Hanesbrands Still A Good Fit

By Ryan C. Fuhrmann | February 21, 2012 AAA

Hanesbrands (NYSE:HBI) owns an appealing array of apparel brands, including Hanes, Champion, Playtex, Bali, JMS/Just My Size, barely there, Wonderbra and Gear For Sports. Volatile cotton costs and uneven buying patterns from some of its larger accounts have made near-term sales and profit trends more murky, but the long-term appeal of the business is still there, provided management delivers on its promise to reduce debt.

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Full-Year Recap
Net sales advanced 7.2% to $4.6 billion. Three of five operating segments reported positive growth. This was lead by outerwear (Champion brand t-shirts, shorts), which jumped 15.9% to $$1.5 billion, or 31.5% of total sales. International also jumped 14.1% and grew to 12.5% of sales. Innerwear (socks, underwear) logged modest 2.2% growth to account for the largest percentage of total sales at 44.4%. Hosiery and the direct-to-consumer units logged slight sales declines and collectively accounted for roughly 12% of sales.

Reported operating profits jumped 18.3% to $478.3 million on very strong profit trends in outerwear and direct-to-consumer. This offset profit declines in hosiery while international and innerwear both posted profit growth just over 5%. Overall, product and selling costs, as well as operating SG&A expenses, grew modestly to allow for some sales leverage. Operating profit improved one percentage point to 10.3% of sales. A drop in other expenses helped push net income up 26.2% to $266.7 million, or $2.69 per diluted share.

Outlook
For 2012, Hanes projects respectable sales growth between 2 and 4%. Analysts currently project sales growth of 4.1% and total sales of just over $4.8 billion. However, management projects earnings in a range of $2.50 and $2.60, due primarily to a 30 cent loss in "imagewear," or the "the wholesale category of casualwear and activewear products sold to the screen-print industry." This is a subset of its outerwear unit.

The Bottom Line
Indications of challenges in imagewear first came about when rival Gildan Activewear (NYSE:GIL) reported its full year results back in December 2011. It lowered its earnings guidance on struggles in its printwear business and also reported a first quarter loss that it attributed in part to volatile cotton costs and inventory destocking by its distributors.

Hanesbrands looks to be experiencing similar issues in the near term. During the fourth quarter, outerwear profits fell 35% and also reported double-digit profit declines in hosiery and its international businesses. Major customers include giant retailers such as Wal-Mart (NYSE:WMT) and J.C. Penney (NYSE:JCP), so changes in their order activity can have a big impact on smaller suppliers such as Hanes.

With the short-term volatility in its business, Hanesbrands has returned to focusing on paying down its hefty debt load. It offered a detailed pay down schedule and also detailed that free cash flow for the year should come in between $400 million and $500 million. That works out to a range of roughly $4 and $5 per diluted share. Given the current share price of $27 per share, this represents a compellingly-low free cash flow multiple of below seven. With more visible growth trends going forward, the stock could rally up to 50%. The fact that Berkshire Hathaway (NYSE:BRK.B) owns archrival Fruit of the Loom also indicates the business model overall is highly appealing.

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

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