Hanesbrands: Headwinds Won't Last, Shares Cheap

Although fourth-quarter operating profit faced a combination of short-term challenges, multiple data points (including e-commerce and global sales) reinforced our belief that narrow-moat

Fourth-quarter profitability levels were disappointing, but we view these as short-term in nature. Adjusted operating margin for fiscal 2017 came in at 14.2% versus our 14.4% estimate and 15.2% in the prior year. We attribute this to higher distribution expenses, additional marketing investments as well as revenue mix. On the distribution expense front, we think this headwind will quickly ease. Strong demand for Champion and the volume of late-quarter orders drove higher distribution costs, which management will address. Furthermore, the mix impact resulted from a sales shortfall in the higher-margin intimates business, which management is currently attempting to right. We expect increased marketing spend to remain a headwind into 2018, but we view this as wise, given the resulting organic growth achieved in the quarter, and given that this expense is essential for protecting the brand intangible asset.

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