January 23, 2015 Hanesbrands Inc (HBI-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 01/23/2015 Current Price (01/22/15) $113.04 Target Price $119.00 52-Week High $115.72 52-Week Low $64.17 One-Year Return (%) 69.63 Beta 1.05 Average Daily Volume (sh) 557,426 Shares Outstanding (mil) 100 Market Capitalization ($mil) $11,292 Short Interest Ratio (days) 3.44 Institutional Ownership (%) 86 Insider Ownership (%) 3 Annual Cash Dividend $1.20 Dividend Yield (%) 1.06 5-Yr. Historical Growth Rates Sales (%) 3.9 Earnings Per Share (%) 22.3 Dividend (%) N/A using TTM EPS 21.8 using 2015 Estimate 17.4 using 2016 Estimate 15.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY We return to a Neutral recommendation from Outperform on Hanesbrands Inc. following its slightly soft third-quarter fiscal 2014 results. Although earnings per share of $1.73 improved 44% from the year-ago results and beat the Zacks Consensus Estimate by a penny driven by higher nmargins, sales missed the consensus mark by 1%. Sales increased 17% from the year-ago results, but currency continued to affect the top line. Overall, we remain encouraged with the company s favorable pricing and successful implementation of the margin boosting Innovate to Elevate strategy. Hanesbrands continues its strategic acquisitions and the recent DBApparel takeover prompted it to raise the fiscal 2014 outlook. However, we remain cautious about the slowdown in the business momentum of the company. Risk Level * Below Avg Type of Stock Large-Growth Industry Textile-Apparel Zacks Industry Rank * 117 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 945 A 1,199 A 1,197 A 1,286 A 4,628 A 2014 1,059 A 1,342 A 1,401 A 1,557 E 5,358 E 2015 1,281 E 1,581 E 1,569 E 1,605 E 6,036 E 2016 6,296 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.51 A $1.19 A $1.23 A $0.98 A $3.91 A 2014 $0.76 A $1.71 A $1.73 A $1.45 E $5.65 E 2015 $0.94 E $2.02 E $1.88 E $1.65 E $6.49 E 2016 $7.28 E Projected EPS Growth - Next 5 Years % 12 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Winston-Salem, NC, Hanesbrands Inc. engages in the design, manufacture, sourcing and sale of apparel essentials for men, women and children in the U.S. and internationally. The company offers products under well-established brands such as Hanes, Champion, Playtex, Bali, Just My Size, Barely There and Wonderbra. Hanesbrands distributes its products through various channels, including mass merchants, national chains and department stores and other retail channels, such as third-party embellishers, specialty retailers, warehouse clubs and sporting goods stores. Hanesbrands reports its operating results under four major segments: Innerwear segment: This segment manufactures and sells core apparel products, such as women's intimate apparel, men's underwear, kids' underwear and socks, marketed under well-known brands like Hanes, Bali, Playtex, Barely There, Just My Size and Wonderbra. Innerwear segment also includes the Hosiery segment, which makes women's sheer hosiery in the United States. Outerwear segment: The segment consists of casual wear and active wear products. The casual product category provides comfortable clothing for men, women and children under the Hanes and Just My Size brands. The active wear products include T-shirts and fleece sold to both retailers and wholesalers. The company sells this segment s products to both retailers and wholesalers. International segment: The International segment includes sales from Latin America, Asia, Canada, Australia, Japan, Mexico and Brazil. The company also has sales offices in India and China. The segment produces and sells products under brands such as Hanes, Champion, Wonderbra, Playtex, Stedman, Zorba, Rinbros, Kendall, Soly Oro, Ritmo and Track N Field. Direct to Consumer segment: This segment includes sales from value-based store outlets and Internet operations that sell products to its customers directly. REASONS TO BUY Strong Brand Portfolio: Hanesbrands is a leading player in innerwear, casual wear and active wear markets in the U.S. The company commands a portfolio of well-recognized flagship brands, including Hanes, Champion, Playtex and Bali, which reinforces its well established position in the industry. The company s customer-specific programs, such as C9 and Just My Size, at stores like Target and Wal-Mart, are in high demand. Hanesbrands flagship brand Hanes commands a major market share in the intimate apparel sector. Hanesbrands further strengthens its brands by collaborating with several renowned designers. This helps the company to place the brands at premium retail outlets. Interacting with customers at these outlets helps the company to know their preferences and current trends. The company ensures efficient distribution of its products which spans from retail outlets like Target Inc. targeting middleclass consumers to high-end retailers, such as Urban Outfitters and Supreme. This reflects the broad appeal of the company s products. Hanesbrands focuses on continuous innovation to boost sales and gain shelf space in retail outlets. Tagless underwear, Hanes ComfortBlend undershirts and underwear, Smart Sizes line of bras, Champion sweetheart compression sports bra, Hanes Convert-A-Tight and Activewear line of Equity Research HBI Page 2
sportswear were some of the originals produced by the company in 2014, which gained huge popularity soon after launch. Moreover, X-temp garments, first introduced in men s underwear, and later expanded to women s socks and panties in fall 2014, as well as bras, legwear, base layer and children s underwear and socks later in the year received favorable response from the consumers. Innovate-to-Elevate Strategy Helps to Maintain Margins: The Innovate-to-Elevate strategy (which focuses on value-added, higher-priced and high-margin items that can be supplied at lower costs) has helped the company to increase its adjusted operating profit margin and generate significant cumulative cash from operations. This substantial amount of cash helped the company to prepay its debts, initiate a regular quarterly cash dividend and acquire Maidenform Brands (acquired in Oct 2013). Management aims to boost sales by 10% and operating profits by over 8% from the 2014 level. It also aims to generate approximately $0.5 billion of cash in 2015. Strong e-commerce Business: Moreover, Hanesbrands has a strong e-commerce business. Nowadays, customers are increasingly resorting to online shopping as it saves time. E-Commerce sales contribute almost one-third of the company s total revenue in the third quarter of fiscal 2014. The online shopping sites of the company hanes.com, championusa.com and onehanesplace.com account for a significant share of the company s online sales. Strategic Agreements Strengthening the Company s Portfolio: The company entered into deals with several retailers to gain shelf space. Hanesbrands completed the takeover of DBApparel in Sep 2014 which also enriched the company s portfolio. It will be accretive to fiscal 2014 results and will help in expanding in Europe. The C9 brand by Champion has an exclusive deal with Target stores under which the departmental chain shelves the active wear garments. With the acquisition of underwear apparel chain Maidenform Brands Inc in October 2013, the company added Maidenform s popular brands like Flexees, Lilyette, Self Expressions and Sweet Nothings to the company s portfolio. Similarly, the acquisition of licensed logo apparel seller Gear for Sports in 2010 added the Champion brand to the company, which occupies a large market share in the college bookstore channel. These deals boost the categories and gain market share against national competitors. Replenishment-Driven Nature of Product Ensures Consistency: Sale of basic apparel is primarily based on replenishment and not on fashion. This ensures consistency and fewer markdowns since it is an essential commodity and does not conform much to the changing fashion trends. Moreover, in case of basic apparels, people usually return to the brand they use which ensures a group of loyal customers. REASON TO SELL Focus on Premium Brands has Inherent Risks: The Intimate Apparel/Innerwear industry is highly competitive and extremely price sensitive. The company s strategy to focus more on premium brands and increase prices in these categories come with the inherent risk of consumers shifting to more competitively-priced brands offered by competitors like Warnaco s Calvin Klein and Warner s brands. Moreover, it has been observed that the Innerwear segment takes longer to recover after a macroeconomic downturn. Lower International Penetration: The slow recovery of the U.S. economy has lowered consumer discretionary spending. Further, the slowdown in Europe is also adding to the woes. In such a scenario, the U.S. companies are looking toward the developing markets to remain afloat. However, Equity Research HBI Page 3
Hanesbrands generates insignificant portion of its sales from international sales, much lower than its peers. Moreover, unlike its peers, it does not have any manufacturing operations in key growth markets like Asia and Latin America. RECENT NEWS Hanesbrands Tops Earnings, Lags Revenues; Ups FY View Oct 30, 2014 Hanesbrands third-quarter fiscal 2014 adjusted earnings per share of $1.73 beat the Zacks Consensus Estimate by a penny and increased 41% from the prior-year quarter. Profit was driven by strong sales and higher margins backed by the success of the Innovate-to-Elevate strategy. Increased supply chain operating efficiencies and lower selling, general and administrative costs toadied quarterly earnings. The Innovate-to-Elevate strategy focuses on value-added, higher-priced and higher-margin items that can be supplied at lower costs. The adjusted earnings per share exclude pre-tax charges of $0.57 per share related to the acquisition of Maidenform Brands, DBApparel (DBA) and other actions. Revenues and Operating Profits Quarterly revenues gained 17% and came in at $1.40 billion driven by strong performance of most of the segments, especially 62.7% growth in International sales. However, sales marginally lagged the Zacks Consensus Estimate of $1.42 billion. Currency continued to affect the company s sales results negatively. This is significant as sales missed consensus for the first time in two year. Hanesbrands has been surpassing estimates consistently backed by its Innovate to Elevate strategy. On a constant currency basis, net sales went up 1% versus the year-ago period. The Maidenform acquisition, completed in fiscal 2013, contributed almost $115 million to total quarterly sales while the DBA takeover, closed in Aug 2014, contributed $81 million. Operating profit went up 22.6% to $217.0 million year over year. Operating margins increased 70 bps to 15.5% Segment Details Innerwear: Net revenue for the Innerwear segment climbed 15.7% year over year to $648.3 million driven by the Maidenform acquisition and growth of the company s base business. Sales were partly offset by the uneven and challenging retail environment. Strong performance of categories like socks, boys underwear and panties were offset by softness in other Innerwear segment. Activewear: Activewear segment sales went up 5% from the year-ago period to $424.7 million on the back of strong performance by the retail, Champion business, branded printwear and Gear for Sports businesses. International: Net sales in the International segment went up 63% to $215.0 million. Sales were negatively impacted by foreign currency movements. On a constant currency basis, international sales slipped 3% year over year. Sales excluding the DBA buyout increased 1% year over year. Direct to Consumer: Direct to Consumer segment s sales went up 13% to $112.7 million backed by contributions from the Maidenform acquisition. Equity Research HBI Page 4
Other Financial Updates During the quarter, Hanesbrands acquired Europe-based intimate apparel company DBA on Aug 29 for 400 million or $528 million. The acquisition is expected to be accretive to fiscal 2014 results. The buyout is in accordance with Hanesbrands acquisition strategy as DBA sells intimate apparel a core category of Hanesbrands. The takeover has opened opportunities in Europe for Hanesbrands. Guidance Upped Hanesbrands raised the full-year fiscal 2014 earnings outlook. The company expects the business momentum to continue in the fourth quarter of fiscal 2014 backed by the Innovate-to-Elevate strategy and back to back acquisitions. Hanesbrands now expects earnings per share in the range of $5.55 to $5.65 up from $5.40 to $5.60. The company expects operating profits within $750 to $770 million versus $735 to $755 million. The company, however, maintained its sales guidance and expects net sales to be between $5.350 billion and $5.375 billion. VALUATION Hanesbrands current trailing 12-month earnings multiple is 21.8x, representing a discount of 11.4% to the industry average of 24.6x. Over the last five years, Hanesbrands shares have traded in the range of 8.2x to 22.3x trailing 12-month earnings. Based on 2014 earnings estimate of $6.49, the stock is trading at 17.4x, which is an 17.9% discount to the industry average of 21.2x. At the end of the third quarter of 2014, the P/B multiple of the stock was approximately 7.5x premium to the industry average of 3.4x. On a ROE basis, the stock looks attractive given a trailing 12-month ROE of 39.7%, which is way above the industry s 11.5%. The stock carries a Zacks Rank #2 (Buy). Our target price of $119.00 is based on approximately 18.3x our 2014 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low HANESBRANDS INC (HBI) 17.4 15.5 14.9 21.8 21.8 22.3 8.2 Industry Average 21.2 18.6 15.6 15.7 24.6 86.3 13.8 S&P 500 16.2 15.2 10.7 15.9 18.7 19.4 12.0 RALPH LAUREN CP (RL) 19.8 17.4 11.9 14.5 20.4 25.2 13.9 TEIJIN (TINLY) 17.8 4.5 17.2 94.8 8.1 GRASIM INDS-GDR (GRSXY) 12.1 9.1 7.4 13.4 16.8 9.5 COACH INC (COH) 20.1 18.7 8.1 9.7 13.1 23.3 11.0 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA HANESBRANDS INC (HBI) 7.5 7.9 3.1 39.7 1.3 1.1 21.2 Equity Research HBI Page 5 Industry Average 3.4 3.4 3.4 11.5 0.2 0.6-1.3 S&P 500 5.1 9.8 3.2 24.8 2.0
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Earnings Surprise and Estimate Revision History Equity Research HBI Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HBI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform - 15.7%, Neutral - 77.7%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research HBI Page 8