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Hanesbrands Inc. (HBI - Analyst Report) reported earnings per share of 41 cents for its fourth quarter 2011, which was 41.4% higher than the prior-year quarter. However,  the EPS was significantly lower than the Zacks Consensus Estimate of 51 cents.

For fiscal 2011, the company reported earnings per share of $2.69, which was 24.5% higher than the prior-year quarter. The result however, missed the Zacks Consensus Estimate of $2.79 by 3.6%.

Profits were primarily impacted by strong performance in the underwear and socks, partially offset by late fourth-quarter softness.

The company expects fiscal 2012 diluted EPS of $2.50 - $2.60. The company’s gross margin percentage is expected to be in the mid-20s in the first quarter, resulting in a loss per share of up to 35 cents.

Revenues and Operating Profits

Total revenue for the quarter slipped 0.4% to $1,145.13 million from $1,149.65 million in the year-ago period. Management attributed the shortfall of sales in the fourth quarter to "unexpected and substantial" slowing of orders in December as retailers tried to lower their inventory levels.

‘Destocking’, or clearing of inventory stocks, reported by many retailers recently can be the cause for the decrease in orders for the apparel manufacturer.

Higher cost of cotton and other products has also pulled down the quarter’s operating profit to $75,288 million, 7.7% lower than the year-ago level. Hanesbrands operating margin shrank 50 basis points (bps), coupled with a gross profit margin contraction of 120 bps, owing to higher cotton and commodity costs.

Segment Details

Hanesbrands’ Hosiery and international segment went up marginally by 0.8% and 0.6%, respectively. Direct to consumer, Innerwear and Outerwear segments all declined by 1.6%, 0.7% and 0.6%, respectively. However, sock sales posted almost double-digits rise with strong growth in both Hanes and Champion branded socks.

Outerwear’s operating profit slumped 35% on flat sales as a result of lower profitability in the retail casual wear category, which lost a key program, and the wholesale category, which was impacted by competitive pricing. International segments operating profit plummeted the most by 45% year over year.

However, Innerwear operating profit increased 20% in the quarter backed by strong expense control.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $35.34 million and long-term debt of $1,807.77 million. Operating activities provided $167.95 million. The amount used for investing activities totaled $90.09 million.

For 2012, the company expects free cash flow to be in the range of $400 million to $500 million.The company’s near-term priority for the usage of free cash flow is to reduce long-term debt and de-leverage its balance sheet.

Our Recommendation

Hanesbrands is a leading player in the innerwear, casual wear and active wear markets in the U.S. It is well established in the industry among stiff competitors like Limited Brands Inc. and Maidenform Brands Inc. .

However, Hanesbrands’ debt-ridden balance sheet and unfavorable foreign translations may weigh upon both the top and bottom lines. Its soft guidance also hurts investors’confidence.

Hanesbrands currently holds a short-term Zacks #4 Rank (Sell). On a long-term basis, we maintain a ‘Neutral’ rating.

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