Hanesbrands Or Under Armour: Which One Should You Bet On?

The U.S. market is on a roller coaster ride with recent events spiking up volatility. Speculation surrounding the rate hike by the Fed and volatile gasoline prices triggered by ‘critical’ gas supply are now accompanied by the fear of Brexit.

Consumer Discretionary Sector: Safe Haven

In spite of the challenges, the consumer discretionary sector fared well in the first-quarter 2016 earnings season. Buoyed by a strong manufacturing sector, consumer discretionary reported modest growth in the first quarter. A dip in gas prices, an improving job scenario and increasing consumer confidence did the trick for these stocks.

Within the consumer discretionary sector, the athleisure category has been gaining steam lately, mainly because of the rising popularity of casual clothing.

Let’s look at the two stocks offering athleisure apparels and accessories – Hanesbrands Inc. (NYSE:HBI) and peer Under Armour, Inc. (NYSE:UA) – and find out which stock looks solid right now in the wake of volatile market scenario.

Hanesbrands’ Start to FY16

Hanesbrands has been posting decent results over the past few quarters on the back of strategic acquisitions and the success of the Innovate-to-Elevate strategy. Strong sales in most of its segments, especially Activewear and International, help the company boost its top line.

During the recently concluded first quarter, earnings of $0.26 surpassed the Zacks Consensus Estimate by 18.18%. Earnings also improved 18% year over year on the success of the Innovate-to-Elevate strategy. Higher sales in Innerwear and Activewear categories and contributions from the Knights Apparel business led to sales growth of 1% year over year.

How's 2016 Going for Under Armour?

Although Under Armour reported positive surprise in both top line and bottom line during the recently reported first quarter fiscal 2016, the recent increase in inventory and debt is a serious concern for the company. In the last reported quarter, the company’s inventory growth stood at 44%, which was much higher than the company’s revenue growth of 30%. Notably, this for the third consecutive quarter in which inventory growth surpassed top-line growth.

The company’s debt increased significantly in the previous quarter. The company recorded debt of $935 million in the first quarter of 2016 as against $677 million in the prior-year quarter. Further, Under Armour projected an increase in interest expenses to approximately $35 million in 2016 on account of higher debt levels. This is likely to weigh on the company’s bottom line.

Fiscal 2016 Outlook

Hanesbrands raised its earnings and sales guidance for 2016 based on expectations of increased synergies from pending acquisitions and debt refinancing. The company now expects adjusted earnings for fiscal 2016 in the range of $1.89 to $1.95, up from the previous guidance of $1.85 to $1.91. The company has also raised its sales guidance to $6.15 billion to $6.25 billion from the previous $5.8 billion to $5.9 billion.

On the other hand, Under Armour was forced to trim its 2016 outlook after one of its major customers, The Sports Authority, moved progressed with the liquidation of its stores. The company now expects net revenues of nearly $4.925 billion for 2016 as against the previous estimate of net revenue of about $5 billion. Nonetheless, this represents an increase of 24% over the 2015 level. Operating income is expected to be in the range of $440 million to $445 million, down from the previous estimate of $503 million to $507 million.

What Do the Numbers Say?

While Hanesbrands carries a Zacks Rank #2 (Buy), Under Armour carries a Zacks Rank #4 (Sell).

However, in terms of share price, both the companies have reported decline. While Under Armour reported a share price decline of 6.49%, Hanesbrands’ reported a decline of 10.5% year to date.

Even with regard to long-term growth, Under Armour seems to enjoy a lead with estimated growth rate pegged at 24.10%. This is way ahead of the industry growth rate of 15.20% and Hanesbrands’ long-term growth rate of 17.3%.

However, Under Armour is presently overvalued as is evident from its unfavorable P/E ratio of 64.42 compared with the textile apparel industry’s 17.33.

On the other hand, Hanesbrands is relatively undervalued as its P/E ratio of 13.80 is favorable compared to the industry average.

Bottom Line

Without doubt, Hanesbrands is a better choice than Under Armour as the former enjoys strong growth potential along with compelling fundamentals, impressive Zacks metrics and solid earnings data, which will help investors beat the volatility and increase returns.