Buyouts & Project Booster Aid Hanesbrands, High Costs Hurt

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Hanesbrands Inc. HBI seems to be making all possible efforts to enhance its performance. To this end, the company is likely to gain from its international strength, focus on buyouts and solid online business. However, the company is battling input cost inflation, which along with softness in its innerwear segment has been weighing on its share price.

Evidently, Hanesbrands has lost 3% in the past six months against the industry 's surge of 23.6%. Nonetheless, the company is progressing well with its cost-saving initiatives, which along with its other growth drivers should help it offset the hurdles and uplift stock. In fact, we have already noted some improvement in this front as this Zacks Rank #3 (Hold) company is up 2.4% in the past month.

International Strength: a Major Driver

Hanesbrands has long been gaining from solid performance of its international segment, which constituted nearly 32% of the company's net sales in the second quarter. Sales at the segment improved 14.9% to $545.9 million, backed by favorable currency movements, acquisition synergies and organic growth. Organic sales jumped 5% on a currency-neutral basis, on the back of double-digit growth in Champion sales across Europe and Asia (online as well as retail and wholesale stores) and contributions from the acquisition of Bras N Things. Management remains focused on making investments and innovations internationally to boost growth further.

Buyouts & Online Strength

Achieving growth via acquisitions remains one of Hanesbrands' core strategies. To this end, the company's acquisitions of Bras N Things and Alternative Apparel played a significant role in augmenting Hanesbrands' second-quarter sales. Apart from this, the company has largely been gaining from contributions from Champion Europe and Hanes Australasia that were acquired in 2016. Management is committed toward driving double-digit growth for global Champion sales. Further, Hanesbrands remains focused on developing its online sales, which have been growing at a solid rate and surged 20% year over year in the second quarter of 2018. Hanesbrands, which is a global partner with Amazon AMZN , is making incremental investments in its online business to keep pace with consumers' evolving shopping patterns. That said, management plans on driving continued double-digit growth in online/consumer-direct sales.

Hurdles in Hanesbrands' Way

Hanesbrands is battling raw-material inflation, which hurt the company's margins in the second quarter of 2018. Incidentally, adjusted gross margin contracted 40 basis points (bps) to 39.1% in the quarter. This along with escalated SG&A expenses weighed on adjusted operating margin that fell 150 bps to 14.3%. Unfortunately, management expects input cost inflation of approximately $35 million in 2018, which may affect the company's margins. Moreover, Hanesbrands has been struggling with soft sales at its Innerwear segment for quite some time now. In second-quarter 2018, Innerwear sales fell 3.4%, owing to softness across Innerwear Basics and Innerwear Intimates in the United States. Moreover, operating profit tumbled on account of input cost inflation, high costs of investments and distribution inefficiencies. Unfortunately, Hanesbrands anticipates its Innerwear sales to decline 1-2% in the third quarter.

Can Saving Efforts Help?

Hanesbrands launched its Project Booster program in first-quarter 2017 to drive investment for growth, minimize costs and increase cash flow. This program is likely to boost the company's Sell More, Spend Less, Generate Cash strategy for additional gains, mainly from the global commercial and supply-chain scale through acquisitions. Moving ahead, by 2019, this project is anticipated to produce nearly $150 million of annualized cost savings, out of which roughly $50 million will be reinvested in targeted growth opportunities. Notably, the company is progressing well with its Project Booster plan, which along with its sales-driving efforts should help it improve its profitability picture.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: AMZN , GES , GIII , HBI

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