Executive Summary / Key Takeaways

• Hanesbrands has completed a radical transformation from a debt-laden, diversified apparel conglomerate into a focused innerwear and activewear pure-play, having shed Champion, outlet stores, and European operations while paying down over $1 billion in debt and expanding operating margins to 22.9% in the U.S. segment.

• The pending acquisition by Gildan Activewear for 0.10 Gildan shares plus $0.80 cash per HBI share represents a strategic endgame that validates management's simplification strategy while offering HBI shareholders exposure to a larger, more efficient operator with $200 million in targeted cost synergies.

• HBI's tariff mitigation strategy provides a durable competitive moat: zero exposure to China for U.S. products, meaningful U.S. cotton content exempt from reciprocal tariffs, and a balanced Western Hemisphere supply chain that positions the company to capture market share as competitors face disruption.

• Segment performance reveals a tale of two businesses: the U.S. innerwear market remains pressured, particularly in intimate apparel where Maidenform faces headwinds, but growth in basics, activewear (nearly 30% growth), and new categories like scrubs and loungewear (165% growth) demonstrates the brand portfolio's resilience.

• The central risk to the thesis is execution: the Gildan merger could face regulatory hurdles or integration challenges, while the Australia business faces potential goodwill impairment if economic conditions worsen, and elevated leverage (5.97x debt-to-equity) remains a constraint despite recent deleveraging progress.

Setting the Scene: From Conglomerate to Pure-Play

Hanesbrands Inc., founded in 1901 and headquartered in Winston-Salem, North Carolina, spent decades building a global apparel empire anchored by iconic brands like Hanes, Champion, and Bonds. For years, the company pursued growth through acquisition and diversification, amassing a complex portfolio that included innerwear, activewear, hosiery, and outlet stores across multiple continents. This expansion came at a cost: by 2023, HBI carried a bloated debt load, operated a fragmented supply chain, and struggled with declining margins in a challenging consumer environment.

The transformation began in earnest with the arrival of CEO Steve Bratspies in 2020 and accelerated through a series of decisive actions. In 2024, HBI announced its exit from the global Champion business, selling intellectual property and operating assets to Authentic Brands Group for an initial closing on September 30, 2024, followed by a deferred closing on January 31, 2025. The company simultaneously shuttered its U.S.-based outlet store business in July 2024 and finalized plans to exit Champion Japan in December 2024. These divestitures weren't merely asset sales; they represented a strategic retreat from lower-margin, capital-intensive operations to focus resources on core innerwear and activewear categories where HBI holds authentic brand equity and supply chain advantages.

This simplification coincided with a radical shift in capital allocation. In January 2023, management pledged to direct all free cash flow toward debt reduction, targeting a net debt-to-adjusted EBITDA ratio of 2-3x. Over the subsequent two years, HBI paid down $1.5 billion in debt and refinanced its 2026 maturities with a new $750 million revolving facility, $400 million Term Loan A, and $1.10 billion Term Loan B, extending maturities to 2030-2032 and increasing the mix of prepayable debt. By the end of Q2 2025, leverage had fallen to 3.3x, down 1.3 turns year-over-year, with management confident in reaching the 2-3x target range by year-end.

The company now operates through two reportable segments: U.S. (innerwear and activewear sales in the United States) and International (sales outside the U.S., primarily in Australia, Latin America, Asia, and Canada). This streamlined structure reflects a "Simplify for Growth, Focus for Impact, and Continuously Improving to Win" strategy that leverages consumer-led innovation, SKU lifecycle management, and advanced analytics to drive profitability.

Technology, Products, and Strategic Differentiation

HBI's competitive moat rests on three pillars: a powerful brand portfolio, a tariff-advantaged supply chain, and data-driven operational excellence. The brand ecosystem—headlined by Hanes in everyday basics, Bonds in Australia, and Maidenform in intimates—generates recurring revenue through consumer loyalty and shelf-space dominance. These brands have been trusted for generations, creating pricing power in categories where purchase decisions are habitual rather than discretionary. Management's confidence is evident in their refusal to pursue private label discussions, instead focusing on expanding HBI's own brands through innovation and distribution gains.

The supply chain transformation provides a structural cost advantage that competitors cannot easily replicate. Approximately 85% of U.S. cost of goods comes from owned manufacturing facilities split evenly between Western Hemisphere (Dominican Republic, El Salvador, Honduras) and Eastern Hemisphere (Vietnam, Thailand) networks. Critically, HBI no longer sources any U.S. products from China, eliminating exposure to U.S.-China tariffs that have plagued apparel rivals. The company benefits from meaningful U.S. yarn and cotton content in its products, which are exempt from reciprocal tariffs under current trade policies. This positioning, combined with roughly two quarters of inventory on hand, means tariff cost impacts won't be felt until Q4 2025, giving HBI ample time to execute mitigation strategies.

Advanced analytics and AI drive the third pillar of differentiation. HBI has reduced SKUs by 50%, eliminating underperforming and margin-diluted products while using demand planning and forecasting tools to quickly pivot and capture demand shifts. This capability proved crucial when a large U.S. retail partner shifted replenishment orders late in Q3 2025, allowing HBI to offset the impact through growth in activewear and new businesses. The company is also leveraging these tools to extend brands into adjacent categories, creating new revenue streams in loungewear, scrubs, and absorbency products that grew 165% in Q2 2025.

Innovation focuses on margin-accretive products rather than volume for volume's sake. The Hanes brand is being elevated through exclusive offerings with Urban Outfitters (URBN) in the U.S. and premium T-shirts at specialty retailers in Japan. Maidenform is pivoting in 2025 to focus on T-shirt bras—the largest category segment—while expanding distribution in mass and online channels. This targeted approach contrasts with the previous strategy of narrow innovation that failed to move the overall brand.

Financial Performance & Segment Dynamics

HBI's financial results demonstrate the transformation's progress, with structurally higher profit margins driven by productivity gains and lower fixed costs. For the nine months ended September 27, 2025, net sales from continuing operations increased 1% to $3.53 billion, while operating profit surged to $439.8 million, up from $406.1 million in the prior year. Operating margin expanded 190 basis points to 12.9%, driven by gross margin expansion (70 basis points from lower input costs, 65 basis points from supply chain savings) and SG&A leverage (160 basis points from cost savings and expense management), partially offset by 105 basis points from unfavorable assortment mix.

The U.S. segment remains the profit engine, generating $1.92 billion in net sales for the nine-month period (down 2% year-over-year) but delivering $439.8 million in operating profit (up 8.3%) at a 22.9% margin, up 220 basis points from 20.7% in the prior year. This margin expansion occurred despite a 4.5% sales decline in Q3 due to the retail partner replenishment shift. The drivers are structural, including supply chain cost savings and lower input costs, partially offset by unfavorable assortment management and mix. The segment's resilience stems from category diversification—while intimates declined mid-teens, basics grew low single-digits, activewear surged nearly 30%, and new businesses like scrubs and loungewear jumped 165%.

The International segment faces more headwinds, with nine-month net sales down 4.5% to $625.9 million and operating profit declining 9.6% to $67.5 million. Operating margin compressed 60 basis points to 10.8% due to macroeconomic pressures in Australia, where sticky inflation and low GDP growth have dampened consumer spending. Currency translation created a $24 million headwind, while constant currency sales declined 1%. The segment's heavier retail component leads to more fixed SG&A costs and quarterly margin fluctuations, though management expects better performance in Q4 due to higher seasonal volume. Despite near-term challenges, the Australia business maintains strong brand equity with Bonds, and Asia continues to deliver growth.

The "Other" segment, comprising transition service agreements from the Champion divestiture, contributed $98.1 million in nine-month sales but will wind down through 2025 as these agreements expire. This temporary revenue boost helped fund debt reduction but will create a headwind next year.

Balance sheet improvements have been dramatic. HBI ended Q3 2025 with $584.6 million of borrowing availability under its $750 million revolving facility and amended its ARS facility in May 2025 to extend maturity to May 2026. The March 2025 refinancing eliminated $900 million of 4.88% Senior Notes due 2026, replacing them with lower-cost, prepayable Term Loans A and B that provide flexibility for continued deleveraging. Combined interest expense from continuing and discontinued operations fell $58 million in the nine-month period due to lower outstanding debt and a reduced weighted average interest rate of 7.12% versus 7.56% in the prior year.

Outlook, Management Guidance, and Execution Risk

Management's guidance reflects confidence in the transformation's durability while acknowledging ongoing consumer headwinds. For full-year 2025, HBI expects net sales of approximately $3.53 billion (essentially flat), operating profit growth of 17% to $485 million, and EPS of $0.66 (up 65%). The outlook assumes a conservative view of the muted consumer environment, with 25% of sales from international markets outside U.S. tariff challenges and two-thirds of U.S. sales from basic innerwear products that historically outperform in tough macroeconomic periods.

Tariff mitigation remains a key strategic advantage. Management has stated they can "fully mitigate" tariff cost headwinds through a combination of cost actions and surgical pricing, with no expected material impact from tariffs on China, Mexico, or Canada. The company's natural offsets—U.S. cotton content, Western Hemisphere manufacturing, and zero China sourcing—provide a cushion that competitors lack. This confidence is backed by inventory positioning that delays cost impacts until Q4, providing time to enact mitigation initiatives.

Debt reduction continues to be the primary capital allocation priority. Management expects to end 2025 with leverage around 3.0x net debt-to-adjusted EBITDA, approaching the 2-3x target range. The refinancing created a greater mix of prepayable debt, increasing flexibility for deleveraging. Operating cash flow is projected at approximately $350 million for 2025, with working capital contributing positively though not at the same level as 2024's $150 million benefit from the Champion transaction.

Revenue growth drivers include new product innovation, distribution gains, and expansion in the Printwear channel, where HBI is leveraging the 50th anniversary of the Hanes Beefy-T. The company has surge capacity in its supply chain network to pursue incremental opportunities from retail partners seeking to reduce exposure to high-tariff countries. New businesses grew 60% in Q1 2025, with continued expansion expected from product launches and space gains.

A critical execution risk is the pending CEO transition. Steve Bratspies announced he will step down once a successor is appointed, having reached a "positive and important inflection point" in the strategy. While the transformation is largely complete, leadership continuity during the Gildan integration will be essential.

Risks and Asymmetries

The Gildan merger agreement, announced August 13, 2025, creates both opportunity and risk. If the deal closes in late 2025 or early 2026 as expected, HBI shareholders will receive 0.10 Gildan shares plus $0.80 cash per share, gaining exposure to a combined entity with doubled revenue and $200 million in targeted cost synergies. However, the merger could disrupt business relationships, divert management attention, and faces potential regulatory scrutiny. If terminated under specified circumstances, HBI may be required to pay Gildan a $67.5 million termination fee or reimburse expenses up to $17.5 million if stockholder approval isn't obtained.

Australia's economic deterioration presents a material impairment risk. The Australia reporting unit's goodwill had a fair value cushion of only 10% above carrying value as of September 27, 2025, with indefinite-lived trademarks approximating carrying value. If economic conditions worsen or earnings don't recover as estimated, HBI could face significant non-cash impairment charges that would impact reported profits and potentially breach debt covenants.

Leverage remains elevated despite progress. At 5.97x debt-to-equity and 3.3x net debt-to-adjusted EBITDA, HBI has less financial flexibility than peers like Gildan (GIL) (1.27x debt-to-equity) or PVH (PVH) (0.87x). Non-compliance with amended financial covenants could occur if economic conditions worsen or earnings don't recover, potentially requiring additional amendments or triggering an event of default. The company must maintain compliance for at least 12 months from the November 6, 2025 filing date.

Consumer demand headwinds continue to pressure the U.S. innerwear market, particularly in intimate apparel, which management notes "typically experiences the greatest pressure in tough macroeconomic environments." While basics and activewear show resilience, a prolonged downturn could slow deleveraging and compress margins. Retail inventory is slightly up year-over-year, creating potential reorder risk if holiday sales disappoint.

Tariff policy remains uncertain despite management's confidence. The imposition of new tariffs or adjustments to existing policies could adversely impact results, particularly if the company's mitigation strategies prove less effective than anticipated. Geopolitical tensions and trade controls add further uncertainty to the global operating environment.

Valuation Context

Trading at $6.47 per share, Hanesbrands presents a complex valuation picture shaped by its transformation and pending acquisition. The stock trades at 5.53x trailing earnings and 0.67x sales, metrics that appear inexpensive relative to apparel peers. However, the P/E ratio benefits from one-time items and may not reflect sustainable earnings power. More meaningful is the enterprise value of $4.74 billion, representing 9.32x EBITDA and 1.38x revenue—multiples that suggest the market is pricing in moderate growth and margin expansion.

The balance sheet remains a key valuation driver. Net debt-to-adjusted EBITDA of 3.3x is elevated but improving rapidly, with management's 2-3x target representing a clear catalyst for multiple expansion. The debt-to-equity ratio of 5.97x remains well above Gildan's 1.27x and PVH's 0.87x, reflecting HBI's leveraged past but also the significant deleveraging already achieved. The company's $264 million in annual operating cash flow and $226 million in free cash flow provide coverage for interest obligations while funding continued debt paydown.

The Gildan deal terms value HBI at a modest premium to recent trading, reflecting the strategic value of HBI's brands and supply chain to a larger, more efficient operator. At 0.10 Gildan shares plus $0.80 cash per HBI share, the consideration offers HBI shareholders participation in the combined entity's $200 million synergy target and improved scale in a consolidating industry. The deal's success will depend on Gildan's ability to integrate HBI's operations while maintaining brand equity and customer relationships.

Comparative metrics highlight HBI's operational progress but also its remaining challenges. The 12.59% operating margin trails Gildan's 23.23% but exceeds PVH's 8.38% and Under Armour (UAA)'s 4.00%, positioning HBI in the middle tier of apparel profitability. Gross margin of 41.91% is solid but below PVH's 57.69% premium positioning, reflecting HBI's value-oriented market focus. Return on equity of 140.06% appears inflated by the company's low book value and high leverage, while return on assets of 5.92% better reflects operational efficiency.

Conclusion

Hanesbrands has executed one of the most dramatic turnarounds in recent apparel history, transforming from a debt-burdened conglomerate into a focused, profitable innerwear and activewear company. The exit from Champion, aggressive debt paydown, and margin expansion through supply chain optimization and SKU rationalization have created a fundamentally healthier business positioned to compete in a challenging consumer environment. The pending Gildan acquisition provides a strategic finale, offering shareholders both immediate cash consideration and participation in a larger, more efficient combined entity.

The investment thesis hinges on two critical variables: successful completion of the Gildan merger and continued execution of the operational improvements that have driven margin expansion. While tariff advantages and brand equity provide defensive moats, elevated leverage and exposure to consumer discretionary spending create downside risk if macro conditions deteriorate further. The Australia business's impairment risk and the CEO transition add execution uncertainty during a pivotal integration period.

For investors, the risk/reward profile is asymmetric: the Gildan deal provides a floor on valuation while the combined entity's synergy potential and HBI's standalone operational improvements offer upside. The key monitoring points will be merger regulatory approval, Q4 2025 tariff impact mitigation, and management's ability to maintain margin momentum through the leadership transition. If these elements align, HBI's transformation will conclude not just with a sale, but with shareholders capturing the full value of a reinvented company.