Hanesbrands Pinned at Neutral

We are maintaining our Neutral recommendation on Hanesbrands Inc. ( HBI - Analyst Report ) . Champion and Just My Size brands seized a major share of the market and boosted sales in the recent quarters.

The Pros and Cons

The company commands a portfolio of well-recognized flagship brands, including Hanes, Champion, Playtex and Bali, which reinforces its well-established position in the industry. The company has also undertaken customer-specific programs like the C9 and Just My Size programs at stores of retailers like Target Corporation ( TGT - Analyst Report ) and Walmart Stores ( WMT - Analyst Report ) , which have helped boost sales of brands like Champion and Just My Size. The Champions brand has reported double-digit growth consecutively for the last few quarters.

Moreover, the company has undertaken a program that uses the ‘Kanban’ concept for its inventory management. The multi-initiative ‘Kanban’ effort determines production quantities, and in doing so, it facilitates just-in-time production and ordering systems. Eventually, it ensures that the supply of products meets customer demands while effectively managing inventory levels. This will improve the cash conversion cycle and prevent oversupply of goods for the company.

However, the Intimate Apparel/Innerwear industry is highly competitive and very price sensitive. Hanesbrandsfaces intense competition in both domestic and international markets from other established players, including Warnaco Group Inc. ( ) , Maidenform Brands Inc. ( MFB - Snapshot Report ) and Gildan Activewear Inc. ( GIL - Snapshot Report ) . The company’s strategy to focus on more premium brands and raise prices in these categories comes with the inherent risk of consumers shifting from Hanesbrands’ high-priced apparels to more competitively priced brands of competitors, like Warnaco’s Calvin Klein and Warner’s brands.

Moreover, a bad harvest in Asia and surging demand has more than doubled cotton prices since last year. Hanesbrands, which specializes in cotton T-shirts and undergarments, is most vulnerable to price volatility because raw material costs make up a greater percentage of the total cost. The company has raised prices thrice during fiscal 2011 and plans to do so again in fiscal 2013. The price increases affected margins and piled up inventories as well as reduced market share in the industry.

During the first quarter of fiscal 2012, Hanesbrands posted a loss per share of 27 cents, which was narrower than the Zacks Consensus Estimate of a loss of 33 cents. However, it fell well short of the prior-quarter earnings of 49 cents on the back of lower margins due to high cotton costs and weak performance in the Outerwear and International segments.

Currently, Hanesbrands carries a Zacks #3 Rank (short term Hold rating).