Hanesbrands Stock: A Champion Apparel Company (NYSE:HBI) (2024)

Hanesbrands, Inc. (NYSE:HBI) is a leading apparel company with some of the world's most recognized brands, including Hanes, Champion, Bali, and Maidenform, among a vast array of others. Hanes is the largest and most widely recognized brand in their portfolio. Additionally, it is the leading basic apparel brand in the U.S. and is found in nine out of 10 U.S households. Hanes and HBI's other iconic brands are marketed to consumers through most sales channels and can be found in some of the most highly trafficked stores, such as Walmart (WMT).

As of the most recent filing period, the company operated in three segments: Innerwear; Activewear; and International. Sales are generally spread out evenly among the three segments, with Innerwear accounting for the largest share of sales, at about 37% as of Q1FY22.

Over the past one year, HBI is down nearly 40% compared to the broader index, which is down about 5% over the same time period. The company's performance also lags a related peer, Gildan Activewear (GIL), who is down 17% for the year. This is despite similar five-year revenue growth rates and HBI's comparative strength in gross profit margins, which stands at 40% versus GIL's 30%.

After a brief rally to start the week, shares are under pressure once again, now down 8% in the past five days. At about 8x forward earnings, HBI is trading at a discount to their own five-year average of 10x and the broader index, which is trading at about 18x. In addition to upside potential, an investment in the stock would come with a dividend yield of over 4.5%. For investors seeking a basic apparel company for their portfolios, HBI is one worth holding for the long-term.

Earnings Review and Other Reportable Events

For the most recent quarter ended April 2, 2022, HBI reported total net sales of +$1.6B, which was 4.5% greater than the same period last year and +$40M greater than expectations. Non-GAAP EPS of $0.34 also came in $0.06 more than expected. In addition to a respectable beat, the company also reaffirmed current year guidance for sales, operating profit, and EPS.

Driving sales higher in the quarter was a 6.3% increase in the Activewear segment, which added to the 1.6% growth reported for Innerwear. One notable brand within the company's portfolio is Champion, a brand that is expected to reach +$3.2B in sales by 2024. That would be a CAGR of 14%.

Strong demand for Champion-related products during the quarter surpassed the company's ability to fill all orders. In constant currency, sales for the brand increased 6%. On a two-year basis, sales accelerated 28%, with strong growth reported both internationally and within the U.S. In the U.S., sales increased 2% over the prior year. Delays in receiving products from some of their suppliers, however, resulted in approximately +$40M of in hand orders going unfilled. If the products had arrived on time, management estimates sales of the brand would have increased at a high teen's rate.

In 2021, HBI's strategic plan included an announcement to exit their European Innerwear business and a decision to divest of their U.S. Sheer Hosiery business. On March 5, 2022, the company completed the sale of the European Innerwear business to an affiliate of Regent, L.P. The U.S. Sheer Hosiery business is also expected to be sold in 2022, but potential purchasers are still being sought. These two strategic moves are expected to further streamline the company's portfolio under their "Full Potential" plan, which is designed to drive +$1.2B in incremental revenue and expand operating margins to 14.3% by 2024.

The Fundamentals

HBI reported total current assets of +$3.3B and total current liabilities of +$2.1B for most recent filing period. Coverage of current obligations is primarily in the form of an inventory balance that accounts for over 50% of total current assets.

In the current period, inventories increased by over 20% from the same period last year. Since inventories are such a large portion of current assets, turnover is the most important metric when assessing liquidity.

At the end of 2021, it was taking about 130 days for HBI to sell their inventory. In prior years, it was taking about 170-180 days. The improvement is notable, given the supply dynamics of the past two years.

With faster inventory turnover and little change in collection and payment times, there are fewer days in which the company requires funding from other sources, such as cash or other longer-term arrangements. If HBI did need to tap into existing cash balances, they would have about +$370M in cash, or 40 days of sales, and total liquidity of more than +$1.4B available to them.

Total debt in the current period declined approximately +$200M over the prior year to +$3.5B. Still, total contractual obligations were approximately +$5.3B, with the bulk of it due prior to 2027. While this seems concerning, net debt stood at 3.1x adjusted EBTIDA, which is manageable. Interest coverage at 1.84x also appears adequate but could still benefit from improvement.

HBI's credit quality is supported by continued growth in earnings. Though margins declined over 300 basis points in the current quarter, SG&A expenses as a percentage of sales declined 30 basis points over prior year to 26%. This was driven by efficiencies and cost management from the company's "Full Potential" initiatives. The improvement in SG&A contributed favorably to operating profit, which came in on the high end of the company's range.

The financial flexibility afforded to HBI from their strong market position enables the company to maintain an annual dividend of $0.60 per share, which is a yield of over 4.5% on current pricing. At the end of 2021, the payouts were fully covered by both operating and free cash flows. Lower net income did result in a higher payout ratio. But for the current quarter, coverage was back at normalized levels. For income-focused investors, the dividend appears safe for the foreseeable future.

Considering various valuation metrics, shares in HBI appear to be trading at a discount to their historical multiples. The company's current price to book, for example, is 6.5x versus a five-year average of 7.3x. Additionally, the use of discounted cash flow models indicates modest upside in the shares. All considered, upside of nearly 40% is possible at current valuations.

Risks To Consider

HBI's total net sales are highly concentrated among their top ten customers. In 2021, for example, the top ten accounted for nearly 50% of total net sales, with their top customer, Walmart, accounting for 17% by itself. This high degree of concentration exposes the company to various risks that could adversely affect their results of operations. The financial deterioration of any of their top customers is one such risk.

Another risk to consider is that HBI doesn't enter into purchase agreements that obligate their customers to purchase their products. As such, most of their sales are on a purchase order basis. Any decision by their customers to reduce the volume of products ordered or to reduce space devoted to selling their products would result in a material decline in the company's total net sales.

In the current period, HBI's total inventory increased by 15% and their operating cash flows were negatively impacted due to the outlays devoted to increased purchases. While these purchases were made to satisfy demand that has been exceeding supply for the last several quarters, there is no guarantee that demand will continue to support the increased level of inventory holdings. In the current inflationary environment, consumers are being squeezed on rising food and energy costs, which take precedence over more discretionary purchases. If these core costs continue to rise, households may further cut their discretionary budgets and/or switch to more private label brands. If HBI is unable to sell their inventory in a timely manner, they would incur significant costs related to holding the goods, such as additional storage and insurance costs, as well as a greater risk of obsolescence.

Inflationary pressures continue to be headwinds for the company's margins. In the current quarter, for example, gross margins were down over 300 basis points, driven in part by the impacts of higher inflation exceeding the benefits from manufacturing efficiencies. With investors growing increasingly uncomfortable with companies that are unable to preserve margins, there is a risk that shares in HBI will remain pressured as costs continue to rise.

Conclusion

HBI is currently trading at new 52-week lows, and the shares were recently downgraded by analysts at Stifel and UBS. The downgrade came on expectations of operating profit and EPS coming in at the lower end of estimates. Additionally, the company is expected to face incrementally higher net cost headwinds in a significantly more challenging macroeconomic environment.

Although these challenges will negatively impact the near-term outlook, the long-term prospects are favorable. At their core, HBI has a portfolio of iconic brands that includes Hanes, the leading basic apparel brand in the U.S. Demand for the company's products remains robust, with challenges primarily related to supply dynamics.

Additionally, the company has implemented various cost savings initiatives and has already realized about +$60M in savings. Furthermore, declining SG&A expenses in the current quarter offset weakness on gross margins. Further reductions in expense is expected as the company continues to implement their "Full Potential" strategic plan.

Shares are currently trading at about 8x forward earnings. This is a significant discount to the broader market and the company's own historical averages. At a 10x valuation, shares would be worth about $17, which is slightly lower than an average target price of $18 when considering other valuation metrics, such as the present value of the company's future cash flows. For long-term investors in the hunt for value, HBI is one potential apparel champion.

Providing timely and quick to the punch analysis of earnings and macro-related events across various sectors, with a focus on retail and real estate. I am a licensed CPA.