Hanesbrands Inc. (HBI - Free Report) has seen its shares gain 6.3% in a month’s time frame, outpacing the industry’s growth of 6.1%. Apparently, the company’s strategic endeavors to counter obstacles have finally helped it win investor confidence. Let’s delve deeper and see if this Zacks Rank #3 (Hold) stock can sustain the momentum.
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What’s Working in Favor of Hanesbrands?
International strength has long been aiding Hanesbrands. Markedly, this segment constituted nearly 34% of the company’s net sales in the third quarter of 2018. Sales for the segment improved 11.3% (up 15% at cc) to $619.4 million. Organic sales rose 10% on a currency-neutral basis backed by strong Champion sales across Europe and Asia. Contributions from the acquisition of Bras N Things ($32 million) also fueled International sales. Management is firmly focused on making investments and innovations internationally, which serve as a major driver.
Apart from Hanesbrands, many textile-apparel players, namely Columbia Sportswear (COLM - Free Report) , lululemon athletica (LULU - Free Report) and Ralph Lauren (RL - Free Report) are benefitting from a respective solid international presence. Meanwhile, Hanesbrands is making discreet acquisitions to solidify its business portfolio, which is one of its core strategies for long-term growth. To this end, contributions from acquisitions (Bras N Things and Alternative Apparel) played a significant role in augmenting Hanesbrands’ third-quarter sales. Evidently, these transactions contributed $48 million to the top line. Additionally, the Champion Europe and Hanes Australasia buyouts in 2016 proved beneficial to the company.
Hanesbrands is also gaining from its cost-containment efforts. Notably, the company launched a multi-year program in first-quarter 2017 to drive investment for growth, minimize costs as well as increase cash flow. This program is likely to boost the company’s Sell More, Spend Less, Generate Cash strategy for additional gains, mainly from the globally commercial and supply-chain scale through acquisitions. By 2019, this project is anticipated to produce nearly $150 million of annualized cost savings, of which roughly $50 million will be reinvested in targeted growth opportunities.
Moreover, the Project Booster cost savings along with other cash flow drivers like synergies from buyouts and diversified revenues are anticipated to help Hanesbrands achieve its cash flow aim of an annual run rate of $1 billion by 2019-end. These factors alongside the company’s strong Activewear unit should help it odds like softness in the innerwear category, adverse currency fluctuations and input cost woes among others.
Hitches on Hanesbrands’ Route
Weakness in the Innerwear segment has long been a concern for Hanesbrands. In third-quarter 2018, Innerwear sales fell 6.9% to $599.7 million due to softness across both Innerwear Basics and Innerwear Intimates. Operating profit decreased 13.6% to $132.2 million on account of raw-material inflation and sluggish replenishment orders compared with solid point-of-sale trends. Hanesbrands anticipates its Innerwear sales to remain flat in the fourth quarter.
Well, Hanesbrands is struggling with raw material inflation, which has been a headwind since the past few quarters. Although gross margin grew in the third quarter, it was hurt by higher input costs to some extent. Unfortunately, raw-material inflation is likely to persist, which is a threat to margins. The company also remains exposed to unfavorable foreign currency translations. In fact, currency woes along with impacts from Sears Holdings’ bankruptcy prompted management to tighten its outlook for 2018 when it reported third-quarter results.
Nevertheless, we expect the company’s robust catalysts to help it stand firm amid these barriers and continue to be in investors’ good books.
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