BofA Double Downgrades Gildan On Nicaraguan Unrest

As geopolitical concerns weigh on the Central American supply chain, Gildan Activewear Inc (USA) (NYSE: GIL) is suffering from circumstances beyond its control, according to Bank of America Merrill Lynch. 

The Rating

Analyst Heather Balsky downgraded Gildan from Buy to Underperform and cut the price target from $34 to $26.

The Thesis

Gildan operates three of its 13 sewing facilities in Nicaragua, which is enduring labor strikes, road closures, violence and political turmoil, Balsky said in the Tuesday downgrade note. (See the analyst's track record here.) 

While the concentrated unrest isn’t seen to stunt the firm’s long-term growth strategy, it could weigh on immediate valuation, the analyst said.

“We expect GIL to work quickly to mitigate supply chain challenges, but these adjustments can take time, hurt efficiency and result in additional costs." 

BofA expects the disruption to drive a 7-percent increase in labor and transportation costs as Gildan shifts sewing to other sites and outsources projects to contractors. At the same time, delivery delays could pressure sales and diminished capacity could prevent Gildan from pursuing incremental demand, Balsky said. 

The variables are likely to restrict fourth-quarter margins and squeeze Gildan's 2018 and 2019 bottom lines by 4 percent, the analyst said. 

Gildan continues to recover from the 2017 Honduran earthquakes, which pushed orders from the first half of 2018 to the second, according to BofA. Similar inventory constraints and manufacturing and transportation inefficiencies were seen after Haiti’s 2010 earthquake, which led to a $7-million cost increase and forfeited sales.

Price Action

Gildan shares were trading down more than 5 percent to $26.75 at the time of publication Tuesday. 

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