Shares of Hanesbrands Inc.’s (HBI - Free Report) declined 2.24% on Feb 2, 2017 after its fourth-quarter 2016 earnings per share of 53 cents missed the Zacks Consensus Estimate of 58 cents by 8.6% due to lower than expected traffic at its stores. However, earnings increased 20% year over year on higher sales due to the Innovate-to-Elevate strategy.
This strategy focuses on value-added, high-priced and higher-margin items that can be supplied at lower costs. Additionally, benefits from the company’s back-to-back acquisitions contributed to earnings growth.
The adjusted earnings exclude $47 million of pre-tax charges related to acquisitions and other actions in fourth-quarter 2016 and comparable year-ago quarter.
Revenues and Operating Profits
Quarterly revenues increased 11.8% to $1.58 billion driven by strong acquisition-related International growth. However, revenues missed the Zacks Consensus Estimate of $1.69 billion during the quarter due to weaker than expected retail environment in the US.
Although cost of sales increased, Hanesbrands' gross profit improved 13.1% to $612.1 million on the back of higher sales. Gross margin expanded 50 basis points (bps) to 38.9%. Operating profit surged 29% to $203.7 million. Operating margins increased 170 bps year over year backed by synergies from Hanes Europe, Knights Apparel and Maidenform.
Following the changes made at the managerial level, the company shifted its wholesale eCommerce business from the Direct-to-Consumer segment to the respective Innerwear and Activewear segments in first-quarter 2016.
Innerwear: Sales declined 8.2% year over year to $611.5 million due to declines in basics and hosiery, while intimates were flat in the quarter. Traffic declines at bricks-and-mortar accelerated from the prior year during the holiday period but were below expectations. Operating profits contracted 200 bps to 22.5% due to lower volume and the negative sales mix.
Activewear: Sales gained 2.8% from the year-ago quarter to $383.5 million owing to higher U.S. Champion revenue growth, driven by double-digit growth in the mass channel. Licensed Sports Apparel sales also surged backed by expansion into the high school channel and organic growth in the college bookstore channel. Operating margins inflated 90 bps in the last year to 16.8%.
International: Sales soared almost 78% to $505.04 million driven by the accretions from acquisitions of the Pacific Brands of Australia, Champion Europe and Champion Japan brands and organic growth in Asia. Operating margin inflated 370 bps to 14%, backed by focus on more profitable revenue in synergies from Hanes Europe.
Online Channel: In the fourth-quarter, the online channel, including retailer websites, company websites and pure-play ecommerce sites, accounted for approximately 11% of U.S. sales, versus approximately 8% in the previous year.
Direct to Consumer: Sales slumped 12.3% to $84.0 million due to its transition to a growth-oriented brand.
Hanesbrands issued its full-year 2017 earnings and sales guidance. For 2017, Hanesbrands anticipates earnings to be in the range of $1.93–$2.03, up 7% year over year. Net sales are expected to be in the range of $6.45–$6.55 billion, up 8% from the previous year. Sales guidance includes expected incremental sales from acquisitions of approximately $420 million to $430 million. Operating profit is expected to be in the range of $935 million to $975 million
For the first quarter, the company expects total net sales growth driven by acquisitions. Organic sales are anticipated to decline in the quarter as a result of lower Innerwear sales. The sales were affected by the retail climate of store closings and tight inventory as well as the exits from the company’s domestic catalog business and non-core offerings. For first quarter earnings are expected to be in the range of 27 cents to 29 cents.
During the quarter, the board of directors announced a hike of 36% in its quarterly dividend to 15 cents per share in Jan 2017. The new dividend will be paid on Mar 7 to shareholders on record as of Feb 14, 2017. The annualized dividend amounts to 60 cents per share with a dividend yield of 2.7%, based on Hanesbrands’ closing price of $22.63 as of Jan 24, 2017. Last year, the company increased its dividend by 10%.
Full Year Results
Full year 2016 earnings per share of $1.85 missed the Zacks Consensus Estimate of $1.90 by 2.63%. However, earnings increased 11% year over year on higher sales due to the Innovate-to-Elevate strategy.
Revenues increased 5.2% to $6.03 billion. However, revenues missed the Zacks Consensus Estimate of $6.66 billion during the year.
Hanesbrands is hampered by currency headwinds, soft sales in the direct-to-consumer segments, and a lackluster performance of the Champion brand. In the past one year, the shares of this retailer have declined 31.1%, underperforming the Zacks categorized Textile-Apparel industry which has witnessed a fall of 18%.
Hanesbrands currently carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the broader consumer discretionary sector are Rocky Brands Inc. (RCKY - Free Report) , Francesca’s Holdings Corp. and Tailored brands Inc. .
Tailored Brands sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth of 13.8%. You can see the complete list of today’s Zacks #1 Rank stocks here. Francesca’s and Rocky Brands carries a Zacks Rank #2 (Buy). They company has an expected earnings growth of 9.6% and 17.5% respectively.
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