Hanesbrands (HBI, Financial) is a consumer goods company engaged in designing, manufacturing, sourcing, and selling a range of basic apparels for men, women, and children through four segments: Innerwear, Activewear, Direct to Consumer, and International. The company posted lower-than-expected first-quarter fiscal 2015 results last month, missing analysts’ estimates both on the top and bottom-line.
First-quarter highlights
- Innerwear segment registered a 4.4% year over year decline in net sales to $546.2 million as a result of reduction in short-term retail inventory of basics. However, operating profit climbed up 13% on the back of Maidenform synergies and benefits from the Innovate-to-Elevate strategy.
- Activewear segment sales notched 1.2% year over year growth on the back of robust growth in Gear For Sports and Hanes Activewear brands. Total segment revenue came in at $298.1 million.
- Direct To Consumer sales declined 2.6% year over year to $81.5 million, and operating loss came in at $2.3 billion versus $1.3 billion in the year-ago quarter.
- International sales increased by a whopping 157.4% year over year to $283.2 million, despite the currency translation headwinds. Operating profit surged over 170% on the back of robust sales volumes.
- Consolidated sales came in at $1.21 billion, representing 14% year over year increase. On a constant currency basis, sales surged 15% year over year. However, analysts’ were expecting $20 million more.
- Gross profit and gross margin increased 25.1% to $446.23 million and 300 basis points to 38.1%, respectively. Adjusted Operating profit and operating margin increased 16% to $133.0 and 90 basis points to 9.1%, respectively.
- Adjusted earnings came in at $0.22 per share, missing analysts’ expectation by $0.01 per share.
- The company declared a quarterly dividend of $0.10 per share.
Growth drivers
The DB Apparel business, a Europe-based intimate apparel company, was acquired in August 2014 and is currently being integrated into Hanesbrands. This acquisition has opened several opportunities in Europe and will be accretive to fiscal 2015 results.
Hanesbrands recently completed acquisition of Knights Apparel, a leading seller of licensed collegiate logo apparel in the mass retail channel.
“This is an exciting acquisition opportunity to leverage our existing Gear for Sports licensed collegiate apparel business, our expertise and size in the mass retail channel, and our low-cost global supply chain,” Hanesbrands Chairman and Chief Executive Officer Richard A. Noll said. “Combining the two companies is a great way to create value.”
Integration planning for Knights Apparel is already under way and this should be completed by the end of the year with synergies beginning to flow through fiscal 2016.
Innovate-to-Elevate strategy focuses on value-added, higher-priced and higher-margin items that can be supplied at a lower cost. During the recent earnings call, Richard A. Noll, CEO, said:
“So, as we finish our brand consolidation strategy linked to our platforms and design, we think we have a real power now to unleash that the full power of Innovate-to-Elevate and drive the brand forward.”
Guidance gets a lift
After acquisition of Knights Apparel, Hanesbrands raised the guidance for fiscal 2015. The details are as shown in the table below:
| Ă‚ | Revised Outlook | Previous Outlook |
| Consolidated Sales | $5.90 to $5.95 billion | $5.775 to $5.825 |
| Operating Profit | $853 to $873 million | $835 to $855 million |
| Earnings Per Share | $1.61 to $1.66 | $1.58 to $1.63 |
Knights Apparel acquisition is expected to contribute $160 million in sales and $18 million in operating profits. However, currency translation headwinds will erode around $35 million from sales.
Final words
Hanesbrands is executing well, though it missed to beat analysts’ expectations on top- and bottom-line. For the next five years, compound annual growth rate is pegged at 13.45%. The company’s Innovate-to-Elevate strategy will be a long-term profitability growth driver.
The innerwear market in the U.S. alone is expected to reach $16 billion by 2019. In addition, Hanesbrands is consolidating its position in the market through acquisitions. The stock carries a forward P/E of 17.11 which is attractive.
Hence, the stock is a buy, despite the first quarter miss.
