SATURDAY,OCTOBER19,2019 | THEGLOBEANDMAILO B9
GLOBEINVESTOR
REPORTONBUSINESS|G
ildan Activewear Inc.
slashed its financial out-
look for the third quarter,
sending the shares down sharply
and raising concerns that the T-
shirt maker’s revised outlook is a
symptom of weaker global eco-
nomic activity.
“This is a company that had
been seeing strong trends and
now suddenly is not, which
makes us wonder if it could be a
proverbial canary in the coal
mine for something broader
happening,” Paul Lejuez, an ana-
lyst at Citigroup Global Markets,
said in a note.
Gildan’s share price plunged
by as much as 35.5 per cent in
early trading on Friday before re-
gaining some ground. In Toron-
to, the shares closed down $11.96
or about 26 per cent to $34.53,
marking the biggest one-day de-
cline for the stock since the
depths of the financial crisis in
2008.
The selloff appeared particu-
larly shocking because a number
of analysts had previously seen
Gildan as a consistently strong
performer that could improve its
profit margins.
As recently as mid-July, the
shares were coasting at a record
high of $52.73.
Now, analysts have cut their
target prices (or where they ex-
pect the shares will trade within
12 months) by an average of 22
per cent, according to Bloom-
berg, with a murkier outlook for
sales and profitability likely
weighing on the stock’s valua-
tion.
“Though Gildan remains fun-
damentally sound with a healthy
balance sheet and asset base, we
have limited visibility to 2020,”
Mark Petrie, an analyst at CIBC
World Markets, said in a note.
Mr. Petrie cut his target price
by 25 per cent, to US$30 from
US$40 previously.
The shares trade in New York
and Toronto.
In its preliminary third-quar-
ter results and full-year outlook,
released after markets closed on
Thursday, Gildan announced
that its sales for the quarter end-
ed Sept. 29 will be about US$50-
million lower than expected.
It blamed the revision on sig-
nificantly weaker demand for
“imprintables,” which areT-shirts that corporations can
emblazon with their logos and
use to promote events.
Gildan expects that sales for
the third quarter will be about
US$740-million, down 2 per cent
from the same quarter last year.
The company also reduced its
outlook for fourth-quarter sales
by US$170-million and expects
that its full-year profit will be in
the range of US$1.65 to US$1.70 a
share, down from previous guid-
ance of US$1.80 to US$1.85.
Gildan did not respond to a
request for comment. The com-
pany will report its third-quarter
results on Oct. 31, likely accom-
panied by more details from
management during a confer-ence call with analysts.
Until then, observers are left
wondering whether this is a
near-term setback for Gildan’s
management or part of a broad-
er trend as companies reduce
spending amid declining global
economic growth and uncertain-
ty related to the trade war be-
tween the United States and Chi-
na.
“The culprit appears to be
broader economic activity,” Ste-
phen MacLeod, an analyst at
BMO Nesbitt Burns, said in a
note.
He pointed out that a big
source of Gildan’s pain emanates
from weak sales through distrib-
utors that cater to corporate cus-
tomers.
Keith Howlett, an analyst at
Desjardins Securities, said in a
note that it is possible that eco-
nomic anxiety is causing some
companies to reduce their dis-
cretionary spending – T-shirts
being an easy place to cut.
But in reducing his recom-
mendation on the stock to “sell”
from a “buy” previously, Mr.
Howlett (who could not be
reached for comment) hinted
that Gildan’s management may
have some explaining to do, giv-
en their optimistic outlook just(^21) ⁄ 2 months ago, after the release
of second-quarter results.
Despite overall slow interna-
tional sales growth for imprinta-
ble T-shirts in the second quar-
ter, management pointed to a
pickup in June and July, and pro-
jected double-digit growth in the
second half of 2019, the analyst
said in the note.
“We have a high regard for Gil-
dan’s manufacturing expertise
and were encouraged that the
proposed target of attaining a 30-
per-cent gross margin rate by
2021 was not only chosen by
management but largely within
its own control,” Mr. Howlett
said.
GILDAN ACTIVEWEAR (GIL-TSX)
CLOSE: $34.53, DOWN $11.96
GILDAN ACTIVEWEAR (GIL-NYSE)
CLOSE: US$26.28, DOWN US$9.10
Gildanseesstockdropaftercuttingoutlook
T-shirtmaker’sselloff
isespeciallyconcerning
afteranalystspeggedit
asastrongperformer
thatcouldimprove
itsprofitmargins
Clothingmanufacturer
Gildan,whoseT-shirtsare
seeninMontreal,expects
third-quartersaleswillbe
aboutUS$740-million,
down2percentfromthe
samequarterlastyear.
CHRISTINNEMUSCHI/
THEGLOBEANDMAIL
DAVIDBERMAN
INVESTMENTREPORTER
W
hen nutritionist Lonie
Murdock started pre-
pared meal service Eat
Train Live in 2015, she had few
competitors in the Toronto mar-
ket.
But in the past few years, she’s
noticed new prepared-meal or
meal-kit services springing up
constantly.
Each has different dishes and
policies, creating a minefield of
considerations and possible con-
fusion for consumers just look-
ing for an easy – and tasty –
meal.
To figure out what kind of ser-
vice or kit is best for you, Ms.
Murdock recommends thinking
about how often you intend to
eat, what size portions you pre-
fer and what kinds of food you
most enjoy.
Once you answer those ques-
tions, you can use the informa-
tion to find a service that fits
your dietary needs, can offer any
meal you desire and won’t pro-
vide portions that leave you
hungry or with plenty of left-
overs.
When researching options,
she says to look for services with
flexibility – meatless options,
shorter preparation and bake
times for busy nights and dishes
that match multiple moods and
occasions.
Ms. Murdock says a lot of peo-
ple want to try out one meal be-
fore they subscribe for a longer
period of time, but she recom-
mends trying at least a few days
of a service.
“What if you get that one meal
and you hate it, but there are 12
other options to choose from
and you end up loving the other
11,” she said. “You won’t know
that unless you try more than a
meal.”
She suggests first-timers look
for or ask about trial periods and
starter discounts they can use to
explore if a service is right for
them.
Services don’t just offer meals,
many can also provide snack and
dessert options.
But that doesn’t mean you
should purchase a plan that cov-
ers every meal.
It might not be worth it to opt
in for breakfast, if you have a
routine of blending up a
smoothie every morning or if
you skip the meal altogether, Ms.
Murdock says.
“I always tell people to focus
on what you do best at home,”
she says.
“But if you’re a person who
has got three kids to get out the
door and maybe breakfast is not
something you do well, consider
[a service].”
Many services offer their best
prices at the beginning of the
year or summer, when people
have just made New Year’s reso-
lutions to eat healthier or when
they’re trying to get fit for swim-
suit season, Ms. Murdock says.
Consumers, she says, should
also be conscious of deadlines.
Many subscriptions require you
to order by a specific date, so
they can prepare ingredients in
time. If you don’t order in time,
expect hefty additional fees or to
go without service for that order
period.
The average service can cost
anywhere from a few dollars to
$12 a portion and the bill will
quickly add up if you’re purchas-
ing many meals for long stretch-
es of time.
To keep the cost down, con-
sider locking in for a longer sub-
scription or more portions.
“If you want the incentives or
to order more for less, find an-
other person to share with,” Ms.
Murdock suggests.
While dinner is often the meal
most people want a service for,
Ms. Murdock says it also tends to
be the most expensive. Custom-
ers, she says, should beware that
items including shrimp, steak
and salmon often come with
premium prices, too.
If you are being cost con-
scious, keep an eye out for dis-
count codes that many services
hand out at transit stations and
busy streets or offer for custom-
ers who refer friends.
Remember to take a careful
look at the fine print when you
subscribe to a service, Ms. Mur-
dock says.
Many services will auto renew
and charge your credit card if
you don’t cancel by specific
dates.
THE CANADIAN PRESS
Aremealkitsworththemoney?
TARADESCHAMPS
Boyd Group Income Fund has indicated that it
plans to convert from an income trust to a
corporation and exchange its units on a one-for-
one basis for new common shares. I am con-
cerned because the company indicated that “the
exchange of fund units for common shares ...
will occur on a taxable basis, which may result
in a taxable event for certain unitholders.” Can
you explain what’s going on?
First, the good news: Winnipeg-basedBoyd
Group Income Fund(BYD.UN) has posted ex-
ceptionally strong returns, thanks to its suc-
cessful growth-by-acquisitions strategy. For
the five years ended Sept. 30, the operator of
collision repair and auto glass shops in Canada
and the United States delivered a total return
of 34.7 per cent on an annualized basis, crush-
ing the S&P/TSX Composite Index’s annual-
ized total return of about 5.3 per cent over the
same period. (Both figures assume reinvest-
ment of dividends.)
To put that into dollar terms, if you’d pur-
chased $10,000 of Boyd Group Income Fund
units five years ago, your stake would be
worth more than $44,000 today.
Now the bad news: If you hold your units in
a non-registered account, you could be facing
a hefty capital gains tax hit when the con-
version takes place. That’s because the ex-
change of units for common shares of the new
company, to be called Boyd Group Services
Inc. (ticker BYD), will be treated for tax pur-
poses as if you had sold the units.
Assuming the transaction is approved at a
special meeting on Dec. 2, the conversion to a
corporation would be effective on Jan. 1. The
conversion requires two-thirds approval of
votes cast by unitholders of Boyd Group In-
come Fund and by class A shareholders of sub-
sidiary Boyd Group Holdings Inc.
The silver lining here is that, based on the
information provided by the company, the
transaction will fall in the 2020 tax year, said
Dorothy Kelt of TaxTips.ca. That means inves-
tors who exchange their units for new shares
won’t have to report their capital gains, if any,
until they file their 2020 tax returns in 2021.
(Investors who hold the units in a registered
plan will not face any capital gains tax.)
The exact conversion price – and, hence,
the capital gain that unitholders will report –
won’t be known until the transaction is final-
ized. But given Boyd Group Income Fund’s
stellar performance, some investors will al-
most certainly be paying Ottawa a sizable
chunk of cash. Returning to the example of an
investor whose $10,000 investment has grown
to $44,000, assuming a combined federal and
provincial marginal tax rate of 50 per cent, the
capital gains tax hit would be $8,500. (Only
half of capital gains are added to income and
taxed at the investor’s marginal rate.)
Why is Boyd Group Income Fund convert-
ing to a corporation, and why did it choose a
taxable exchange instead of a tax-deferred rol-
lover?
One goal of conversion is to broaden the
company’s investor base by adopting a struc-
ture “that is more generally accepted and un-
derstood by the capital markets and global in-
stitutional investors,” the company said when
it announced the transaction in September.
Another objective is to remove the restriction
on foreign ownership; currently, non-resi-
dents of Canada are permitted to collectively
own no more than 49 per cent of the fund’s
units.
“We believe that while we might have been
able to run with the current structure for some
time, that non-Canadian foreign ownership re-
striction was starting to get too close ... to
really be comfortable for an extended period
of time,” Brock Bulbuck, chief executive of
Boyd Group Income Fund, said on a confer-
ence call with analysts.
“I think Bloomberg [data are] showing that
the non-Canadian ownership is in the neigh-
bourhood of 32 per cent. And our analysis ac-
tually shows it’s somewhat higher than that,”
he said.
As for the decision to choose a taxable con-
version, the company said in an e-mail that “it
results in the simplest post-conversion struc-
ture that will be the most easily understood
and accepted by the capital markets. It will
also provide the most flexibility for the busi-
ness going forward.”
“Pursuing a tax-deferred strategy may have
benefited certain unitholders by deferring the
tax they would otherwise pay, but doing so
would also result in a future tax liability for
the Fund, which would ultimately be borne by
all shareholders, whether or not they were a
Fund unitholder that participated in the con-
version transaction.”
More details about the proposed transac-
tion, including the tax consequences, will be
included in an information circular that the
company plans to mail to unitholders in late
October.
Special to The Globe and Mail
E-mail your questions to
[email protected]. I can’t respond to
everyone personally, but I select certain
questions to answer in my column.
WhyBoydGroup’sconversion
willtriggeraheftytaxhitforsome
JOHN
HEINZL
OPINION
INVESTORCLINIC