Sell Block: A Psych-Out From Same-Store Sales?

Don’t let May’s sudden jump in retail sales fool you into buying apparel maker Gildan Activewear, Cramer said Thursday. This clothing company doesn’t move in tandem with the sector.

Gildan’s T-shirts, sweatshirts and fleeces may look similar to those of Hanesbrands HBI, but these companies are not the same. Unlike Hanesbrands , most of Gildan’s customers are businesses, nonprofits, schools and sports teams who buy “blanks” on which they can print their logos. Only 10% of Gildan’s revenues come from retail, in fact, and that isn’t enough to warrant buying the stock as a play on today’s sales numbers.

In this era of cost cuts, as all kinds of institutions, business or otherwise, are focused on saving money. Therefore, you can bet that morale-boosting tchotchkes are the first things to go. That’s bad news for Gildan. Just look at privately held Broder, a blank-clothing distributor that accounted for 23% of Gildan’s 2008 sales. Broder teetered on the edge of bankruptcy until mid-May when it refinanced about 95% of its debt. So whatever money the company has left is not going to Gildan. Cramer said this was a perfect example of the blanks business right now. It’s in much worse shape than retail.

Another problem with Gildan: It manufactures everything itself, and that translates into higher fixed costs. The company will pay those costs regardless of how many T-shirts it sells. So when business declines, the margins shrink, which is exactly what has been happening. The most recent quarter saw margins slip to about 16% from 28%. Oddly, though, that didn’t stop Gildan from adding three new factories to the 10 it already has.

Between 2003 and 2006, GIL as an investment made sense. The company kept prices low and took market share as a result, making it a classic growth stock. But business has hit a wall now that customers have stopped buying. And there’s just no fat left to cut from Gildan in order to boost profitability.

So while GIL may be up about 185% since the early March lows, Cramer said, this stock still belongs in the Sell Block. He recommended using Thursday’s bump as an exit point.

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