Thursday, February 26, 2009

Gildan Activewear: Higher Market Share, So What?

When times are good, many bad companies can grow revenues and earnings because their industry is operating at full capacity. Conversely, in recessionary times, even great companies can see revenues drop as demand slows industry-wide. So how does one identify the great companies from the bad ones?

One way to do it is by comparing margins across competitors. By doing so, investors can avoid falling into the "market share" trap that companies try to sell investors.

Consider Gildan Activewear (GIL), maker of non-fashion socks, underwear and t-shirts. Sales were down 26% in its first quarter ended Dec 31, 2008, but the company proudly proclaims an overall 4 point increase in its industry market share, and goes on to break down its market share gains by category.

Unfortunately, this is only half the story, as the other half has not been provided. Without knowing why the change in market share has occurred, investors are getting little in the way of relevant information. If competitors had higher prices relative to Gildan, then Gildan's market share has hardly been earned. Gildan has had to delay construction on a new facility because of fears it is running over-capacity; therefore, it only makes sense that it would set its price point lower than that of its competitors to move inventory.

Nowadays, many companies are singing praises over their market share gains despite negative sales. Investors should recognize that market share gains my come at a price, and should therefore examine margins across competitors and over time to ensure the gains are being made because the company is the most efficient producer.

Disclosure: None

1 comment:

Nurseb911 said...

Margins never lie....that's something I learnt a long time ago. I made a similar case for Coca-Cola recently in favour of Pepsico. Many investors look at PEP and determine it's a better stock because of its diversification in the product portfolio. But when you examine the margins of both businesses (gross & profit) you come to a startling observation that one's margins are significantly higher than the other.
In an environment such as this a company has to protect their margins even if revenues drop - that means controlling fixed costs and cutting spending.

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