Entering a new chapter after selling off its Champion brand, HanesBrands (HBI) has pivoted towards becoming a streamlined, focused innerwear business, a move that has seen its shares soar by 38.65% over the past three months. Q3 delivered promising results, with top-and-bottom-line beats. At the same time, revenue growth is anticipated in Q4, and a strong commitment to reducing its debt significantly suggests the company is on the path to realizing further potential upside. These confident strides forward indicate that the recent decision to focus the brand on its core innerwear business may lead to sustained sales growth and margin improvement.
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The stock looks to be trading at a discount relative to industry peers, putting HBI in a promising position to deliver solid shareholder returns over the long term. This is backed by forecasted top-line growth, margin expansion, and further consolidation of HanesBrands’ balance sheet.
HanesBrands Sells off a Crown Jewel
HanesBrands is a global consumer goods company that designs, manufactures, and sells a diverse range of innerwear apparel for all genders and ages. The company operates predominantly through three segments: Innerwear, Activewear, and International. Aside from its core brand, Hanes, the company boasts a portfolio of other brand names, such as Playtex, Maidenform, and Bali, while also manufacturing and marketing underwear for Polo Ralph Lauren.
The company recently announced the conclusion of the sale of the intellectual property and certain operational assets of its global Champion business to Authentic Brands Group. This strategic sale was finalized shortly after the third quarter of 2024 and is a crucial milestone on HanesBrands’ path to strengthen and simplify its operations.
The company plans to utilize the proceeds from the sale and its internal cash generation to pay down approximately $1 billion of debt in the latter half of 2024. It has already made considerable progress towards this goal, having reduced nearly $870 million of its debt as of October. HanesBrands’ management believes that returning to a strategic focus on its core innerwear business will offer strong shareholder returns in the coming years via a blend of top-line growth, margin expansion, double-digit earnings per share growth, and further balance sheet deleveraging.
HanesBrands’ Recent Financial Results and Outlook
The company recently reported solid third-quarter 2024 results. Revenue of $937.10 million slightly outperformed expectations by $1.44 million. Although net sales decreased 2.5% compared to the previous year, mainly due to the divestiture of the U.S. Sheer Hosiery business. Gross profit and margin increased significantly year-over-year, driven by lower input costs, comprehensive cost savings initiatives, and effective assortment management strategies.
To further improve cost-efficiency, HanesBrands has implemented optimization actions within its supply chain, and these strategies have resulted in an adjusted gross profit of $392 million, marking an 11% increase from the prior year. Gross margin improvement and strategic brand investments boosted operating profit and margin, leading to a 27% increase in operating profit. Non-GAAP earnings per share (EPS) came in at $0.15, surpassing consensus estimates by $0.03.
At the quarter’s end, the company reported over $1.4 billion in liquidity, comprising $317 million of cash and equivalents with approximately $1.1 billion of available capacity under the company’s credit facilities. The Leverage Ratio stood at a comfortable 4.3 times on a net debt-to-adjusted EBITDA basis, below the set covenant and the prior year’s rate. Additionally, the company successfully paid down an estimated $870 million of debt post the end of Q3 2024. Cash flow from operations was $197 million year-to-date, with free cash flow of $165 million.
Forecast for Q4
Management has given guidance for the Fiscal year 2024, with projected net sales from continuing operations at about $3.61 billion. This signifies roughly a 4% decrease compared to the previous year. The estimated GAAP operating profit from continuing operations is approximately $174 million, and the adjusted operating profit is around $417 million. Lastly, the company anticipates a GAAP loss per share of about $(0.32) and adjusted earnings per share from continuing operations of approximately $0.39.
Cash flow from operations is projected to be around $250 million by the end of the fiscal year, and free cash flow is expected to be about $210 million.
Is HBI Stock a Buy?
After a significant multi-year decline in the share price, the stock has rebounded nicely, posting a 79% return year-to-date. It trades near the high end of its 52-week price range of $3.58 – $8.70 and shows ongoing positive price momentum as it trades above all the major moving averages. The P/S ratio of 0.5x looks to be a discount to the Apparel Manufacturing industry average of 1.067x.
Analysts following the company have taken a cautious approach to HBI stock. Based on the most recent recommendations from four analysts, HanesBrands is rated a Hold overall. The average price target for HBI stock is $6.63, representing a potential downside of -17.13% from current levels.
Bottom Line on HBI
HanesBrands has shown some resilience and made tough strategic choices as it looks to turn the company’s fortunes around. Early signs are promising, as the expectation-beating Q3 results and surging share price attest. Still, there is some road to travel yet, as reflected in analysts’ projections. The stock trades at a relative discount, so brave investors willing to jump on the turnaround bandwagon could see decent appreciation over time. However, it may come at the cost of patience through short-term price volatility.
