National Bank Financial analyst Vishal Shreedhar expects a “resilient distributor performance” from Gildan Activewear Inc. when it releases its third-quarter financial results early next month.
However, he warned recent channel checks have shown a “flattish printwear backdrop” and “challenged” retail environment for the Montreal-based company.
“Despite pervasive macroeconomic concerns, our interpretation is that distributors are not anticipating a punitive outlook,” he said.
“In addition, peer commentary suggests several major market trends: (a) A softening retail environment (while the decline in replenishment is expected to improve, it will still weigh on GIL’s results); (b) Supply chains are continuing to recover; (c) Building inventories may cause promotional impacts in H2/22+, particularly in retail.”
For the quarter, Mr. Shreedhar is projecting earnings per share of 82 cents, a penny ahead of the Street’s estimate and 2 cents above the result from a year ago. That gain is driven by consolidated sales of $845-million, increasing from $802-million and $8-million higher than the consensus expectation.
“The Activewear segment is expected to deliver sales growth of 7 per cent year-over-year, reflecting pricing,” he said. “Sales in the Hosiery & Underwear segment are expected to be lower by 2 per cent year-over-year, reflecting softening retail demand, partly offset by pricing.”
In response to foreign exchange gains, Mr. Shreedhar raised his target for Gildan shares to $45 from $43, keeping an “outperform” rating “due to depressed valuation.” The average on the Street is $53.76.
“While the near-term outlook may become more challenging, we believe that Gildan’s share price already reflects a punitive expectation,” he said. “Specifically, Gildan’s shares trade at 9.4 times our NTM [next 12-month] EPS vs. the five-year average of 17.5 times. Applying a normalized long-term valuation of 17 times NTM EPS suggests that the market is looking for EPS to fall to $1.77 (which we think is punitive).
“For investors that have latitude to look through a potential slowing in near-term earnings, we believe that Gildan can provide attractive upside.”