Hanesbrands Loses 10% In A Year: Rising Costs A Key Concern

Hanesbrands Inc. (NYSE:HBI) has been facing multiple challenges from rising competition and evolving trends in the apparel space. This has dampened investors’ sentiments, which is evident from the stock’s 10.2% decline against the industry’s rally of 26.1%. In fact, this Zacks Rank #4 (Sell) company hit a 52-week low of $17.94 during the trading session on Apr 2, eventually closing at $18.18.

On the flip side, other players like Michael Kors (NYSE:KORS) , Lululemon Athletica (NASDAQ:LULU) and PVH Corp. (NYSE:PVH) have been delivering stellar performance and contributing toward the industry’s rally on the back of well-chalked strategies to stay competitive.

Let’s take a closer look at the factors that have made Hanesbrands the odd pick and see if there’s any scope for a turnaround.

What’s Pulling Hanesbrands?

After posting in-line earnings in the preceding two quarters, the company succumbed to a negative surprise in the fourth quarter of 2017. Moreover, earnings fell year over year, thanks to higher cost of sales and higher SG&A expenses as well as interest expense. An improvement in the top line failed to cushion the downtrend. Further, adjusted operating profit slipped 7.7% with the operating margin contracting 180 bps, due to higher SG&A expenses.

Apart from this, we note that the Intimate Apparel/Innerwear industry is highly competitive and price sensitive. The company’s strategy to focus more on premium brands and hike prices in these categories come with the inherent risk of consumers shifting to more competitively-priced brands offered by competitors. Thus, failure to offer high-quality distinguished products at competitive price may hamper Hanesbrands’ market share, resulting in lower earnings and sales.

Moreover, to add to investor’s disappointment, management continues to be cautious about 2018, given a challenging U.S. wholesale landscape. Also, rising input costs and increased marketing investments to support new innovations are likely to affect margins. Incidentally, management expects operating margin for the first half of 2018 to be hurt by escalated marketing and distribution costs.

Any Hopes of a Turnaround?

We are hopeful about the company’s focus on buyouts, evident from its recent acquisition of Bras N Things that is likely to augment earnings in 2018. In this regard, the company has been gaining from contributions from Champion Europe and Hanes Australasia that were acquired in 2016.

Additionally, the company has long been benefitting from the solid performance of its international segment, driven by store openings, robust consumer demand and extensive online sales. Moreover, management is focused on making investments and innovations, internationally, to sustain growth in this segment. Also, Hanesbrands’ organic sales growth during the fourth quarter has been encouraging. For 2018, the company projects organic sales growth at roughly 1% on a constant-currency basis.

While the aforementioned factors make us hopeful about Hanesbrands’ revival, it is to be seen if these drivers can actually place the company in tandem with other industry gainers.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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