Hanesbrands Earnings: A Lower Near-Term Outlook but Some Signs of Progress; Shares Undervalued

Narrow-moat Hanesbrands’ HBI second-quarter results were in line with our expectations, but it guided to disappointing profit recovery in the second half of the year due to slow sales of Champion and tough market conditions in Australia. Hanes now expects full-year adjusted EPS of $0.16-$0.30, down from its prior range of $0.31-$0.42. However, as our EPS estimate of $0.31 was at the bottom of its prior range and we do not expect to adjust our long-term estimates (including 3% annual sales growth and 13% operating margins), we expect to make only a low-single-digit percentage reduction to our $20 per share fair value estimate.

Matching our forecast, Hanes’ second-quarter sales fell 5%. Innerwear sales (49% of total) outperformed our forecast for a 5% decline with 3% growth, but activewear sales (19% of total) fell 19% versus our projection for a 5% decline. International sales (28% of total) fell 4%, close to our negative 3% estimate. We view the weakness in Australia as temporary and macroeconomy-related given that Hanes’ brands maintain their market leadership. However, the firm clearly needs a better plan for Champion, which has been underperforming similar activewear brands. To its credit, Hanes’ management outlined aggressive actions to rebuild Champion under its Full Potential plan, including new merchandise, supply chain improvements, and sales through pop-up stores.

Hanes’ adjusted gross and operating margins of 36.6% and 6.1%, respectively, eclipsed our estimates by 60 and 50 basis points. The firm is on track to lift its gross margins to the high-30s by the end of the year due to cost cuts and supply chain improvements under Full Potential and the declines in input costs over the past year. Its primary challenge is generating sales growth from each of its segments.