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We are maintaining our ‘Outperform’ recommendation on Hanesbrands Inc. (HBI - Analyst Report) following its 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 increase was driven by strong sales growth in both the 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%, reflecting the continuous improvement since the last two quarters.

The company introduced new products like the Hanes ComfortBlend men’s underwear, Hanes Classics slim fit and stretch premium underwear T-shirts, as well as Bali and Barely There Smart Size seamless bras in the quarter. In addition, the quarter witnessed 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 to promote its C9 by Champion as well as the Just My Size brands at stores of retailers like Target Corporation (TGT - Analyst Report) and Wal-Mart Stores Inc. (WMT - Analyst Report). Over the last few quarters, the Champion brand has been reporting consecutive double-digit growth.

Moreover, Hanesbrands is concentrating on the premium and core sectors, where pricing is more favorable. Thus, the company sold its European imagewear division in May 2012 and eliminated its exposure in Europe. Thereby, the company reduced the risks, improved operating margins and strengthened its branded portfolio in core geographies.  Hanesbrands also discontinued the private-label production and divested its Outer Banks brand in the U.S. in May.

Hanesbrands has a strong cash flow and its priority remains to reduce long-term debt and deleverage its balance sheet. The company retired approximately $300 million of floating-rate bond debt in the third quarter of 2012. In addition, Hanesbrands repaid $250 million 8% Senior Notes due 2016, a year earlier than expected. The early repayment of the debt reduced the company’s 2012 long-term debt to $1.25 billion and thereby its interest expenses for 2013. It also raised its earnings expectation for full year 2013 to a range of $3.25–$3.40 per share from the previous low $3 range.

Despite the currency and cotton cost headwinds, Hanesbrands anticipates its earnings, sales and free cash flow to improve in fiscal 2012. Hanesbrands 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 approximately 2% year over year for 2012.

Additionally, Hanesbrands expects free cash flow to be toward the higher end of the previous range of $400 million to $500 million. The company continues to expect substantial savings in selling, general & administrative costs from efficiency initiatives and is also undertaking efforts to optimize its inventories. We thus hold a Zacks #2 Rank (short-term Buy rating) on Hanesbrands.

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