Hanesbrands Earnings: Meeting Expectations Mildly Positive Considering Tough Market; Shares Cheap

Although it reported a small net loss, narrow-moat Hanesbrands’ HBI 2023 first-quarter results were in line with its outlook and our estimates. Moreover, the company reiterated its full-year guidance, including a 2% sales decline (at the midpoint) and adjusted EPS of $0.31-$0.42. Hanes’ shares edged up by a mid-single-digit percentage on this news, likely because expectations were extremely low. As our estimates align with the current outlook, we do not expect to make any material change to our $20 per share fair value estimate and continue to view Hanes’ shares as very undervalued. While the company lacks sales momentum and is contending with slowing consumer demand, we anticipate its profit margins will improve markedly by the end of 2023 due to lower input costs, putting it on track to return to operating margins of around 13% within about two years, up from just 9% (adjusted) in 2022.

Hanes recorded an 11.8% sales decline in the quarter, slightly better than our estimate of a 12.5% drop. Each of its three segments experienced sales declines in a market characterized by excess inventory and depressed demand amid inflation, but the innerwear and international units suffered smaller declines than we had expected. Activewear, however, continues to struggle, as it posted a 19% sales decline versus our forecast of an 11% drop. We believe Hanes needs a better plan for Champion (sales down 17%) which has lost momentum and seems to be underperforming similar athleisure brands.

Hanes’ first-quarter margin performance was mixed. While its 32.7% adjusted gross margin missed our forecast by 130 basis points, its 4.6% operating margin came in 80 basis points above our estimate due to solid expense control. We expect its gross margins should be closer to typical high-30s levels by the end of this year as the recent declines in cotton and logistical costs begin to show in cost of goods sold. Hanes’ adjusted EPS loss of $0.06 in the quarter matched our forecast.