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Hanesbrands' (HBI) Full Potential Plan Solid, Cost Woes Stay

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Hanesbrands Inc. (HBI - Free Report) is on track with its Full Potential plan, which was unveiled in May 2021. The iconic apparel maker has been benefiting from strength in the Champion brand. These upsides were reflected in the company’s fourth-quarter 2021 results, wherein management offered an encouraging net sales guidance for the first quarter and 2022.

That being said, Hanesbrands has been grappling with cost-related headwinds. Let’s delve deeper.

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Impressive Q4 Result & View

Hanesbrands reported fourth-quarter 2021 results, with the top and the bottom lines increasing year over year and beating the respective Zacks Consensus Estimate. Adjusted income from continuing operations of 44 cents a share, improved from 42 cents and 39 cents reported in fourth-quarter 2020 and fourth-quarter 2019, respectively. Net sales from continuing operations rose nearly 4% to $1,752.3 million. Results gained from strength in the Champion brand, the progress of the Full Potential plan and the strong point-of-sale performance.

For first-quarter 2022, net sales from continuing operations are anticipated to be nearly in the $1.51-$1.57 billion range. The mid-point of the guidance suggests year-over-year net sales growth of 2%. For 2022, net sales from continuing operations are anticipated to be about $7-$7.15 billion. The mid-point of the guidance suggests about 4% year-over-year net sales growth and a 5.5% rise at constant currency (cc).

Full Potential Plan in Action

The Zacks Rank #3 (Hold) company is progressing well with its Full Potential plan, which includes growing the global Champion brand, re-igniting innerwear growth, driving consumer-centricity and focusing on the portfolio. Management remains encouraged with its steady start to the Full Potential growth plan even amid an extremely tough operating landscape. Despite struggling with major inflation and global logistic headwinds, the company surpassed its initial full-year 2021 target offered on its May 2021 Investor Day.

Encouragingly, management recently raised its 2024 Full Potential financial outlook due to high consumer demand for its brands globally and the strength of its Full Potential growth strategy, among other factors. For 2024, Hanesbrands now expects sales of nearly $8 billion compared with nearly $7.4 billion anticipated earlier. Global Champion sales are forecast to be about $3.2 billion from nearly $3 billion envisioned earlier. Adjusted operating profit is likely to be around $1.15 billion compared with the earlier view of nearly $1.05 billion. Adjusted operating margin is likely to be approximately 14.4% now compared with the earlier view of nearly 14.3%.

As part of its Full Potential plan, management remains focused on investing in high-growth categories. Under the plan, it is investing in iconic brands and the simplification of its business portfolio. Through its consumer-centricity objective, the company expects to drive growth by presenting innovative products, increasing awareness via higher brand marketing as well as making strategic investments in digital capabilities including online marketing and advanced analytics. The company is on track with SKU reduction, which will help it gain better manufacturing and distribution efficiencies.

Primary Impediments

During the fourth quarter of 2021, Hanesbrands’ adjusted gross margin of 38.4% contracted 195 basis points (bps) year over year and roughly 235 bps from the fourth quarter of 2019. The downside was due to higher expedite costs. Adjusted operating margin contracted around 100 bps year over year and 240 bps from the fourth quarter of 2019 on account of the decline in gross margin.

On its last earnings call, management highlighted that it expects to keep witnessing gross and operating margin pressure through the first half of the year. The downside stemmed from the timing of inflation and planned investments related to the Full Potential plan. Also, the company’s strategic decision to increase spending on expediting products to support innovation launches and retail space gains is a downside. Management expects first-quarter gross margin to decline year over year at the same rate witnessed in the fourth quarter. The company projects a first-quarter operating margin decline of roughly 420 bps at the mid-point of the guidance range.

Owing to its international presence, Hanesbrands is susceptible to unfavorable currency fluctuations. For the first quarter of 2022, net sales from continuing operations are likely to include an adverse impact of about $35 million from currency movements. For 2022, net sales from continuing operations are anticipated to reflect a currency headwind of nearly $100 million.

After all is said and done, it is yet to be seen if the aforementioned upsides can help Hanesbrands stay afloat amid such adversity. Hanesbrands’ stock has decreased 12% in the past three months compared with the industry’s decline of 11.5%.

Eye These Solid Picks

Some better-ranked stocks are Delta Apparel , Gildan Activewear (GIL - Free Report) and Columbia Sportswear (COLM - Free Report) .

Delta Apparel currently carries a Zacks Rank of 2 (Buy). DLA has a trailing four-quarter earnings surprise of 21.3%, on average. Shares of DLA have declined 3.6% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Delta Apparel's current financial year’s sales and EPS suggests growth of 12.3% and 19.1%, respectively, from the corresponding year-ago period's reported numbers.

Gildan Activewear, presently carries a Zacks Rank #2 at present. Shares of Gildan Activewear have decreased 12% in the past three months.

The Zacks Consensus Estimate for Gildan Activewear’s 2022 sales and EPS suggests growth of 8.9% and 3.3%, respectively, from the corresponding year-ago reported figures. GIL has a trailing four-quarter earnings surprise of 66.6%, on average.

Columbia Sportswear currently has a Zacks Rank #2. COLM has a trailing four-quarter earnings surprise of 203.3%, on average. Shares of COLM have declined 7.7% in the past three months.

The Zacks Consensus Estimate for Columbia Sportswear's current financial-year sales suggests growth of 17.7% and the same for EPS indicates growth of 8.1% from the respective year-ago period's reported figures.


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