%, which is down from 20.4% in 2022.
The company frontloaded higher costs and expenses towards the earlier months of the year as it worked through higher-cost inventory. It anticipates moving lower-cost inventory during the remainder of the year. Management’s guidance for adjusted operating margins between 18% and 20% for this year is understandable. Perhaps product mix, and tamed inflation, will be helpful as we progress in 2023.
Most noteworthy, the company’s investments in a new manufacturing facility in Bangladesh, and its lower earnings run rate, meant a worse free cash flow position last quarter. Quarterly free cash flow of negative US$202 million was a worse outcome compared to cash usage of US$85 million during the same period in 2022.
Encouragingly, the company sees “strong cash flow generation,” as it “progress(es) through the year.”
That said, liquidity has gone lower.
Gildan Activewear intends to repurchase up to 5% of its public float during the year, and, as a result, its 2023 earnings per share will be flat year over year. It used US$32 million to repurchase its common stock earlier this year and had “only” US$73.8 million in cash and cash equivalence on its balance sheet.
It’s necessary that investors witness strong free cash flow generation during the remaining quarters of 2023. Shares would bounce back strongly if that happens.
Watch insider trades
Investors may wish to watch out for persistent insider sales of Gildan Activewear stock during the remainder of 2023.
Four insiders sold 184,438 shares in Gildan Activewear stock during the past three months. Naturally, insiders may sell their employer’s stock for many personal reasons; however, investors become more skeptical of management’s bullish revenue, earnings, and cash flow guidance if insiders dispose of their employer’s stock en mass over the next few months.
Insider trades may be an investment signal if highly informed professionals “express” their personal sentiments financially in large numbers.
