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Hanesbrands (HBI) Hurt by Weak Activewear Unit, Drab Margins

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Zacks Equity Research
·3 min read
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Hanesbrands Inc. HBI is reeling under headwinds related to the coronavirus outbreak. The company’s operations in the Activewear segment are being affected due to the pandemic. Also, management provided an unimpressive guidance for fourth-quarter 2020 in the wake of COVID-19.  Apart from these, Hanesbrands has been grappling with strained margins for a while now. Nevertheless, the company’s recently floated protective gear business is providing some breather.

Let’s delve deeper.

Hurdles in Hanesbrands’ Way

In third-quarter 2020, sales in the company’s U.S. Activewear business declined 41% year over year. The downside was primarily caused by weakness in sports apparel business stemming from coronavirus-related problems like cancelled sporting events and shutting of college bookstores.

Also, this Zacks Rank #4 (Sell) company has been grappling with strained margins for a while now. In the third quarter, adjusted gross margin of 36.7% contracted nearly 275 basis points (bps) thanks to higher inventory reserves and negative manufacturing variances. Also, adjusted operating margin declined nearly 170 bps to 12.6%. In fact, management expects gross and operating margins to be affected by negative manufacturing variances and escalated SG&A expenses in the fourth quarter.


 

Moreover, Hanesbrands provided unimpressive top and bottom-line view for the fourth quarter. This reflects pandemic-related uncertainties like recent lockdowns and curfews in Europe. For the quarter, net sales are anticipated in the range of $1.60-$1.66 billion. The midpoint of guidance suggests a net sales decline of 7% year over year. Further, adjusted earnings per share are envisioned in the band of 25-30 cents in the quarter. When the mid-point of this guidance is compared with rebased figures to reflect exits of the C9 Champion and DKNY programs, the metric is likely to decline nearly 39%.

Moreover, Hanesbrands operates in a highly-competitive textile and apparel market. Incidentally, failure to offer high-quality distinguished products at a competitive price may hamper the company’s market share, resulting in lower earnings and sales.

Wrapping Up

Hanesbrands is undertaking a number of measures to stay afloat amid the coronavirus crisis. The company developed a product line of personal protective garments, which resonates well with the present environment. Notably, Hanesbrands sold personal protective garments worth $179 million worldwide during the third quarter of 2020. As consumers are resorting more to online shopping, the company continues to focus on developing its online sales.

That being said, let’s see if these upsides can help the company counter the aforementioned hurdles. Shares of Hanesbrands have lost 15.1% in the past three months against the industry’s growth of 16.6%.

Key Picks

Crocs CROX, which sports a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 15%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kontoor Brands, Inc. KTB, which sports a Zacks Rank #1, has a long-term earnings growth rate of 6%.

V.F. Corporation VFC, with a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 12.3%.

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