Hanesbrands (NYSE: HBI) recently reported its first-quarter earnings results, and once again, the Champion brand is on fire.
Overall, sales increased 10% year over year (adjusted for currency), led by a 17% increase in the activewear segment. Driving the activewear growth was Champion, with sales soaring 75% excluding the mass retail channel. This is the second consecutive quarter of accelerating sales growth for the brand.
Champion is one of the hottest athleisure brands in the market, but management sees the brand as more than just a fad -- it sees Champion growing for years.
Image source: Champion.com.
A global athleisure brand in the making
CEO Gerald Evans said, "We continue to experience strong consumer demand for the brand around the world." He added, "The success of Champion over the past several years is a result of our highly coordinated global strategy to elevate the brand after it was reunited in 2016."
Champion is a key piece of the company's growth strategy. The innerwear segment (63% of total sales) has struggled to grow in recent years, which has pulled the stock price down. Management is making progress to stabilize innerwear, but if Champion continues to grow at double-digit rates, the company will depend less and less on sales of socks and underwear over the long term.
Champion is ahead of schedule in reaching management's target of $2 billion in annual sales by 2022. That would put the Champion brand, excluding sales to other retailers, at about one-third of total sales. Beyond the $2 billion sales level, management sees a long runway of growth for a brand that is resonating with millennials.
For 2019, management sees Champion sales growing by 30% to $1.8 billion, while achieving a high-teens growth rate in the second half of the year. Even with the slowdown in sales expected later this year, this is still impressive, given the tough year-over-year comparison with last year's blistering growth rates.
The brand is so strong that it's outperforming management's most optimistic expectations. During the recent call, CFO Barry Hytinen admitted that its 2019 guidance may be too low: "As we said last quarter, the guidance may prove to be conservative, given the strong trends we're seeing in Champion."
A well-oiled supply chain helps meet demand
The explosive growth of the brand didn't come out of nowhere. There has been a lot of investment in the supply chain and infrastructure to meet this much demand. Management has opened new distribution channels around the world, which has allowed the company to connect the brand with new customers. In the last quarter, management credited these efforts for the double-digit growth in both the wholesale and consumer channels, as well as broad-based growth across regions.
The acceleration of Champion sales -- going from 40% growth to 75% in the span of two quarters -- would not have been easy to accomplish were the business not efficient at speeding up product manufacturing. If a retailer doesn't have its ducks in a row, a surge in demand can lead to a loss of sales and market share. For example, if the product is out of stock, customers will naturally gravitate to a competitor.
The recent acceleration in sales reflects a supply chain that is well tuned to meeting a massive surge in demand. It's especially impressive for a company that is primarily known for selling socks and underwear, not athleisure.
Overall, Champion's success reflects a management team that knows what it's doing and is very focused on guiding Champion to greater heights as an athletic brand over the long term.
The company sees a significant expansion opportunity for Champion in Asia and Europe. Evans said, "Within our direct-to-consumer platform, we're continuing our online efforts while developing a network of branded stores, particularly in Asia."
Management also sees opportunity for expanding margins over the long term, as it focuses on investing in higher-margin products across innerwear and activewear.
All in all, Hanesbrands continues to improve its growth prospects on the back of robust growth with Champion. As long as the company continues to make progress as it did this past quarter, it's only a matter of time before investors send the stock higher.
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