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Why Is HanesBrands (HBI) Down 12% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for HanesBrands (HBI). Shares have lost about 12% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HanesBrands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Hanesbrands Q1 Earnings & Sales Surpass Estimates

Hanesbrands released first-quarter 2019 results wherein the top and the bottom line exceeded estimates and grew year over year. Results were driven by robust growth across all businesses and regions. Also, increased sales in Innerwear segment in Asia, Australia and the Americas along with higher sales in Innerwear basics for the second successive quarter contributed to quarterly results. 

Q1 in Detail

The company posted adjusted earnings of 27 cents a share, outpacing the Zacks Consensus Estimate of 25 cents. However, quarterly earnings rose 4% year over year from 26 cents in the year-ago period. 

Further, net sales improved 8% to $1,588 million and also surpassed the Zacks Consensus Estimate of $1,534 million. On constant currency (cc) basis, organic sales were up 10%, marking the company’s seventh straight quarterly increase. This upside was backed by increased sales from Innerwear basics, Activewear and International units, mainly fueled by strength in Champion. 

Moreover, Global Champion sales soared more than 75% at cc excluding mass channel backed by sales growth in double-digits across all regions. Also, the company’s consumer-direct sales (including retail and online networks) increased 16% year over year owing to solid e-commerce sales in mostly all its segments.

Moving on, adjusted operating profit inched up 2.3% to $169.4 million. However, adjusted operating margin contracted 60 basis points (bps) to 10.7% due to a $4-million bad-debt charge related to the insolvency of Heritage Sportswear.

Segment Details

Innerwear: Sales dipped 3% in the quarter to $475.9 million due to softness across Innerwear intimates, somewhat offset by growth at Innerwear basics. However, operating profit got nudged up 3% to $104.6 million. Further, the company has witnessed strong performances in underwear, socks and shapewear categories. It remains on track with its plans for the bra turnaround strategy.

Activewear: Sales advanced 17% to $405.3 million, courtesy of higher sales at Champion. However, sales of Champion at mass retail slipped roughly 3%. Further, operating profits increased 14% to $43.6 million.

International: Sales at this segment improved 13% to $646.2 million, boosted by solid growth across Europe, Asia, Australia and the Americas and sturdy sales in innerwear and activewear. Organic sales rose 18% on currency-neutral basis, banking on contributions from Bras N Things within a year of its buyout. Operating profit at this segment jumped 20% to $92.7 million in the quarter, riding on organic growth, contribution from Bras N Things and integration synergies.

Other: Sales declined 6% to roughly $60.6 million. This segment posted an operating profit of $0.8 million, down 71.3% year over year.

Other Financial Details

Hanesbrands ended the quarter with cash and cash equivalents of $287.1 million, long-term debt of $3,615.5 million and equity of $1,038 million. Also, the company generated $194.3 million in net cash from operations during the quarter.

Guidance

Management has retained its 2019 view and issued a new one for second-quarter 2019. For the second quarter, it anticipates the company’s top line to be $1.735-$1.765 million. Adjusted operating profit is expected to be $238-$248 million. Moreover, the company projects adjusted earnings to be 43-45 cents. The Zacks Consensus Estimate for the metric is pegged at 48 cents. Effective tax-rate for the second quarter is forecast at roughly 14%. Further, it estimates more than 365 million shares outstanding. 

For 2019, the company issued an initial outlook. Net sales are predicted in the $6.885-$6.985 billion range. While GAAP operating profit is likely to be in the $900-$930 million band. Adjusted operating profit is assumed within $955-$985 million. Further, the company envisions adjusted earnings of $1.72-$1.80 for the year along with net cash from operations of $700-$800 million. 

At the mid-point, the current guidance for the year reflects year-over-year growth of roughly 2% in net sales, 5% in operating profit on a GAAP basis and 2% in adjusted operating profit. Further, the guidance represents mid-point growth of 7% and 3% for GAAP and adjusted earnings, respectively, coupled with a 17% improvement in operating cash flow. Effective tax-rate for 2019 is hoped to be almost 14%. Further, it anticipates roughly 366 million shares outstanding. 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, HanesBrands has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

HanesBrands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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