Hanesbrand: A Good Fit?

08/13/2019 5:00 am EST


Ben Reynolds

CEO, Sure Dividend

Hanesbrands (HBI) is a leading marketer of everyday basic innerwear and activewear appare; it sells its products under well-known brands such as Hanes and Champion, notes Ben Reynolds, editor of Sure Dividend.

Hanesbrands has a market capitalization of $5.5 billion and produces about $7 billion in annual revenue.

Hanesbrands reported Q2 earnings on 8/1/19 and results were quite strong. Total revenue was up 3% as constant currency revenue rose 5%, but 2% of the gain was offset by forex translation.

This was the eighth consecutive gain in organic sales. Gains were made across the board as Innerwear sales met expectations, International sales were up 4%, and Champion brand merchandise rose more than 50%.

Gross margins were slightly below consensus at 39% of revenue, but the operating margin was 14% of revenue. Management also noted that current momentum is strong, particularly with the Champion brand. We’re reiterating our earnings-per-share (EPS) estimate of $1.78 for this year after Q2 results.

Hanesbrands benefits from strong brand recognition in the discount apparel space. This is particularly true for the company’s flagship Champion brand, which has been performing very well recently. Hanesbrands’ management team expects to achieve $2 billion in Champion brand sales by 2022, primarily through opening new stores and expanding its product lineup globally.

Hanesbrands’ earnings-per-share declined by 19% in the last recession (2008-2009) and its balance sheet’s quality has deteriorated in recent years. More specifically, Hanesbrands has spent $2.9 billion on acquisitions in the last seven years, and these acquisitions were primarily funded through debt.

The company’s interest expense consumes 25% of its operating income currently. This is an important trend that current or prospective investors should watch closely moving forward.

Hanesbrands began paying down its debt in the 3rd quarter of fiscal 2018. We expect more deleveraging ahead, which should help alleviate some of the pressure on earnings from interest expense.

Hanesbrands has compounded its earnings-per-share at an impressive 12.7% rate over the last decade, but at just 4.9% annually over the last 4 years. Due to heightened competition and direct-to-consumer sales channels, we are conservatively forecasting 3% annual growth for Hanesbrands moving forward.

Using our estimate of $1.78 in earnings-per-share this year, the company is trading at a price-to-earnings ratio of 8.5. We see fair value at 12.9 times earnings, which is in line with its historical valuations.

If the company’s price-to-earnings ratio reverts to its historical levels over the next 5 years, this will boost its total returns by a robust 8.8% per year during this time period.

Through a combination of earnings growth (3%), dividend payments (4.0%), and valuation expansion (8.8%), we believe that Hanesbrands could potentially deliver total returns of 15.8% per year over the next 5 years.

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