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Here's Why Gildan Activewear Stock Is Down 25% Today

By Jason Hall - Oct 18, 2019 at 12:27PM

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Its most important business is substantially underperforming expectations.

What happened

Shares of Gildan Activewear (GIL 1.71%) are down 24.7% at 12:13 p.m. EDT on Oct. 18 following the apparel maker's announcement of a big downward revision in its guidance for sales and earnings for the rest of the year. Late Thursday, Gildan issued its preliminary third-quarter results and updated full-year guidance that caught investors by surprise and led to an enormous amount of activity. At this writing, more than 31 times as many Gildan shares have traded hands than during a typical trading day. And we still have almost four hours of trading remaining. 

So what

When Gildan reported second-quarter earnings on Aug. 1, it called for full-year earnings between $1.80 and $1.85 per share and revenue to grow in the mid-single-digit range. Two and a half months later, management has had to change its tune. In the preliminary third-quarter release, the company said it expects earnings of $0.51 per share for the quarter, which would be down 7% from last year's third quarter

Man in suit watching red line crashing into a concrete floor.

Image source: Getty Images.

The culprit? "Significantly weaker than expected demand for imprintables," the company's customizable apparel products including team apparel. Gildan entered the quarter projecting low single-digit growth in this segment, but looks to have exited it with point-of-sale results having fallen by high single digits.

Moreover, the company says it now expects that weakness to continue through the rest of the year. Full-year guidance is now $1.50 to $1.55 per share, a 16% haircut from the guidance it had announced 10 weeks ago. 

Now what

A quick analysis of the revised guidance, versus the amount of the sell-off, may make it look like Gildan is a bargain today. After all, the stock is down 25% while earnings guidance is "only" 16% lower. However, I think investors should consider that the sell-off isn't just about the downgrade but bigger concerns about the state of consumer demand and how that could affect the prospects for consumer discretionary stocks like Gildan. 

And I think it's a reasonable concern to have, particularly since Gildan's stock isn't exactly bargain-basement cheap. After today's sell-off, shares still trade for nearly 18.5 trailing earnings and 14.6 times guidance for full-year 2019 results. Furthermore, the 1.9% dividend yield isn't really enough to offset the risks of a weakening economy hindering its prospects and sending the stock price lower. 

Now, with that said, if Gildan's stock price were to fall lower but its business results were to remain stable -- a possibility if we get further news that points toward a weakening economy -- it could move into value-stock territory

But as things stand today, I think investors can find better opportunities elsewhere, particularly if they're looking for value. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Gildan Activewear Inc. Stock Quote
Gildan Activewear Inc.
GIL
$31.60 (1.71%) $0.53

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