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Bankrupt American Apparel could help Gildan grow overseas

March 1, 2017

Gildan believes American Apparel will help the company internationally, and analysts agree

Gildan Activewear Inc. believes there’s potential for international business growth in the bankrupt controversial brand American Apparel, and so do analysts.

Gildan GIL, +0.80% , which is based in Montreal, won the auction for American Apparel’s brand and other assets in January with an $88 million bid. Stores were not included in the deal.

“We have quickly begun implementing our integration plans, which include leveraging our manufacturing network, while at the same time working on a supply chain to also support Made in the USA product,” said Rhodri Harries, chief financial officer at Gildan, on the company’s fourth-quarter conference call on Thursday. The company expects American Apparel to be neutral on earnings in 2017, but accretive in 2018.

Going forward, Gildan believes American Apparel will be a premium fashion basics brand in the company’s portfolio that has opportunities in international markets, where, according to Harries, there has been “huge interest” from customers.

“[T]he competitive landscape today for Anvil brand positioning is it’s priced below… how we view some of the competitors in the market, and American Apparel will be slightly higher than that,” said Harries.

The Anvil brand includes items like t-shirts and hoodies for men and women.

American Apparel was once a successful, on-trend brand, known for its super sexy (some would say prurient) ads and its founder, Dov Charney, who attracted as much attention as the clothes.

Experts believe that American Apparel’s time has passed, however, with other fast-fashion retailers, like H&M Hennes and Mauritz HMB, +0.26%  , filling the demand for affordable fashion basics.

“American Apparel was a marketing machine that had basically run its course,” said Erich Joachimsthaler chief executive officer of Vivaldi, a business consultancy and branding firm. “What American Apparel was able to do was astounding. It was selling sex and doing it in a way that we could not believe. That’s no longer cool.”

The brand had a “cult audience” that wasn’t that big to begin with, according to Jessica Ramirez, retail research analyst at Jane Hali & Associates, a retail investment research firm.

“They’ve been out of the loop for a few years, especially after the store closings” began, Ramirez said. “Before that they were getting hit by fast fashion.”

But the brand could get new life overseas, analysts say.

“[The] American Apparel brand presents a meaningful growth opportunity,” said RBC Capital Markets in a Friday note. Analysts believe “American Apparel has a strong market position” in the fashion segment in one of Gildan’s key U.S. markets, and agree with executives that there are prospects abroad.

“While the company will continue to support made-in-USA product, we expect Gildan to also introduce products at lower price points, which can be manufactured at its Honduras facilities,” the note said. “This lower-priced product can be directed to both the U.S. and international markets, in our view.”

RBC rates Gildan shares outperform, but lowered its price target to $29 from $30.

As a company, Raymond James believes Gildan is snatching up business from the competition, despite the tough apparel landscape.

“While the apparel retail backdrop was (and remains) challenging, Gildan not only continues to take share in every category in which it competes (as a function of its relative contribution margin for retailers and compelling proposition for consumers), but also has significantly more flex in its pricing model,” analysts said in a Friday note.

Raymond James rates Gildan stock strong buy with a $36 price target.

Gildan shares are down 6.4% for the past year while the S&P 500 SPX, +0.79%  index is up 19.5% for the same period.

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