Knock Your Socks Off

06/08/2010 12:01 am EST


Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Canadian underwear maker Gildan and convenience store operator Alimentation Couche-Tard are aggressively expanding south of the border, writes Tom Slee in the Internet Wealth Builder.

It's never wise to count your chickens in the stock market, but Gildan Activewear (NYSE: GIL, Toronto: GIL) is certainly on a roll. First-quarter earnings of 24 cents a share, compared to four cents in 2008, beat expectations. Sales of $220 million were up 19.8% from the previous year. Those results showed that, despite a still very difficult environment, Gildan can sell its entire output and maintain strong profit margins. That's quite a trick in the murderously competitive rag trade.

At the same time, and what I particularly like, is that the company is penetrating the huge US mass retailing market. Gildan has started shipping underwear and socks under the Starter brand for Wal-Mart Stores (NYSE: WMT), has entered into a socks program with Dollar General (NYSE: DG), and is supplying Cherokee brand underwear to Target (NYSE: TGT). These contracts provide a solid sales base and economies of scale.

Looking ahead, there are reports that Gildan plans to increase its wholesale active wear prices by 5% in July. That should more than offset higher cotton costs. At the same time, the company's sales efforts in Mexico and Europe should boost its international revenues. A growing product line is also likely to pay off.

Gildan Activewear is a Buy with a revised target of $35.

At Alimentation Couche-Tard (Toronto: ATD.B), the news is mixed. Third-quarter earnings were disappointing. The reason is simple: ATD sold dramatically less fuel in its US convenience stores and the margins on this business contracted. There is less traffic on the roads as the American economic recovery continues to splutter.

Investors have backed away from the stock, but I think that the third quarter was a glitch. The company is in excellent shape and continues to expand. On April 26th, the company made a $36-a-share bid for Casey's General Stores (Nasdaq: CASY), an attractive chain of 1,500 retail outlets. It is centered in Iowa and generates some of the highest profit margins in the industry. Casey's also owns a lot of valuable real estate. This would be a significant acquisition for ATD as Canadian analysts have been recommending Casey's as a Buy in its own right.

There is activity on other fronts. In January, the company created a joint venture with Shell Oil to operate 100 convenience stores in the Chicago metropolitan area. Eight stores under the Acel banner in North Carolina were acquired at about the same time, and so it goes.

I am encouraged by the strong balance sheet, and while this year's US earnings are going to be lower than originally thought, we could still see about $1.60 a share. That means the stock is cheap. Alimentation Couche-Tard is a Buy with a target of C$23.

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