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We are upgrading our recommendation on Hanesbrands Inc. (HBI - Analyst Report) to Outperform from Neutral on the back of solid third quarter 2012 results.

Hanesbrands' third quarter earnings of $1.11 per share outpaced the prior-year earnings by 31% and the Zacks Consensus Estimate by 5.7%. The upswing was driven by strong sales growth in both Innerwear and Outerwear segments. Operating profit in the quarter climbed 8% to $156.5 million, driven by lower selling, general and administrative expenses. Operating profit margin expanded 60 basis points to 12.8%.

The company introduced new products like Hanes ComfortBlend men’s underwear, Hanes Classics slim fit and stretch premium underwear T-shirts, and Bali and Barely There Smart Size seamless bras. In addition, the quarter saw strong sales of Champion activewear and Gear for Sports apparels.  

Overall, 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 Wal-Mart Stores, Inc. (WMT - Analyst Report), thus boosting 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.

Despite currency and cotton cost headwinds, Hanesbrands anticipates its earnings and sales to improve in fiscal 2012. Hanesbrands now expects earnings in the range of $2.54 – $2.60 per share for fiscal 2012, versus $2.50 – $2.60 anticipated previously. The company also expects its sales to increase by approximately 2% for 2012.

The company expects free cash flow to be toward the higher end of the previous range of $400 million to $500 million. In addition, the company continues to see substantial savings in selling, general & administrative costs from efficiency initiatives and is also undertaking efforts to optimize its inventories, reduce long-term debt and de-leverage its balance sheet.

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

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