Hanesbrands Boosts Bottom Line As Underwear Underdog

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A pparel company Hanesbrands has found its comfort zone. The maker of underwear, socks and T-shirts benefits from a string of intersecting trends: consistent demand for undergarments and other everyday apparel, a shift toward activewear clothing, strong brand recognition, its own low-cost production platform and a series of strategic acquisitions that have helped it bolster sales, analysts say.

"There's a lot to like here," Morningstar analyst Bridget Weishaar told IBD.

AfterHanesbrands ( HBI ) reported in April that its first-quarter adjusted earnings per share rose 16% from a year earlier to 22 cents on net sales that climbed 14% to $1.21 billion, the Winston-Salem, N.C.-based outfit raised its guidance for the full year. It forecast net sales of $5.9 billion to $5.95 billion for 2015, up from previous guidance of $5.78 billion to $5.83 billion, and adjusted EPS of $1.61 to $1.66, up from $1.58 to $1.63.

2015 Gains In Sight

The guidance represents an increase over 2014 results of 10.9% to 11.8% for net sales and 13% to 17% for adjusted EPS.

The company, which sells its products wholesale to department stores and mass retailers, is cash-rich and expects to remain so, forecasting net cash from operating activities to total between $550 million and $600 million this year.

Hanesbrands' stock is up 24% so far in 2015.

Its strong financial performance and stock price appreciation help it earn an IBD Composite Rating of 95, meaning it outperforms 95% of stocks in the market as measured by fundamental and technical factors.

The company belongs to IBD's Apparel-Clothing Manufacturing group. Hanes ranks third in the group by Composite Rating, behindG-III ( GIII ) andCarter's ( CRI ).

The group's largest name by market cap isVF Corp.V FC, which owns 7 For All Mankind, Lee and Wrangler jeans among its brands, which also include activewear names Lucy and The North Face.

Second in the group by size isUnder Armour ( UA ), a big beneficiary of the activewear trend, along withNike ( NKE ), in the Apparel-Shoes & Related Manufacturing group.

Knights Apparel For Schools

Hanesbrands' elevated outlook reflected a solid start to 2015 and the anticipated impact from its latest acquisition, it said. Early in the second quarter Hanesbrands closed its buy of Knights Apparel, which sells clothes such as t-shirts and sweatshirts with licensed college logos.

The deal amplified two key trends for Hanesbrands: ongoing growth in activewear and related clothing, and expansion via acquisitions.

Hanesbrands' product lines include Hanes and Playtex. The Knights Apparel acquisition complements its Gear for Sports operation, as well as its prominent Champion brand.

"They are riding the athletic apparel cycle for sure," John Kernan, an analyst at Cowen & Co., told IBD.

Analysts say that popular fashion has in recent years moved away from the likes of skinny jeans and toward activewear and sports-themed clothing, including workout pants, bolstering Hanesbrands' fortunes. On top of this, as consumers discard former fashion preferences for newer ones, they often also buy new undergarments that mesh with their newer designs, analysts say, and this too benefits Hanesbrands' core Hanes innerwear business.

Acquiring The Goods

The company in 2013 bought Maidenform Brands, a seller of bras and other undergarments for women, and in 2014 bought DBApparel, a marketer of intimate apparel and hosiery in Europe.

Those two deals bolstered sales last year and Hanesbrands' bottom line, with fourth-quarter profit more than doubling.

Morningstar's Weishaar said Hanesbrands produces most of its merchandise in-house and uses its massive scale to keep costs relatively low. When it looks at acquisitions, it typically eyes targets that outsource at least some of their production work. After closing a deal, it then brings the acquired company onto its own manufacturing platform, lowering expenses and boosting profits, she said.

"So I think that the M&A play just continues on for them," Weishaar said. "I think that's going to be one of their biggest growth drivers."

Cowen's Kernan agreed. "They are going to make more acquisitions for sure," he said."They do a really good job rolling up companies and putting them on their platform."

In a report, Kernan estimated that Hanesbrands could reach a run rate of $700 million in annual free cash flow next year, bolstering its ability to pursue more deals.

"With only 6% of sales in Europe, we see opportunity for HBI to acquire brands in a fragmented market," he wrote in the report.

Kernan projected that Hanesbrands could complete an additional $1.7 billion in deals over about five years. That, he noted, would leave the company generating double-digit earnings growth for years even if expansion in its core innerwear business were modest.

But the core business, Kernan added, is on solid ground. The company's brands, he wrote, are "enduring and powerful."

Within the $20 billion U.S. innerwear market, Kernan estimates that Hanes holds an 18% share at retail.

Weishaar noted that innerwear is still Hanesbrands' biggest business. That, she added, is a good thing because it infuses reliability.

She said most of the innerwear business consists of "very basic" undergarments. People tend to know their size and what brand works for them. Most don't want to try on undergarments at stores, so tend to go with a familiar brand. Hanesbrands is familiar to a big share of them.

"They just want to pick it up and go," she said.

New Socks And Underwear

Unlike other lines of clothing, consumers need to regularly replace their supplies of apparel such as underwear, t-shirts and socks.

"It's a replenishment business, so demand is steady," Weishaar said. "It's a really great space to be in."

Hanesbrands declined IBD's interview request, citing a customary quiet period ahead of reporting second-quarter earnings.

While speaking at a May conference, CEO Richard Noll acknowledged that Hanesbrands' business may fluctuate quarter to quarter "as retailers can adjust their inventory levels up and down." But over the course of a typical full year, "our business is remarkably stable due to the replenishment nature of most of our categories."

That, along with boosts from acquisitions, makes him confident in Hanesbrands' long-term growth.

"I feel really good about our ability to drive EPS up double digits for many years to come," he said.

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

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

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