HanesBrands (NYSE:HBI) is a powerful brand name in the market for basic clothing. Its product offerings are completely mundane and consist of socks, underwear, bras and t-shirts. However, these items are necessities and must be replaced when they inevitably wear out. This leads to generally steady sales trends, but expansion potential to other markets looks to have been put on hold thanks to sovereign debt worries in Europe and suggestions that this is slowing overall global economic growth. SEE: Free Cash Flow: Free, But Not Always Easy
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Recent Results and Outlook
HanesBrands reported second quarter results after the market close on Tuesday. Sales eked out 1% growth to almost $1.2 billion. Modest results were posted in each primary operating unit. Inner wear sales of underwear and undershirts advanced 2%, outerwear sales of the Champion brand sportswear and Hanes casual clothes grew 1%, but international sales fell 2%, though excluding currency fluctuations, the growth would have been positive at 5%. Hanes also sold off a European business that caters to screen-print customers that uses its t-shirts and related apparel to print their own designs and logos. Rival Gildan Activewear (NYSE:GIL) primarily serves this market. Sales at these discontinued operations were approximately $190 million and resulted in a loss of 66 cents per share during the quarter.
SEE: How To Decode A Company's Earnings Reports
Reported net income, including the loss, was only a penny, but 68 cents on a recurring basis. This still represented a decline of 15% and was attributed to the continued volatility of cotton prices, which are obviously a huge material for making t-shirts and other clothing. Interest expense fell to less than $37 million and was attributed to lower debt and refinancing other notes at lower interest rates. This was still a sizable part of the quarterly operating profit of $120 million. For the full year, Hanes expects sales slightly above $4.5 billion and earnings in a range of $2.50 and $2.60 per diluted share. It plans to reduce interest expense by $17 million during the year and use most of its estimated $400 million to $500 million in free cash flow to pay down debt.
The Bottom Line
With the slowing economic growth, HanesBrands is shifting from growth to a more defensive mode. Since being spun off from Sara Lee, the company has focused on lowering costs and more efficient manufacturing capacity but was also saddled with a hefty debt load that was recently still high at $1.7 billion. In 2013, it plans to pay down another $500 million in debt and projects profits of around $3 per share. The business model is appealing overall, provided growth doesn't slow too much.
Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B) was able to pick up rival Fruit of the Loom in distress, but his interest in the space confirms it can generate ample and excess capital. Hanes' free cash flow will come in between $4 and $5 per diluted share. This puts the free cash flow multiple in very reasonable territory between six and 7.5. International was supposed to provide an avenue for steady sales growth, but for now looks to be more of a burden. This suggests that growth will be slow for the time being, and could even mean international growth opportunities could prove more difficult than previously thought.
SEE: Great Expectations: Forecasting Sales Growth
For the time being, investors may be best served waiting on the sidelines. The high debt load puts Hanes at risk of a more severe global economic contraction, and there is likely going to be an extended period of anemic overall growth trends. At least cotton price volatility looks to have passed for now.
At the time of writing, Ryan C. Fuhrmann did not own shares in any company mentioned in this article.
SEE: Free Cash Flow: Free, But Not Always Easy