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Why Hanesbrands Stock Dropped 15% in August

John Ballard, The Motley Fool

What happened

Shares of Hanesbrands (NYSE: HBI) fell 15.1% last month, according to data provided by S&P Global Market Intelligence. Sometimes, stocks make sudden moves based on a surprisingly good or bad earnings report, and other times, stocks move for reasons that don't make a lot of sense. The drop in Hanesbrands stock last month can be chalked up to the latter.

The company reported a solid second quarter at the beginning of August, with the innerwear segment performing in line with management's expectations. But the star of the show continues to be the growth in the activewear segment, where the Champion brand is on fire. If that wasn't enough to encourage investors, management also reaffirmed its previous guidance, calling for growth on the top and bottom line for the full year. 

The Champion U.S.A. logo displayed in bright neon lights on a store sign.

IMAGE SOURCE: HANESBRANDS.

So what

To put the Hanesbrands stock performance in context, the SPDR S&P Retail ETF, which tracks all the retail stocks in the S&P 500 index, was down 6.62% in August. That significantly underperformed the S&P 500 loss of just 1.81%. 

Retailers have come under pressure lately because of the Trump administration's latest round of tariff hikes, which took effect on Sept. 1. Some investors worry that these tariffs could negatively impact a range of consumer goods companies that do business in China, like Hanesbrands. 

Still, even with the near-term headwinds of trade wars and retail store closures, Hanesbrands expects revenue to be up through the end of the year. For 2019, management is calling for revenue growth of 2% at the midpoint of guidance. Earnings per share should be up 5%, and operating cash flow is expected to increase by 17% year over year. 

Now what

The guidance for growth on the top and bottom lines makes the stock look like a bargain at a forward price-to-earnings ratio of just 7.4 times next year's earnings estimate. The stock also pays a dividend yield of 4.39%, which looks sustainable based on the company's trailing-12-month free cash flow of $546 million. 

Hanesbrands is continuing to nurse a stagnant market for innerwear, while investing in the fast-growing Champion brand. In the second quarter, the popular athleisure brand experienced sales growth, excluding sales to other large retailers, of more than 50% year over year. Champion sales are currently about a quarter of total revenue at $1.8 billion, but management is looking to grow the brand to $3 billion in annual sales.

Investors interested in finding a value stock in the apparel industry should keep their eyes on Hanesbrands, given the tremendous growth opportunity with the Champion brand and an ultra-cheap valuation. 

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John Ballard owns shares of Hanesbrands. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com