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Here's Why HanesBrands (HBI) Appears Promising Despite Hurdles

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HanesBrands Inc. (HBI - Free Report) has been demonstrating strong resilience amid a challenging macroeconomic landscape. The company has enhanced its operating and financial models by developing brand building, data analytics, inventory management and SKU discipline capabilities.

A focus on enhancing the Innerwear business has been working well, as evidenced by the market share growth in the first quarter of 2024. With solid fixed-cost reductions and streamlined supply chains, the company’s gross margins have returned to historical levels, reaching an adjusted gross margin of 39.9% in the first quarter.

These upsides are likely to keep this Zacks Rank #1 (Strong Buy) company going amid a tough operating landscape marked by inflation, market uncertainties and volatile consumer demand. The Zacks Consensus Estimate for 2024 earnings per share (EPS) has risen by a penny to 46 cents over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

What’s Working Well?

HanesBrands’ foundational financial model has consistently been robust, characterized by healthy margins and steady cash generation. Over the past three years, the company has taken necessary actions across the business to enhance its operating and financial models. This includes developing new capabilities in brand building, data analytics, inventory management and SKU discipline.

Additionally, management has recruited new talent, streamlined the supply chain and eliminated fixed costs of more than $200 million (about half of which were part of SG&A). Adjusted SG&A expenses declined 3% to $378 million in the first quarter on cost savings initiatives, disciplined expense management and reduced distribution expenses.  This also helped the company fund brand marketing investments toward the U.S. Innerwear and global Champion business. The adjusted operating margin stood at 7.3%, up nearly 270 bps.

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Moving on, HanesBrands’ reignite Innerwear strategy continues to gain traction. The company has been acquiring market share, driven by innovation targeted at a younger consumer demographic, the successful expansion of permanent retail space, a well-executed back-to-school campaign and enhanced on-shelf availability. Leveraging data analytics capabilities, the company supports retail partners in improving sales and working capital efficiency. The company is managing its inventory more efficiently and reducing SKUs to focus on higher-velocity, higher-margin SKUs.

Although HanesBrands’ global Innerwear business was pressurized by limited consumer spending in the first quarter of 2024, the company continued to strengthen this business amid headwinds. A focus on innovation launches, coupled with increased investment in brand marketing, keeps the company well-positioned for continued market share growth.

Additionally, HBI recently inked a deal to offload the intellectual property and certain operating assets of its global Champion business to Authentic Brands Group (or Authentic). This sale is likely to maximize the value for Champion while helping HBI speed up debt reduction and positioning it for long-term growth. On concluding the sale of the global Champion brand, Hanesbrands intends to focus on enhancing its position in the innerwear category and achieving above-market growth via consumer-centric product innovation and elevated investments across leading brands such as Hanes, Bonds, Maidenform and Bali.

Wrapping Up

All the abovementioned actions are likely to drive strong earnings growth this year and position the company for more consistent top and bottom-line growth over time. Management envisions operating profit and earnings per share to increase year over year in the second quarter and full-year 2024 despite expecting soft sales.

Shares of HBI have risen 10.2% in the past six months against the industry’s decline of 19.3%. 

3 Other Solid Bets

Crocs (CROX - Free Report) designs, develops, manufactures, markets, distributes and sells casual lifestyle footwear and accessories. It currently carries a Zacks Rank #2 (Buy). CROX has a trailing four-quarter average earnings surprise of 17.1%.

The Zacks Consensus Estimate for Crocs’ current financial-year sales and earnings suggests growth of 4.4% and 5.2%, respectively, from the year-ago reported numbers.

Guess? (GES - Free Report) , which designs, markets, distributes and licenses lifestyle collections of apparel and accessories, currently carries a Zacks Rank #2. The Zacks Consensus Estimate for GES’ current fiscal-year sales indicates growth of 11.7% from the year-ago reported figure.

Guess? has a trailing four-quarter earnings surprise of about 31%, on average.

Kontoor Brands (KTB - Free Report) , a lifestyle apparel company, presently carries a Zacks Rank #2. KTB has a trailing four-quarter earnings surprise of nearly 13%, on average.

The Zacks Consensus Estimate for Kontoor Brands’ current financial-year earnings suggests growth of roughly 11% from the year-ago reported number.

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