Consumer Market Pressures Hanes

Since its spin-off in September 2006, Hanesbrands, Inc. (HBI - Analyst Report) has reduced debt by $285 million. The firm’s business model requires only modest sales growth to create substantial EPS growth. Earnings are being driven by brand-building and cost-reduction initiatives.

But the management is reporting non-GAAP EPS, excluding unusual actions, which may be distorting perceived earnings. Also, the company operates in the highly competitive apparel essentials market, which generally lacks pricing power. We maintain our Hold recommendation.

The company’s growth model is expected to generate strong, consistent cash flow. The business model looks for long-term annual sales growth between 1% and 3% driven by investments in the company’s large brands and retail partnership programs.

The management is consolidating the organization and the distribution network, in addition to developing a global supply chain in lower-cost countries. Hanesbrands’ cost-reduction initiatives are ultimately targeted to generate gross annualized savings of $200 million. The management has hinted that it may announce a more explicit EPS goal of 15% to 25% growth in 2009 if all its long-term growth goals are achieved.

However, the challenging consumer environment has the potential to put pressure on 2008 sales. The management expects input costs to rise by approximately $32 million. In the first quarter, the company’s advertising spending increased by $10 million. Increased costs and expenses could offset the savings from the company’s cost-reduction initiatives.

Hanesbrands stock has traded in P/E range between 13 and 20. It is currently selling at 15.3 times trailing 12 month EPS. The target price is $30.00, which is a 16.5 P/E multiple on 12 month trailing earnings.

Read the full analyst report on HBI