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Hanesbrands Outperforms Again

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We reaffirm our Outperform recommendation on Hanesbrands Inc. (HBI - Free Report) following the appraisal of second-quarter fiscal 2013 results wherein HBI’s Innovate-to-Elevate strategy triggered modest revenue growth.

Why the Reiteration?

On Jul 31, 2013, Hanesbrands delivered second-quarter fiscal 2013 earnings which surpassed both prior-year quarter earnings and the Zacks Consensus Estimate by 77.6% and 24%, respectively. The upside was prompted by the success of HBI’s Innovate-to-Elevate strategy and lower comparable base in the prior-year quarter due to higher cotton cost. Net sales also benefited from strong results in the Innerwear segment.

Gross profit surged 18.7% backed by lower cost of sales following shutdown of underperforming businesses. Lower cotton cost benefited the company’s operating profit margin which shot up 51.3% year over year.

Following decent performance in the first half of fiscal 2013, HBI raised its fiscal 2013 earnings per share guidance to a range of $3.50 to $3.65 from its previous range of $3.25 to $3.40. We are encouraged by HBI’s increasing focus on core categories and shutdown of underperforming segments. This will help Hanes boost profit in the coming quarters.

HBI’s takeover of Maidenform brands in Jul 2013 which sells intimate apparel, a core category of Hanesbrands, is particularly encouraging. The acquisition will bring Maidenform’s popular brands like Flexees, Lilyette, Self Expressions and Sweet Nothings into Hanesbrands’ already rich portfolio.

Moreover, with the acquisition, Hanesbrands will be able to expand its customer base to include the younger generation as average-figure bra business of Maidenform targeting younger buyers complements Hanesbrands’ full-figure bra business targeting older women.

Hanesbrands, which carries a Zacks Rank #1 (Strong Buy), has also entered into deals with several retailers which are providing shelf space to the company’s products. C9 brand by Champion has an exclusive deal at Target stores (TGT - Free Report) under which the departmental chain shelves the active wear garments under the brand.

Walmart Stores (WMT - Free Report) is increasing shelf space for Hanesbrands’ men’s underwear and Macy’s Inc. (M - Free Report) introduced Hanes’ products in its stores from Jun 2013. These deals will help Hanes increase its market share in the coming quarters.

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