With its “Back to Basics” strategy delivering “impressive” results and seeing a sales recovery underway, Canaccord Genuity analyst Luke Hannan upgraded Gildan Activewear Inc. to “buy” from “hold.”
Before the bell on Thursday, the Montreal-based clothing reported revenue for the second quarter of US$747-million, exceeding both Mr. Hannan’s US$710-million estimate and the consensus projection of US$697-million. Adjusted earnings per share of 68 US cents also blew past expectations (53 US cents and 51 US cents, respectively).
“Notably, Gildan’s Back to Basics strategy has continued to pay dividends, with adjusted gross margin of 30.5 per cent representing an expansion of 270 basis points relative to 2019,” the analyst said. The company has also been able to scale its business back up efficiently, with SG&A as a percentage of sales coming in at 10.7 per cent for the quarter, or 80 bps better than Q2/19.
“Despite an uncertain outlook, with (1) labour shortages, (2) reduced supply of raw materials/higher transportation costs ‚and (3) the Delta variant creating more questions than answers on expected demand, Gildan expects to achieve its 18-per-cent adjusted operating margin target for 2021, which is well above our and consensus’ 16.6-per-cent expectation.”
Raising his full-year revenue and earnings projections, Mr. Hannan also hiked his target for Gildan shares to US$42.50 from US$38. The current average is US$41.85.
“Given the combination of (1) strong results despite demand that remains below pre-pandemic levels (21-per-cent adj. EPS growth despite revenue falling 7 per cent vs. Q2/19); (2) flexibility to implement price increases to maintain its 18-per-cent margin target for 2021/ early 2022 in the face of an inflationary cost environment; and (3) robust free cash flow generation leading to 0.6 times net debt/TTM EBITDA (well below Gildan’s 1-2 times comfort level) and the resumption of its share buyback program, the risk-reward profile for Gildan shares becomes significantly more compelling for investors, in our view, particularly with the stock trading at 15.3 times our NTM EPS estimate. As a result, we are upgrading our rating,” he said.
Others making target changes include:
* Scotia Capital’s Patricia Baker to US$44 from US$42 with a “sector outperform” rating.
“All in, Q2 was a very solid quarter for GIL and reflects solid execution underscoring the importance of the company’s ‘Back to Basics’ strategy,” she said.
* CIBC’s Mark Petrie to US$43 from US$41 with an “outperformer” rating.
* National Bank Financial’s Vishal Shreedhar to $56 from $53 with an “outperform” rating.