Apparel firm HanesBrands (NYSE:HBI) reported third quarter results on Wednesday that saw continued solid sales growth, and another quarter of impressive profit expansion. Combined with a reasonable earnings multiple, the stock is worth a look, though the investment story does have one major potential drawback.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Sales improved 4.8% to $1.2 billion. HanesBrands divides its operations into five primary units, and reported low double-digit growth in both the outerwear (t-shirts and fleeces) and international segments. Innerwear (underwear and socks) eked out 0.5% growth while direct-to-consumer (outlet stores and online) sales fell nearly 3%. Hosiery (L'eggs, Hanes brands) sales were the laggard, falling almost 8%.

Operating profits advanced nearly 34% to $152.7 million, as innerwear and outerwear posted profit increases of more than 40%. Direct-to-consumer profits grew a robust 16.5%, with international and hosiery posting profit declines. Management attributed the overall profit growth to a higher-margin sales mix, price increases and cost controls, the last of which continues to benefit from supply-chain efficiencies implemented since being spun off from former parent Sara Lee (NYSE:SLE). (For related reading on operating profits, see Understanding The Income Statement.)

Interest expense grew only 5.3%, but still ate up more than a quarter of operating income and stems from a hefty debt load inherited as part of the spinoff. Overall though, the modest growth helped push net income up 48.1% to $90.8 million, though diluted earnings grew a slightly slower 44.4% to 91 cents per diluted share due to higher shares outstanding.

Analysts currently project full year sales growth of 14%, and total sales of nearly $5 billion. HanesBrands tempered its full-year earnings guidance range to $2.75 to $2.85 per diluted share, though this will still represent year-over-year growth of "more than 25%." It also gave a free cash flow range of $100 million to $200 million, which would represent a pretty wide range between $1 and $2 per diluted share.

The Bottom Line
HanesBrands plans to use free cash flow to pay down its hefty debt load of $2 billion. Sales have proven very resilient throughout the economic downturn and management has managed to steadily boost profits, but has been aggressive in spending on capital expenditures and making acquisitions. As such, it has had to continually rely on outside debt financing to fund its operations and roll over existing debt.

This strategy could prove very risky, if credit markets return to experiencing volatility as they did in 2008. And, though unlikely, it would be nice to see management more aggressively reduce debt and more conservatively balance its growth ambitions. Customer concentration is another drawback, with four firms, including Wal-Mart (NYSE:WMT) and CVS Caremark (NYSE:CVS), each accounting for more than 10% of sales in many of the operating units.

Despite these concerns, the recent sales growth and profit improvements have been impressive. Additionally, HanesBrands' valuation is quite reasonable with a forward P/E of about 10. The free cash flow multiple would also be quite reasonable, if management can end up generating cash flow toward the higher end of its wide range. Combined with reduced debt, HanesBrands could end up like the handbag firm Coach (NYSE:COH) as another extremely successful spinoff from Sara Lee. (For related reading on the forward P/E, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  3. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  4. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  5. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  6. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  7. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  8. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  9. Investing News

    This is the Fastest-Growing Consumer Complaint

    There’s no way to guarantee that your Social Security number won’t fall into the wrong hands. Here are some ways to make yourself less of a target.
  10. Investing Basics

    These Industries Have The Most Illiquid Stocks

    U.S. equity markets are vast and highly liquid, but a few sectors have failed to attract substantial capital.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!