Post the 2008 subprime crisis, the U.S. economy tanked, giving rise to massive unemployment and credit squeezes, which led to a steep decline in consumer spending. To deal with this issue, the Federal Reserve introduced quantitative easing, which is an unconventional tool to increase monetary supply and subsequent credit availability. Post-QE the U.S. economy marginally stabilized with the unemployment rates falling and growth picking up. However, these are still testing times, as massive budget cuts still loom around the corner.
A poor macroeconomic environment in the North American markets still poses a massive threat to the company, as a large percentage of its sales are generated from this region.
Competitive landscape
Gildan’s primary competitors across segments are Hanesbrands Inc. (NYSE:HBI) and Berkshire Hathaway Inc. (NYSE:BRK.A). Hanesbrands Inc. (NYSE:HBI) has been one of the best performing in its segment. It reported a profit of $54 million during the first quarter of fiscal 2013, which is a huge improvement from the same quarter the previous year, where the company reported a loss of $27 million.
Although revenue decreased by 2.8%, increases in gross margins at around 8% provided the necessary impetus for strong earnings growth. With the Innovate-to-Elevate strategy the company aims to further penetrate the market and challenge Gildan’s leadership in North American. Its recent jump in earnings has resulted in several investors keeping a highly bullish view on its stock.
Berkshire Hathaway Inc. (NYSE:BRK.A)’sFruit of the Loom and Russell Corporation are other key competitors. A legal battle between the two has led to Gildan settling the issue with a $1 million compensation to Russell over the trademark infringement issues.
The rivalry between the companies has been ongoing for decades, and in spite of the acquisition of Fruit of the Loom and Russell Corporation by Warren Buffett’s Berkshire Hathaway, Gildan has been able to outperform its competitors and sustain its leadership position in the North American markets.
Why this stock could be a good buy
Gildan’s fundamentals are strong, and coupled with strategic acquisitions recently made, Gildan is becoming the largest sock producer in the world. The company controls almost 70% of the North American market, which is indicative of its true dominance.
In addition, the company has strategically located production facilities, which allow it to maintain competitve pricing. It is a leader in its segment, and going forward even a marginal increase in consumer spending could send its share price soaring.
Kiran Gulati has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Kiran is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Improving Macro-Economic Evironment Can Send Gildan Soaring originally appeared on Fool.com is written by Kiran Gulati.
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