Blue chip stock Gildan Activewear remains a buy

Gildan Activewear, one of our blue chip Key stocks, is earning more money. It’s using its climbing earnings to invest aggressively for future growth. The shares remain on a buy, mainly for long-term price gains, but also for small as well as increasing dividends.

Gildan Activewear, one of our blue chip Key stocks, earned more in the first half of fiscal 2014. It also expects to earn more for the full year. That’s despite investing heavily to support the company’s planned growth initiatives. It remains a buy for long-term price gains and small dividends that we expect to keep rising.

In the six months to March 30, Gildan earned $123 million, or a dollar a share, excluding one-time restructuring and acquisition costs. (All figures in U.S. dollars unless otherwise noted). This was up by 9.9 per cent from $112 million, or 91 cents a share, a year earlier. It’s profiting from supplying family apparel.

In the first half, Gildan’s sales rose by six per cent, to $1 billion. It sold more clothing in both divisions: sales of Branded Apparel climbed by 8.7 per cent, to $360 million. Sales of Printwear went up by 4.7 per cent, to $640 million. The better sales of printwear also reflect increased sales of higher-priced clothing.

Gildan’s investment costs pay off later on

Unfortunately, Gildan’s cost of goods rose by seven per cent—more than sales. The cost of cotton was higher in this year’s first half than a year earlier. On a more positive note, the higher costs included “transitional manufacturing costs to upgrade the Company’s manufacturing operations and support future growth.” That is, Gildan is willing to accept investment costs if it expects them to pay off in the years ahead. While the company’s gross profit was up by 3.3 per cent, its gross profit margin declined by 0.8 percentage points to 27.2 per cent.

Gildan overcame the higher cost of goods by reducing its SG&A (Selling, General and Administrative) costs. These dipped by 0.6 per cent. As a percentage of sales, SG&A costs fell by a percentage point, to 14.2 per cent. As a result, the company’s operating income jumped by 11.9 per cent, to $128 million. Its operating profit margin rose by 0.6 percentage points, to 12.8 per cent of sales.

In fiscal 2014, Gildan expects to earn adjusted earnings per share of $3.00 to $3.12 a share. Since it earned at the higher end of its forecast range in the second quarter, it’s expected to earn $3.08—above the mid-point. That would represent solid earnings per share growth of 14.5 per cent from earnings of $2.69 a share last year. This works out to expected earnings of C$3.35 ($3.08 divided by 0.92), up from last year’s earnings of C$2.92 ($2.69 divided by 0.92).

Gildan writes, “The earnings impact of slightly higher sales volumes is projected to be offset by the impact of the transitional manufacturing inefficiencies.” This will include extra “costs to train sewing operators and ramp up sewing operations to support a planned further significant increase in underwear sales and sales of higher-valued products in 2015.” This is expected to pay off next year (which begins in October). In fiscal 2015, the company is expected to earn $3.52 a share. That works out to earnings per share growth of 14.3 per cent.

Gildan says that the colder-than-usual weather earlier in fiscal 2014 held back sales of T-shirts, among others. But it’s unlikely that next winter will be as cold as this past one. Will next winter turn out to be as mild as the winter of 2013? If so, the company’s sales could do even better next year.

Gildan will have invested $350 million

In 2014, Gildan expects to have invested close to $350 million in many capital projects. This includes vertically-integrated yarn manufacturing and more underwear knitting equipment. That will support its growth initiative in underwear.

Gildan will start investing in the new textile manufacturing facility in Costa Rica. The facility will have duty-free and quota-free access to major markets in the U.S. The facility is also close to the company’s sewing plants in Nicaragua.

Gildan will reconfigure and upgrade equipment in Honduras. It will invest in “new sock manufacturing equipment, a new sewing facility in the Dominican Republic, further investments in energy-saving projects, and the new distribution centre in Honduras.” The company is also likely to expand “due to the introduction of new higher-valued product and projected future sales growth from new retail programs and increased shelf space.”

Gildan’s money is not at all ‘dead money’

Gildan sees long-term opportunities in its business. That’s why it’s investing aggressively at a time when many companies are criticized for sitting on ‘dead money’. The company is unlikely to use its capital to buy back its own shares. It’s using a small part of its capital to pay dividends and raise them.

Gildan began paying dividends in fiscal 2011. That year it paid 23 cents a share. In fiscal 2012, the company paid 30 cents a share. In fiscal 2013, it paid 36 cents a share. This year, Gildan is expected to pay 43 cents a share. That’s nearly 47 Canadian cents a share. Due to the high share price, the yield is only 0.8 per cent. Even so, we expect Gildan to continue to raise its dividend every year as its earnings grow.

GILDAN ACTIVEWEAR C$58.21 (Quality rating: Conservative; Sector: Manufacturing; TSX—GIL; T: 514-343-8815; remains a buy for long-term gains and small but rising dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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