Stock Strategist

Champion Boosts Undervalued Hanesbrands

David Swartz

 Hanesbrands (HBI) slightly exceeded our sales and earnings expectations in the first quarter. Sales of $1.59 billion beat our forecast of $1.53 billion despite an unexpectedly high year-over-year negative $46 million impact from foreign currency. GAAP and adjusted earnings per share of $0.22 and $0.27, respectively, both exceeded our forecast by $0.01. The sales outperformance was led by Champion, which experienced a 75% worldwide year-over-year increase in constant-currency sales, excluding the winding-down C9 business at Target. We believe Champion will continue to benefit from the casual athletic fashion trend. Hanesbrands’ first-quarter international operating margin of 14.4% exceeded our forecast of 11% as higher sales from Champion as well as Bras N Things, acquired last year, allowed for expense leverage. We forecast a 2019 operating margin of 15% for the international segment. We do not expect to change our $27 fair value estimate as our 2019 adjusted EPS forecast of $1.76 remains in line with Hanesbrands’ guidance of $1.72-$1.80. We view Hanesbrands as significantly undervalued.

We believe Hanesbrands has leading share and pricing in basic innerwear in multiple countries thanks to the strength of its brands. We think its international acquisitions add to its brand intangible asset. While the U.S. innerwear channel has been affected by store closures and inventory reductions, we think the Hanes brand still achieves premium pricing and shelf space. Hanesbrands’ first-quarter U.S. innerwear operating margin of 22% matched our estimate, and we forecast an operating margin of 24% for the segment in 2019, up from 22% last year. We believe the strength of the Hanes brand will allow it to maintain prime shelf space at Walmart despite the imminent launch of new private-label men’s underwear from Gildan, which we believe will largely replace Gildan-branded underwear.

David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.