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Hanesbrands Beats Q3 Earnings; Ups View

RL HBI KORS

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Hanesbrands Inc. (HBI - Analyst Report) reported third-quarter 2013 earnings per share of $1.23, up 10.8% from the comparable prior-year quarter. Earnings beat the Zacks Consensus Estimate of $1.14 by 7.8%.

Even though revenues did not favor the earnings growth, the upswing was driven by higher margins backed by the success of the ‘Innovate-to-Elevate’ strategy implemented by the company. The strategy focuses on value-added, higher-priced and higher-margin items that can be supplied at lower cost.

Revenues and Operating Profits

Quarterly revenues slipped 1.8% to $1.19 billion, backed by lower sales in almost all the business segments. Revenues, however, lagged the Zacks Consensus Estimate of $1.23 billion due to sluggish retail environment.

However, both the core products and new products of HBI gained share during the quarter backed by success of the Innovate-to-Elevate strategy.

Gross profit surged 5.4% year over year to $421.7 million, while gross profit margin inflated 240 basis points (bps) to 35.2% in the third quarter backed by lower cost of sales.

Operating profit in the quarter shot up 13.0% to $176.9 million from $156.5 million in the year-ago quarter. Operating profit margin expanded 200 bps to 14.8% mainly due to lower cotton costs, favorable pricing and successful implementation of the Innovate-to-Elevate strategy.

Segment Details

Innerwear: Net revenue for the Innerwear segment slipped 2.5% year over year to $560.1 million in the reported quarter mainly due to lower retail sales in the back-to-school period.

Although operating profit in the segment declined 0.2% year on year to $99.9 million, margin inflated 40 bps to 17.8% due to share gains of most of the brands like Hanes socks, Bali bras and panties, Polo underwear, and Hanes, Playtex and Just My Sizebras of the segment.

Socks and bras also performed well during the quarter. Sales grew in September, but the growth was slow as the retailers reduced orders due to low August sales.

Activewear: Activewear segment sales went down 1.9% from the year-ago period to $405.1 million, due to a decline in branded Printwear sales. The sales in the category declined as it is in the process of phasing out its low-margin products.

The segment reported operating profit, up 39.1% to $68.6 million compared to $49.3 million a year ago. Operating margin improved 500 bps to 16.9% backed by double-digit margin gains in retail activewear and Gear for Sports categories of the segment. Moreover, profit in brands like Champion and Hanes, as well as the shift of focus from less profitable elements of Branded Printwear business resulted in margin gains during the quarter.

International: Net sales in the International segment slipped 0.1% to $132.1 million in the quarter. Foreign exchange headwinds primarily hurt the segment results. Excluding currency, revenues in this segment increased 10% in the quarter. Operating profit, however, slipped 6.2% to $16.6 million due to unfavorable currency translation.

Direct to Consumer: Direct to Consumer segment’s sales remained almost flat at $100.0 million reflecting soft retail conditions in the country. However, operating profit surged 29.2% to $16.2 million compared with the year-ago level.

Other Financial Updates

The company exited the third quarter of 2013 with cash and cash equivalents of $132.3 million compared with $82.3 million in the previous quarter. Long-term debt was $1.25 billion in the third quarter of 2013 compared with $1.37 billion in the previous quarter.

On Oct 7, 2013, Hanesbrands completed the takeover of the underwear apparel chain, Maidenform Brands Inc., for approximately $583 million. The acquisition was funded with cash and cash equivalents and short-term borrowings through revolving credit facilities. The revolving credit facilities are expected to be retired through Hanesbrands' free cash flow.

The acquisition brings Maidenform's popular brands like Flexees, Lilyette, Self Expressions and Sweet Nothings and Hanesbrands' market leading brands like Playtex, Bali, Just My Size, Hanes, Barely There, Wonderbra, Champion and L'eggs under one banner. It will also give HBI a competitive edge over Limited Brands Inc. .

The acquisition is expected to be accretive to Hanesbrands' earnings in the first 12 months. Moreover, it is expected to generate additional revenues of $500 million, 60 cents in earnings per share, $80 million of operating profit and $65 million of free cash flow.

Guidance

For full-year 2013, the company raised its guidance backed by decent year-to-date results. It raised its earnings per share guidance to a range of $3.75 to $3.85 from $3.50 to $3.65. It expects operating profits between $580 million and $590 million for the year, higher from previous estimated range of $550 million to $575 million. It expects net sales slightly above $4.6 billion compared to $4.55 billion as estimated earlier.

Moreover, HBI raised its 2014 earnings per share target range to $4.25 to $4.50, compared to the low $4 range provided earlier.

Hanesbrands engages in the marketing of innerwear, outerwear and hosiery apparel and carries a Zacks Rank #1 (Strong Buy). Other companies in the same industry are Ralph Lauren Corporation (RL - Analyst Report) and Michael Kors Holding Limited (KORS - Analyst Report) that hold a Zacks Rank #2 (Buy).

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