Hanesbrands Stock Forecast

What type of company is Hanesbrands? Hanesbrands, Inc. [NYSE: HBI] is a consumer goods company, that designs, manufactures, sources and sells an extensive range of apparels and clothing products for men, women, and children in the United States. The company also sells its products in Europe, Australia, Asia, Latin America, Canada, the Middle East, Africa, Mexico, and Brazil.

Hanesbrands operates through three segments:

• Innerwear,
• Activewear, and
• International.

The company manufactures and sells men’s underwear, women’s panties, children’s underwear, T-shirts, sport shirts, thermals, performance apparel, shoes, socks, bras, fleece, sleepwear, hosiery, and home goods products, to name a few.

What brands are under Hanes? Its brands include, Polo Ralph Lauren, Lovable, Wonderbra, DKNY, Playtex, Bras N Things, JMS/Just My Size, Gear for Sports, Hanes Beefy-T, Champion and Bonds, among others. Hanesbrands Inc. was founded in 1901 and is headquartered in Winston-Salem, North Carolina.

The Bull Case for Hanesbrands

Last year, the company announced its new Full Potential Plan, designed to energize growth and augment profitability.

The company, under this plan, hopes to:

• grow the Champion brand,
• expand its product portfolio,
• lay more emphasis on younger consumers, and
• strengthen its e-commerce capabilities.

Management is striving hard to grow its direct sales as well as expand its presence on third-party sites. As per the plan, the company also hopes to enter into new relationships with high-profile educational institutions for supplying its Champion brand sports fan apparel. It more recently signed a deal with University of Texas.

Still in its first year of executing its three-year “Full Potential” growth plan, HBI has started to show some positive results with strong third-quarter results and a good guidance. The owner of brands such as Hanes, Champion, and Playtex, reported enhanced sales, better EPS, and improving operating cash flow.

The company also delivered higher conversion rates and average order values. Online sales volume registered 62%, which included 50% growth on company-owned websites.

“We continue to make progress on our Full Potential plan as we invest in our iconic brands, build talent, enhance e-commerce capabilities and modernize our technology,” said Hanesbrands CEO Steve Bratspies.

The company suffered, albeit a little less, during the pandemic last year by spinning up a business in personal protective equipment (PPE) that, to an extent, helped compensate for sales deteriorations in the core innerwear and activewear businesses.

However, with the pandemic winding down, this cannot be a long-term growth strategy for the company.  As such, Hanesbrands is dropping about 20% of its stock keeping units (SKUs) and putting PPE on the back-burner.

Hanesbrands Earnings Results Impress

The apparel manufacturer reported $0.53 EPS for the quarter, in comparison to the $0.42 earnings per share it posted during the same period last year.

HBI reported total revenue of $1.79 billion for the quarter, up 5.8% or $98 million, compared to the same quarter last year. This included 33% growth in Champion brand sales globally.

Gross profit increased $80 million or 13% compared to 2019, and gross margin expanded nearly 65 basis points to 39.1%.

Cost savings programs in the company’s supply chain and benefits from business mix more than made up for the higher transportation and inflation cost in the quarter.

HBI Dividend Is Very Enticing… For Now

Hanesbrands currently offers a dividend yield of 3.41%, and the payout has remained unchanged for the past four years or so.

This has spooked some investors who think that the company’s inability to increase the dividend demonstrates financial weakness, with a dividend cut not entirely ruled out. 

However, given its manageable debt and bright long-term prospects, analysts believe Hanesbrands, though far from being a dividend growth rockstar, can easily maintain its current level of decent dividend yield.

Is Hanesbrands A Good Stock To Buy?

FY-20 was certainly challenging, but the company is all set to turn a corner with prudent financial engineering, and improved performance, thanks to the early success of the Full Potential plan, which looks all set to steady the ship, and offer a firm growth course over the next several years. There is a stronger consumer demand for the company’s products brands, and all this has translated into improved financial strength.

The stellar show by the company in the latest quarter has upped investors’ confidence, who believe that the worst is over. While the company’s growth plan will require successful execution, investors now have a story to latch on to.

Combined with the relatively low valuation and the financial engineering that’s put the company in a stronger position for future growth, HBI currently looks like a solid value stock with attractive growth prospects.

The Bear Case for Hanesbrands

First, the current environment remains very challenging. Like the vast majority of companies around the world, the company, owing to supply-chain bottlenecks, can expect broad-based inflation pressures to continue for the foreseeable future. Also, HBI carries a lot of debt, though the strong cash position amply supports its current liquidity needs.

There are also headwinds in the form of fluid global operating environment.  With the ongoing disruptions in the global transportation environment, the company is seeing incremental pressure from higher freight costs, particularly ocean freight as well as higher labor costs in its distribution centers. Moreover, the Full Potential plan is still in its infancy and there should be a clearer picture in time to come.

Hanesbrands owns a portfolio of well-known and respected brands, with average order value and conversion continuing to go up globally.

However, one very important thing to note here is that HBI operates in an industry characterized by cut-throat competition and ever-changing consumer preferences.  As such, few analysts believe that it is not a buy-and-hold-forever stock, and investors would do well to book profits as soon as the stock jumps around 20-30% from its current valuation. Also, if the market has a strong correction, HBI might have a large decline.

To sum it up, HBI may not be a screaming buy, but the previously struggling textile company still represents a decent opportunity for investors judging by how management is taking concrete and measurable initiatives that could yield lasting results.

Hanesbrands Stock Price Forecast

One-year price forecasts for Hanesbrands range from a high estimate of $27.00 to a low estimate of $15.00.

On average, it is expected that Hanesbrands’ share price could reach $22 in the next year, which suggests a possible upside of over 23% from the stock’s price at the time of research.

Is Hanesbrands Stock A Buy?

When it comes to business performance, HBI has had a poor run – it has consistently underperformed the S&P 500 over the last seven years. However, there seems to be a light at the end of the tunnel as its sustainable growth plan has finally started to show results.

Another thing working in its favor is that the stock is incredibly undervalued, which means it could be the right time for investors to purchase the stock at its current price level.

Growth Prospects For HBI

Hanesbrands has been very active in the acquisition space. The apparel company has made acquisitions worth more than $ 3 billion in the last seven years but, unfortunately for the company and its investors, the EPS has failed to take off as previously imagined.  

It should, therefore, come as no surprise that HBI share price has been a dampener, losing close to 30% in the last seven years, while the S&P 500 has more than doubled during the same period. The company has been trying to assimilate its past acquisitions, but fierce competition is throwing a wrench in its works. These two factors have led to HBI’s poor business performance. 

On the bright side, Hanesbrands proved unusually hardy to the lockdowns and economic meltdown, thanks to its flexibility. In fact, the company started manufacturing masks at some of its manufacturing facilities, and thus hugely benefitted from an elevated demand for masks at the peak of the pandemic. HBI’s ability to adapt allowed it to post just an 18% decrease in its adjusted EPS last year.

More importantly, the company seems to be regaining its mojo, thanks to the rapid growth of the global activewear industry, which is estimated to be currently a $215 billion business with rapid growth potential.

It is worth noting that the U.S. activewear category grew at an average annual rate of 8.0% during 2017-2019. In sharp contrast, the overall apparel category grew by a meagre 1.2% per year on average during the same time period.

What it means is that HBI can majorly benefit from the fast-expanding active apparel segment to grow its revenue and earnings in times to come. 

Management Forecasts 11% Sales Growth

Hanesbrands posted adjusted earnings of 53 cents a share on total income of $188 million. This compares to $160 million, or 46 cents per share, in the prior year period; and $174 million, or 48 cents per share, in Q3 2019.

The $1.79 billion in net sales, an increase of $98 million, or 6%, included 33% growth in Champion brand sales globally. This compared with $1.69 billion for the prior year quarter, which included $179 million in sales of PPE in response to Covid-19.

The year-over-year growth could be attributed to strong consumer demand and point-of-sale trends in the U.S., Europe, Americas and certain Asia markets, including China, which more than offset headwinds from the extended government Covid-related lockdowns in Australia and Japan.

The company’s online sales surged 62% from third-quarter 2019, including 50% growth on company-owned websites. The adjusted operating margin expanded 50 bps to 14.7%, owing to cost-saving programs and gains from the business mix, which more than offset higher marketing investments and cost inflation.

Management was buoyed by brand strength, strong inventory position, and the progress of the Full Potential plan hiked the 2021 view. For fiscal-year 2021 ending Jan 1, 2022, HBI expects net sales of $6.76 billion to $6.83 billion, 11% growth over prior year at the midpoint of the guidance period.

The company forecasts adjusted EPS of $1.79 to $1.84, adjusted operating profit of $910 million to $930 million, and capital expenditures of approximately $75 million to $85 million.

The management is pinning high hopes on the Champion brand globally, expecting its annual global sales to grow by 1 billion by the end of 2024. HBI also expects to generate average annual free cash flow of $515 million in 2022-2024, which will help reduce its debt load.

Is HBI Stock Undervalued?

Hanesbrands is currently trading at a very low valuation with respect to its expected earnings this year.

The stock is undervalued for the simple reason that HBI’s performance in the past few years has simply been below par and, to top it all, the company has to grapple with excessive material debt.

Its net debt (total liabilities – cash – receivables) stands at $5.1 billion, which is 80% of the market capitalization of the stock. However, the high net debt should not induce panic and chaos as the debt is manageable, given the company’s progress of the Full Potential plan, its bright future growth prospects and the fact that its interest expense consumes only 20% of operating income.

Is HBI Stock Cheap?

Hanesbrands has been an underperformer in recent years due to its volatile business performance. Business, however, has started to look promising for the company with its ambitious growth plan in place.

The stock is incredibly cheap, which means even a decent performance could offer appreciable returns to investors.

Hanesbrands Stock Forecast: Conclusion

Hanesbrands is a well-diversified business in apparel manufacturing with a rather extensive footprint and a lot of well-known brands under its belt.

Business, however, has rather been lukewarm for the company for the past few years, thanks to some mis-steps by the company which resulted in business volatility and increased debts. Additionally, the business, like its contemporaries, suffered during the pandemic as lockdowns and stores closures led to diminishing sales and profit.

Having said that, the future of the company looks much brighter, with its strong third-quarter results serving as validating signals for investors.

The company delivered a strong third-quarter results, driven by market share gains in global innerwear and activewear businesses, the progress of the Full Potential plan, continued demand for its significant portfolio of brands (the company’s brands can be found apparently in 90% of all US households), strong inventory position, and strong point-of-sale performance. 

Revenue for the company was in line with expectations despite an unexpected lockdown in Australia that closed 2/3 of its stores for essentially the entire quarter.

As compared to 2019, sales increased 11% or $179 million to $1.79 billion. Champion brand sales globally increased 20% over third quarter of 2019, driven by strong consumer demand, with 22% growth in the U.S. and 19% growth internationally. Innerwear sales increased 25% over 2019.

Operating profit increased $20 million or 8% over 2019, and the company generated $315 million of cash flow from operations, bringing year-to-date operating cash flow to $527 million. Gross profit increased $80 million or 13% compared to 2019, and gross margin expanded nearly 65 basis points to 39.1%.

Buoyed by its strong showing, the company reiterated its fourth quarter guidance for sales and adjusted operating profit, despite the incremental pressure expected from increasing freight and transportation costs. HBI expects net sales of $1.71 billion to $1.78 billion, 3% growth over prior year in the fourth-quarter. It forecasts adjusted operating profit of $200 million to $220 million, and adjusted EPS of 40 to 45 cents.

Hanesbrands is offering a 3.2% dividend yield, which is pretty decent, and given the fact that the company has a solid payout ratio of only 32%, a good plan in place to manage its debt, and its promising growth prospects, investors can expect Hanesbrands to continue with its current dividend.

Final Thoughts

HBI is working hard on cost reduction and productivity initiatives, and its Full Potential plan remains on track.

HBI’s profitability shone in the third quarter despite the presence of quite a few headwinds such as supply chain constraints, input cost inflation, logistical difficulties, and, more importantly, the unexpected closure of its stores around the globe because of the pandemic.

Business conditions are returning to normal for the company, and the powerful apparel manufacturer could reclaim its former glory, given the fact that the management has shown strong commitment towards maintaining its growth-related investments.

Given the low valuation of the stock and lucrative growth prospects, the upside potential for investors could be meaningful.  Hanesbrands is one of the few significantly undervalued opportunities in apparel manufacturing and, given its prospects, it might be a good bet for investors playing for the long run.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.