Can Hanesbrands' (HBI) Strategic Efforts Aid A Turnaround?

Hanesbrands Inc. (NYSE:HBI) is grappling with raw material inflation, softness in the innerwear category, stiff competition and adverse currency fluctuations. These hurdles impacted the company’s third-quarter 2018 results and affected investor sentiment.

In the past three months, shares of this Winston-Salem, NC-based company have lost approximately 33%, underperforming the industry and S&P 500’s decline of 28.7% and 19.4%, respectively.



Factors Affecting Hanesbrands’ Performance

Hanesbrands has been struggling with soft sales at its Innerwear segment for quite some time now. In third-quarter 2018, Innerwear sales fell 6.9% to $599.7 million due to softness across both Innerwear Basics and Innerwear Intimates. Sales at this segment have also declined a respective 3.4% and 3% in the second and first quarter of 2018. Hanesbrands anticipates its Innerwear sales to remain flat in the fourth quarter. Moreover, operating profit fell 13.6% on account of raw-material inflation and sluggish replenishment orders.

Also, the company is witnessing raw material inflation since the past few quarters. Although gross margin expanded in the third quarter, it was hurt by increased input costs to some extent. Unfortunately, raw-material inflation is likely to persist, which is a threat to margins.

Moreover, currency woes along with impacts from Sears Holdings’ bankruptcy led management to tighten its outlook for 2018. Management now expects currency to significantly hurt net sales compared to what was projected earlier. It envisions adjusted earnings of $1.69-$1.73 per share, lower than $1.72-$1.80 guided earlier. This includes a negative impact of nearly 5 cents from Sears Holdings’ bankruptcy and currency woes.

Efforts to Counter Challenges

Hanesbrands’ Activewear and International segments have long been gaining from splendid performance by its Champion business. During the third quarter, Global Champion sales surged 30% on a currency-neutral basis, backed by double-digit increases in Asia, Europe and the United States. Further, sales advanced across all channels, including wholesale, owned-retail and online.

On a constant-currency basis (cc), Champion sales soared 40%, excluding mass channel. Management expects Champion sales growth to remain sturdy and continue driving Hanesbrands’ Activewear and International units’ performances in the fourth quarter. In fact, management anticipates Champion sales to jump at a significant double-digit rate, courtesy of solid order bookings through the first half of fiscal 2019. Moreover, the company expects Champion sales outside the mass channel to surpass $1.3 billion in 2018.

Further, the company is making strategic acquisitions to strengthen its business portfolio, which is one of its core strategies for long-term growth. To this end, contributions from acquisitions (Bras N Things and Alternative Apparel) played a significant role in augmenting Hanesbrands’ third-quarter sales. Evidently, these acquisitions contributed $48 million to the top line. Apart from this, the Champion Europe and Hanes Australasia acquisitions in 2016 proved beneficial for the company.

Moreover, Hanesbrands launched a multi-year 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. 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.

Also, the Project Booster cost savings along with other cash flow drivers, like synergies from buyouts and diversified revenues, are anticipated to help Hanesbrands achieve its cash flow target of an annual run rate of $1 billion by the end of 2019.

Despite aforementioned hurdles, we expect these growth drivers to provide a cushion to Hanesbrands and help this Zacks Rank #3 (Hold) stock revive in the long run.

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