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International Unit Boosts Hanesbrands, Innerwear Unit Hurts

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Rising costs, currency headwinds and weakness in innerwear unit have made matters dull for Hanesbrands Inc. HBI. Nevertheless, the company is striving to stay afloat on the back of strong international business, organic sales, online business as well as cost saving efforts. Let’s delve into both aspects.

Factors Aiding Performance

Hanesbrands’ organic sales have improved consistently. On a constant-currency (cc) basis, organic sales rose 10% during the first quarter of 2019, marking the company’s seventh straight quarter of increase. Strong brands like Champion and sturdy presence in international markets are fueling organic sales. Speaking of international unit, sales in the category improved 13% during the first quarter. Management is focused on making investments and innovations internationally. Apart from Hanesbrands, many textile-apparel players like Columbia Sportswear (COLM - Free Report) and Ralph Lauren RL are benefitting from their solid international presence.

Additionally, the company is gaining from robust presence in the digital arena.  During the first quarter, the company’s Global consumer-directed sales (including store and all online networks) rose more than 16% year over year. Hanesbrands, which has partnered with Amazon AMZN, is focused on making incremental investments in online business to keep pace with consumers’ evolving shopping patterns.

The company is also gaining from cost-containment efforts. Notably, it launched a multi-year program in first-quarter 2017 to drive investment for growth, minimize costs as well as increase cash flow. Moving ahead, the project is anticipated to produce nearly $150 million of annualized cost savings by 2019. Of the amount, roughly $50 million will be reinvested in targeted growth opportunities. Furthermore, the Project Booster cost savings along with other cash flow drivers like synergies from buyouts and diversified revenues are estimated to enable Hanesbrands achieve cash flow target of an annual run rate of $1 billion by the end of 2019.

Hurdles in the Path

Hanesbrands is battling soft sales in the Innerwear segment for quite some time. In first-quarter 2019, Innerwear sales dipped 3% due to softness in Innerwear Intimates. Previously, sales in the segment declined 3%, 3.4% and 6.9% in the first, the second and the third quarter of 2018, respectively. Also, sales were flat during the fourth quarter. Management stated that revenues for the bra category have been persistently dismal. Consequently, Hanesbrands is quite conservative regarding the Innerwear segment for 2019, wherein U.S. Innerwear sales are likely to decline 2% (at the midpoint of management’s projected range).

Additionally, Hanesbrands is battling raw material inflation. In fact, gross margin remained flat in the fourth quarter as the company was struggling against higher input costs and unfavorable mix.  Moreover, the company is facing pressure from unfavorable foreign currency translations. Evidently, adverse currency movements weighed on Hanesbrands’ sales in the first quarter of 2018 to the tune of about $46 million. Earlier, management had stated that it expects currency to have a $60-million negative impact on net sales in 2019.

Well these headwinds have weighed on the stock that declined nearly 8% in the past three months compared with the industry’s fall of 2.1%.  

Wrapping Up

Although the aforementioned headwinds are a concern, we expect this Zacks Rank #3 (Hold) company’s growth catalysts to help it stand firm amid these barriers. These are likely to aid the company in making a comeback to investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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