Why Hanes Should Be on Your Shopping List
Investors are overlooking the narrow-moat company's mix shift in its business and sustainable free cash flow.
We believe Hanesbrands’ (HBI) transformation is underappreciated by the market and that the risk/reward of an investment is very favorable, as the shares trade well below our $23 fair value estimate. In our opinion, investors are focused on difficulties in the company’s low-growth innerwear operations and partial dependence on physical retail in the United States and are overlooking the mix shift in its business and its sustainable free cash flow generation. Through a series of acquisitions (at a cost of about $2.7 billion since 2013), Hanes has transformed its brand portfolio into a more diversified and global operation with higher margins and returns. Its Champion brand has grown into a multinational athleisure brand with a significant following and growth opportunities. We think cohesive management of the brand will allow Champion to stand on its own even if the athleisure fashion trend fades.
Moreover, we believe Hanes has margin improvement opportunities stemming from the potential for additional acquisition synergies and supply chain initiatives as we think it can scale its advantaged in-house manufacturing competency. We forecast operating margins above 14% in 2024 and thereafter, something that Hanes has failed to achieve in the past two years. While the COVID-19 crisis has slammed all international apparel companies in 2020, we think Hanes may recover faster than most as its products have limited fashion risk, are purchased regularly regardless of economic conditions, and are available in a large variety of retail outlets, some of which have remained open during the pandemic.
David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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