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Hanesbrands Cheers on Global Strength, Innerwear Unit a Drag

Zacks Equity Research

Hanesbrands Inc. HBI is in investors’ good books, as evident from the stock’s 51.3% rally in the past three months compared with the industry’s rally of 25.9%. This popular apparel products manufacturer is gaining from consistent rise in organic sales, strong international presence, prudent buyouts and cost-saving efforts. However, the company is facing hindrances stemming from adverse currency movements and weak innerwear business. Let’s take a closer look at both sides of the story.

Factors Adding Sheen to Hanesbrands

Hanesbrands has long been gaining from solid performance in the international segment, which contributed 34.4% to the company’s net sales in fourth-quarter 2018. The unit is gaining from strong Champion sales across Europe and Asia. Contributions from the acquisition of Bras N Things are also fueling sales in the segment. Management is focused on making investments and innovations internationally, which is a major driver. Apart from Hanesbrands, other textile-apparel players such as Columbia Sportswear COLM, lululemon athletica LULU and Ralph Lauren RL are benefitting from solid international presence.

Hanesbrands also makes strategic acquisitions to strengthen its business portfolio, which is one of its core strategies for long-term growth. The buyouts provide the infrastructure, capability and systems to deliver to a broad set of retail customers. To this end, Hanesbrands acquired Alternative Apparel more than a year ago. Also, the company bought Bras N Things last year and is on track with its integration. Markedly, contributions from these acquisitions played a major role in augmenting the company’s fourth-quarter 2018 sales. Also, management expects Bras N Things to contribute to sales growth in the first quarter of 2019. Apart from this, the company has largely been gaining from contributions from Champion Europe and Hanes Australasia.

Additionally, we note that the company’s solid brands as well as strength in activewear and international businesses have been boosting organic sales. In fact, the fourth quarter marked the company’s six consecutive quarter of organic sales growth. Encouragingly, organic sales (at cc) are projected to improve 2.5% in 2019.

Hanesbrands is also progressing with the Project Booster Program, which is directed toward driving investment for growth, minimizing costs and increasing cash flow. By 2019, this project is anticipated to produce nearly $150 million of annualized cost savings, of which roughly $50 million will be reinvested in targeted growth opportunities. Furthermore, the Project Booster cost savings along with other cash flow drivers like synergies from buyouts and diversified revenues are estimated to help Hanesbrands achieve cash flow target of an annual run rate of $1 billion by the end of 2019.



 

Can Efforts Help Overcome Roadblocks?

Weakness in the Innerwear category has long been a concern for Hanesbrands. Softness in the Innerwear Basics and Innerwear Intimates is plaguing performance. Management stated that a tough a U.S. retail scenario, stemming from extended bankruptcies and store closures, is likely to continue weighing on this category.

Moreover, the company is exposed to unfavorable foreign currency translations that dented sales in the fourth quarter of 2018 to the tune of about $26 million. Further, management expects currency to have a $60-million negative impact on net sales in 2019, with most of it being realized in the first quarter.

Nevertheless, we expect this Zacks Rank #3 (Hold) company’s robust catalysts to help it stand firm amid these headwinds and continue as a preferred pick for investors.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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