Shares of Gildan Activewear (TSX:GIL) have defied expectations and are up nearly 120% over the past two years, while most other apparel names have come under significant pressure. The apparel world is indeed a tough place unless you are an efficient entrepreneur who knows how to maintain (and even gain) additional market share.
Gildan isn’t exactly the glowing, fashionable garment that Wall Street raves about. It’s more of an under-the-radar, high-value play that’s stealthily doubling in just under two years. You may own several pieces of Gildan clothing without even realizing it.
For those unfamiliar with the company, it’s the maker of clothing essentials, from T-shirts to hoodies and even underwear. If you want to mass produce a particular graphic tee or something similar at an affordable price, Gildan is one of the best places to look. Undoubtedly, wardrobe essentials never go out of style.
And with great emphasis on operational efficiency, Gildan has been able to produce at scale while keeping costs to a minimum. In fact, it is Gildan’s efficient operations that have served as a kind of economic moat for the company. And it’s this moat that could continue to keep Gildan’s cash flows safe as other parts of the apparel market face headwinds and other challenges that have weighed heavily on some of the industry’s biggest names.
The deal with Hanesbrands strengthens the foundations
More recently, Gildan further increased its position when it bought popular underwear manufacturer Hanesbrands, a move that could not only deliver a huge bump to earnings but also be rich in significant synergies. Indeed, Hanesbrand faced numerous problems that I think Gildan management can easily solve. Of course, only time will tell how creative the Hanes deal will be.
Either way, this move makes Gildan an absolute force in the retail scene. Gildan’s ability to pass low costs on to its customers could undoubtedly ensure the company performs well when economic growth dries up and consumers become more price-conscious. Consumers have become much more value-oriented in recent years, thanks in part to the wave of inflation that could only get worse as interest rates continue to fall from current levels. With one of the best value propositions in apparel, I think the name will continue to do well.
Gildan stock still looks incredibly cheap
Today, the stock trades at a very modest price-to-earnings ratio of 19.6 times its trailing price-to-earnings (P/E) ratio, despite hovering around its new all-time highs just above $85 per share.
Arguably, GIL stock is as much a value play as it is a momentum play. Looking to the near future, shares appear even cheaper, with a price-to-earnings ratio of around 13.3 times forward price-to-earnings. While clothing brands like Hanesbrands and Gildan may not be exciting, they generate an incredible amount of cash flow, and I think there is plenty of support for the current year-end rally.
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