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HanesBrands (HBI) Poised for Robust Earnings Growth and Debt Reduction
Published on September 24, 2024 | Ticker: HBI

HanesBrands Inc. (HBI) is a leading global apparel company that designs, manufactures, sources, and sells a broad range of everyday basic apparel products, including innerwear, activewear, and international products. The company's portfolio of iconic brands, such as Hanes, Champion, Bonds, Bali, and Maidenform, have strong consumer positioning and help distinguish them from competitors.

Over the past few years, HanesBrands has faced several challenges, including significant cost inflation, market disruption, and consumer-demand headwinds. However, the company has taken decisive actions to enhance its operating and financial models, positioning it for a strong recovery and long-term growth.

Business Overview

HanesBrands operates in three main segments: Innerwear, Activewear, and International. The Innerwear segment includes sales of basic branded apparel products such as men's underwear, women's panties, children's underwear and socks, and intimate apparel. The Activewear segment includes sales of branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel. The International segment primarily includes sales of the company's innerwear and activewear products outside the United States, primarily in Australia, Europe, Asia, Latin America, and Canada.

In 2023, HanesBrands reported annual net income of -$17,726,000, annual revenue of $5,636,523,000, annual operating cash flow of $561,749,000, and annual free cash flow of $517,693,000. The company's quarterly results for the first quarter of 2024 showed net sales of $1,156,201,000, a decrease of 16.8% compared to the same period in the prior year. The decrease was primarily due to the continued macroeconomic slowdown impacting consumer spending across segments, expected discrete items impacting the Activewear segment, the divestiture of the U.S. Sheer Hosiery business in the prior year, and the unfavorable impact from foreign currency exchange rates in the International business.

Operational Improvements and Strategic Initiatives

Over the past three years, HanesBrands has taken significant steps to enhance its operating and financial models. The company has built new capabilities around brand building, data analytics, inventory management, and SKU discipline. It has also streamlined its supply chain, extended its advantages, and taken out more than $200 million in fixed costs, nearly half of which were in SG&A.

HanesBrands' "Full Potential transformation plan" is designed to re-energize and reignite its Innerwear business, grow the Champion brand through improved product and channel segmentation, and become a more consumer-focused organization that delivers products consumers want. The company has also simplified its business by selling its European Innerwear and U.S. Sheer Hosiery businesses.

In the Innerwear segment, HanesBrands is launching new consumer-led innovations, including Maidenform M, Bonds Shape Of, and the second phase of its successful Hanes Originals platform called SuperSoft. The company is also increasing brand marketing investments to support its current and future innovation launches, build greater brand relevance with younger consumers, gain incremental shelf space and seasonal programming, and further solidify the leadership position of its brand portfolio.

In the Activewear segment, HanesBrands is aggressively implementing its "global Champion performance plan" designed to strengthen the brand and position it for long-term profitable growth. The company is focused on building brand heat, particularly with younger consumers, including strategic collaborations and targeted new product offerings in key channels. HanesBrands has also moved its kids' business to a license model, which is part of its strategic plan to optimize the portfolio.

Improved Financial Position and Outlook

HanesBrands' financial position has significantly improved over the past year. The company has paid down $500 million in debt, reducing its leverage to 5.0x on a net debt to adjusted EBITDA basis as of the first quarter of 2024. This is nearly a half a turn lower than the prior year. The company's strong cash flow generation, driven by its improved operating performance and working capital management, has enabled it to reduce debt and strengthen its balance sheet.

Looking ahead, HanesBrands has reiterated its full-year guidance for 2024, expecting sales of approximately $5.37 billion, operating profit of $500 million to $520 million, and earnings per share of $0.46. The company is highly confident in its ability to deliver on this guidance, citing its visibility into input costs, the benefits of its cost-saving initiatives, and the strength of its brand portfolio and innovation pipeline.

In the second quarter of 2024, HanesBrands expects net sales to decrease approximately 6% on a reported basis, with organic constant currency sales expected to decline around 3%. However, the company anticipates operating profit to increase approximately 40% over the prior year, with operating margin expanding nearly 300 basis points to 9%, driven by lower input costs and its cost-saving initiatives.

Risks and Challenges

While HanesBrands has made significant progress in enhancing its operations and financial position, the company still faces several risks and challenges. The global macroeconomic pressures, including consumer-demand headwinds and higher interest rates, could continue to adversely impact the company's business and results of operations. Additionally, the company's ongoing evaluation of strategic alternatives for its global Champion business introduces uncertainty, and any potential transaction or other strategic outcome could have implications for the company's future.

Conclusion

HanesBrands has taken decisive actions to transform its business and position itself for long-term growth and value creation. The company's strong brand portfolio, industry-leading innovation, and low-cost global supply chain provide a solid foundation for success. With its improved operating and financial models, HanesBrands is poised to accelerate earnings growth, drive faster deleveraging of its balance sheet, and unlock significant shareholder value in the coming years.

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