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2 Dirt-Cheap Apparel Stocks

Timothy Green, The Motley Fool

Companies that manufacture clothing aren't getting a lot of love from investors. The retail industry is in flux, with bankruptcies and store closings pressuring suppliers, and the possibility of additional tariffs has had investors spooked.

With pessimism running high, now's the time to scoop up some bargains. Hanesbrands (NYSE: HBI) and Kontoor Brands (NYSE: KTB) are two apparel stocks trading for beaten-down prices, and both offer compelling dividends. Here's why you should consider these two dirt-cheap apparel stocks.

Puzzle pieces spelling the word "value."

Image source: Getty Images.

Hanesbrands

Hanesbrands' core business is innerwear, a market in which it holds the No. 1 or No. 2 position across multiple categories. In the U.S., the company is top dog in the men's underwear, kids' underwear, socks, and hosiery markets, and it's No. 2 in intimates and T-shirts. A similar story plays out in many of Hanesbrands' international markets.

While innerwear is a slow-growth market, per-capita consumption is stable, and sales are heavily skewed toward branded merchandise instead of private labels. The century-old Hanes brand isn't trendy, but it certainly has staying power.

Hanesbrands' other main business is activewear. The company's Champion brand is growing quickly outside of mass market retailers, and it's on pace to hit $2 billion of annual revenue by 2022, even with a significant setback related to Target.

Solid growth from activewear and international sales has driven seven consecutive quarters of constant-currency organic sales growth for Hanesbrands. In the first quarter of 2019, organic sales were up 10% year over year. Full-year growth will be slower, according to Hanesbrands' guidance, as the company is expecting retail store closings and currency to negatively affect sales, particularly in the U.S. innerwear business. But the company still expects solid growth from activewear and international markets.

While Hanesbrands certainly shouldn't be valued like a growth company, the market has taken the stock a little too far in the other direction. With the company expecting non-GAAP (adjusted) earnings per share between $1.72 and $1.80 for 2019, shares of Hanesbrands trade for less than 10 times earnings. The stock also sports a dividend yield of roughly 3.5%.

Given Hanesbrands dominant position in the innerwear business and its growth potential in activewear, that seems too cheap. While there are risks, including a tumultuous retail environment and tariffs, Hanesbrands should be on every value investor's radar.

Kontoor Brands

In May, V.F. Corp. completed the spinoff of its denim business. The new company, called Kontoor Brands, began trading on May 23.

Most of Kontoor's revenue comes from its two denim brands, Wrangler and Lee. Both have been around for a long time -- Wrangler is more than 70 years old, and Lee is more than 100 years old. Neither brand is particularly trendy, but they remain popular after all these years. Wrangler is the No. 2 denim brand in the U.S. and the No. 1 denim brand in the mass channel, while Lee is a leading denim brand in China and India.

Revenue for the businesses that are now part of Kontoor has been largely stagnant for the past decade, and a tough retail environment has been hurting sales in the past couple of years. Kontoor expects to generate at least $2.5 billion of revenue in 2019, and revenue is expected to grow at a low-single-digit pace over the following two years.

Here's where it gets interesting. Analysts are expecting Kontoor to produce adjusted earnings of $3.46 per share this year. With the stock trading around $28 per share, down significantly since it was spun off, the price-to-earnings ratio is just 8. Earnings growth will likely be tepid, but a single-digit earnings multiple gives investors a solid margin of safety.

And Kontoor is an even better dividend stock than Hanesbrands. Kontoor hasn't declared its first quarterly dividend yet, but the company reiterated its plan to pay per-share dividends totaling $2.24 annually. That works out to a dividend yield of about 8%.

If Kontoor can't muster the low-single-digit growth it's aiming for, the stock could turn into a value trap. But with solid brands that have stood the test of time, the company has a good shot at producing solid returns for investors.

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Timothy Green owns shares of Hanesbrands and Kontoor Brands Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.