Narrow-Moat Hanesbrands Struggling to Adapt to Worsening Market Conditions; Shares Undervalued

Hanesbrands' 2022 third-quarter profitability met expectations, but this was overshadowed by a dim fourth-quarter outlook as consumers are cutting back on spending, retailers are managing inventories tightly, and the strong U.S. dollar affects international results. Peers like narrow-moat VF and no-moat Gildan have recently reported similar conditions. Hanes now expects a nearly 20% sales decline and adjusted EPS of $0.04-$0.11 for the fourth quarter versus our estimates of a 4% sales drop and $0.28 in adjusted EPS. While declining input costs and Hanes' actions, including inventory reductions and product innovation, should allow for improving results in 2023, tough industry conditions may last well into the year. Thus, we expect to make a high-single-digit percentage reduction in our $24 fair value estimate, although we do view Hanes as undervalued. Despite a disappointing 2022, we think Hanes' issues are primarily due to the broader economy and that its brand intangible asset, the source of our narrow-moat rating, remains intact.