This apparel maker has doubled its earnings per share in just two years and increased its annual earnings forecast from time to time, despite a challenging consumer spending environment. Contributions from acquisitions, efficiency gains from self-owned global supply chain and benefits from 'Innovate-to-Elevate' strategy continue to boost the company's results.
The Stock In Focus...
Hanesbrands Inc. (HBI) manufactures and markets everyday basic apparel under some of the world's strongest apparel brands. Its inner wear and activewear apparel brands include Hanes, Champion, Bali, Playtex, Maidenform, JMS/Just My Size, L'eggs, Flexees, Barely there, Wonderbra, Gear for Sports and Lilyette. In addition, the company's international brands include Zorba, Rinbros, Sol y Oro, Track N Field and Ritmo.
Operating Segments
The company's operations are managed and reported in four operating segments: Inner wear, Activewear, Direct to Consumer and International. These segments are organized principally by product category, geographic location or distribution channel.
More than 50% of the company's sales comes from the Innerwear segment, which generated sales of $2.01 billion for the first nine months of 2014, compared to year-ago $1.74 billion. The segment posted sales of $2.4 billion in 2013, and $2.3 billion in 2012.
The second largest revenue contributor is the Activewear segment, with year-to-date sales of $1.04 billion versus year-ago $966.5 million. The segment generated sales of $1.3 billion in 2013 and 2012, and represents more than 25% of total sales.
Direct to customer sales represents 8% of total sales. For the Nine months ended September 27, 2014, Direct to customer sales rose to $300.7 million from $272.7 million reported in the nine months ended September 28, 2013. In 2013, Direct to customer sales rose to $380 million from $372 million in 2012.
Year-to-date International sales rose to $456.6 million from $358.3 million last year, vs. $496 million in 2013, and $501 million in 2012. Key international markets include Japan, Australia, China, Canada, Mexico, Brazil and Argentina.
Innovate-to-Elevate Strategy
The company's Innovate-to-Elevate strategy or I2E combines Brand Power, Innovation Platforms, and Supply Chain Leverage to synergistically drive sustainable margin expansion. Hanesbrands' I2E strategy that started in its underwear business, has been steadily extended across Intimates to Activewear, International, and Maidenform to drive margin expansion.
Brand Power
Hanesbrands seeks to drive modest sales growth by consistently offering consumers brands they trust and products with unsurpassed value. The company has five of the top 20 apparel brands -- Hanes, Champion, Playtex, Bali, and Maidenform - that are the ties that bind its customers to its consumer franchise.
Platform Innovation
Hanesbrands follows a disciplined Consumer Packaged Goods or CPG process that focuses on identifying the long-term megatrends that will impact its categories over the next 5 to 10 years. Upon identifying these trends, the company utilizes a disciplined big-idea process to put more science into the art of apparel.
Hanesbrands' product innovation platforms include:
Tagless apparel platform - delivers superior softness without the itch and irritation of a tag.
Smart Sizes bra platform - combines a simplified shopping system that eliminates the complicated cup-and-band combinations of traditional bra sizing systems with a more comfortable, flexible fit.
ComfortBlend - combines cotton and synthetic yarns for products that are softer, shrink less and dry faster, and is an outgrowth of the performance fabric megatrend.
X-Temp fabric platform - designed to keep consumers cooler and drier by increasing the rate of evaporation, when body temperature rises and reducing the rate of evaporation as body temperature colls.
These product innovation platforms incorporate big-idea innovation to span brands, product categories, business segments, retailer and distribution channels and geographies. The company is focused on driving innovation that is margin accretive and that can leverage its supply chain in order to drive further economies of scale.
Low-cost Global Supply Chain
Unlike most apparel companies, Hanes primarily operates its own manufacturing facilities. More than 90% of the apparel that it sells worldwide and in the United States, is manufactured in its own plants or those of dedicated contractors. This facilitates low-cost manufacturing and scaled-up production of the company's latest big ideas to enhance margins.
Excluding actions, the company said it grew its operating profit by $40 million year-to-date over last year. Slightly more than half of the increase was due to contributions from Maidenform and DBApparel. The remainder was from continued profitability improvement in its core business, which was driven by efficiency gains from its self-owned global supply chain and I2E strategy.
Bolt-on Acquisitions
The company believes that Bolt-on Acquisitions are a great vehicle to drive incremental earnings per share growth and shareholder returns.
It looks for acquisitions in core categories, and expects the acquisition to provide complementary revenue growth opportunities in consumer segments, channels, or geographies. The company also expects the acquisition to be financially justifiable based on high-probability cost synergies that leverage its supply chain and/or SG&A structure and provide strong returns to shareholders. Excluding acquisition and integration costs, the acquisition is expected to be accretive in the first year.
On August 29, 2014, the company acquired DBA Lux Holding S.A., a leading marketer of intimate apparel, hosiery and underwear in Europe with a portfolio of strong brands including DIM, Nur Die/Nur Der, Lovable, Shock Absorber and Abanderado from SLB Brands Holdings Ltd. and certain individual DBA shareholders.
The acquisition was an all-cash transaction equal to €400,000 (about $528 million) enterprise value less net debt and working capital adjustments as defined in the purchase agreement. Total purchase price was €297,031, and the acquisition was financed through a combination of cash on hand and third party borrowings.
October 7, 2013, the company announced the completion of the acquisition of Maidenform Brands Inc. for about $583 million. Maidenform is a leading seller of bras, shapewear and panties under brands such as Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, as well as Donna Karan and DKNY intimate apparel under license.
Hanesbrands' net sales for the nine months ended September 27, 2014 rose 14% to $3.80 billion from $3.34 billion last year, primarily reflecting an incremental $381 million of sales from the Maidenform acquisition. The DBA acquisition added an incremental $81 million of sales, representing one month of activity for the third quarter of 2014.
Customers & Distribution Channels
In 2013, about 89% of the company's net sales were to customers in the United States and about 11% were to customers outside the United States. Domestically, almost 87% of its net sales were wholesale sales to retailers, 9% were direct to consumers and 4% were wholesale sales to wholesalers and third party embellishers.
Hanesbrands' largest customers are Wal-Mart Stores Inc., Target Corp., and Kohl's Corp., accounting for 27%, 19% and 6%, respectively, of the company's total net sales in 2013.
Wal-Mart and Target are Hanesbrands' only customers with sales that exceed 10% of any individual segment's sales. In its Inner-wear segment, Wal-Mart accounted for 38% of net sales and Target accounted for 17% of net sales during 2013. In Activewear segment, Target accounted for 33% of net sales and Wal-Mart accounted for 20% of net sales.
Sales to the mass merchant channel in the United States accounted for about 46% of the company's net sales in 2013. Hanesbrands' largest mass merchant customer is Wal-Mart, which accounted for about 27% of its net sales in 2013.
Sales to the national chains and department stores channel in the United States accounted for about 13% of the company's net sales in 2013.
Latest Q3 Results
The company's third-quarter net income was $118.9 million or $1.16 per share compared to $125.3 million or $1.23 per share last year. Excluding items, adjusted earnings for the quarter were $1.73 a share.
Revenues for the quarter were up 17% at $1.4 billion compared with $1.2 billion in the prior year.
Analysts polled by Thomson Reuters estimated earnings of $1.68 per share on revenues of $1.41 billion for the quarter. Analysts' estimates typically exclude special items.
Inner-ware segments' revenue, excluding Maidenform, was up slightly from last year while operating margins improved 200 basis points, driven predominantly by efficiency gains in the company's supply chain.
Activewear sales in the quarter increased 5% over last year driven by strong double-digit growth in its Gear for Sports business. Activewear delivered an operating margin of 16.1% for the quarter, up from 14.4% last quarter and 10.9% in the first quarter as the benefits from Innovate-to-Elevate continue to drive margin improvement.
Revenue in Champion business is up 5% year-to-date with strong results in the sporting goods, mid-tier and department store channels being somewhat offset by mass.
International. Sales, excluding DBA, were up 1% over last year and up 5% on a constant currency basis. Excluding DBA, operating profit rose 23%, while operating margin improved 270 basis points to 15.3% due to contributions from Maidenform as well as continued benefits from its regionalization strategy.
Year-To-Date Results
Net income for the nine months ended September 27, 2014 was $315.1 million or $3.09 per share compared to $298.2 million or $2.93 per share in the same period of last year.
Net sales increased 14% to $3.80 billion from $3.34 billion generated a year ago.
Annual Financial Data
The company reported net income of $330.4 million or $3.25 per share in fiscal 2013, compared to $164.6 million or $1.64 per share in 2012, $266.6 million or $2.69 per share in 2011, $211.2 million or $2.16 per share in 2010, and $51.2 million or $0.54 per share in 2009.
The company's annual net sales increased 8% at a CAGR level from 2009 to 2013. Net sales increased to $4.62 billion in fiscal 2013, from $4.52 billion in 2012, $4.43 billion in 2011, $4.14 billion in 2010, and $3.74 billion in 2009.
Total net sales for the nine months ended September 27, 2014 increased 14% to $3.80 billion from $3.34 billion in the same period of last year.
Future in Focus
The company expects its Innovate-to-Elevate strategy, self-owned supply chain, and substantial cash flow to deliver superior shareholder returns over time. The company believes that it is positioned to unleash the full potential of Maidenform with its Innovate-to-Elevate strategy, and contribute over $500 million in revenue and by 2016 it should see $80 million in operating profit.
For the fourth quarter, the company projects adjusted earnings of $1.35 - $1.45 a share on sales of $1.55 billion - $1.57 billion. Analysts expect earnings of $1.40 a share on sales of $1.55 billion.
The fourth-quarter guidance includes estimated contributions from DBA of about €155 million - €175 million in net sales, or $194 million - $219 million, and about €14 million in adjusted operating profit, or about $17 million, with an expected currency exchange rate of about $1.25 to the euro.
For the full year, the company now expects adjusted earnings of $5.55 - $5.65 a share, up from the prior range of $5.40 - $5.60 a share. Sales are still estimated in the range of $5.35 billion - $5.38 billion, including about $500 million contributed by Maidenform Brands Inc. and $275 million - $300 million contributed by DBA. Analysts expect earnings of $5.58 a share on sales of $5.36 billion for the year.
GAAP earnings are expected to be in the range of $3.90 - $4.25 per share, and GAAP operating profit for 2014 could be in the range of $560 million - $600 million.
The company expects net cash from operating activities to be in the range of $550 million - $600 million for the year, compared with the previous guidance range of $500 million - $600 million. Any cash generated in 2014 by DBA is expected to be substantially offset by cash closing expenses for the acquisition. The company continues to expect to make pension contributions of about $60 million and net capital expenditures of about $70 million.
More information about Hanesbrands can be found at the company's corporate website.
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