Morningstar | C9 Exit Hurts but Should Not Overshadow Hanesbrands' Activewear, Direct, and International Momentum
Hanesbrands' second-quarter update was in line with our expectations, but the news that Target will exit its contract for the exclusive C9 by Champion line in 2020 is grabbing investors' attention. C9 generated $380 million in trailing 12-month revenue, or 5.7% of total TTM revenue, with operating margins roughly in line with core U.S. Champion margins (roughly 14%-15%). While we're likely to trim our $29 fair value estimate by a dollar or two to account for the lost revenue, we believe today's pullback is an overreaction by the market and leaves Hanesbrands at an attractive risk/return proposition.What makes us confident in our longer-term assumptions? One, the company continues to execute on its global direct (up 20% and now 22% of total sales) and international (up 12% on a constant-currency basis and constituting 31% of sales) strategies, which should mitigate any declines among traditional retailers. Two, the Champion brand outside of Target has been growing at a healthy high 20s/low 30s clip the past four quarters (constant currency). While we appreciate investor concerns that Target and other retailers could shift to a greater emphasis on their own private-label portfolios, we believe Champion's current momentum (which is expected into next year based on current bookings as well as international expansion and direct sales efforts) should be sufficient to put the brand near management's brand target of $2 billion in sales by 2022 (versus $1.4 billion in 2017), with upside optionality if C9 is rolled out at other retailers.
There is no change to our narrow moat rating based on the second-quarter update, and we remain comfortable calling for low-single-digit average annual revenue growth over the next five years even after factoring in lost C9 revenue. We continue to believe operating margins will expand from 14% in 2017 to 16% by fiscal 2022, aided by $85 million in synergies in 2018 and 2019 and $100 million in net cost savings from Project Booster.
Hanesbrands is a marketer of basic innerwear and activewear apparel in the Americas, Europe, Australia and Asia/Pacific under some apparel brands, including Hanes, Champion, Bonds, DIM, Maidenform, Bali, Playtex, Lovable, Bras N Things, Nur Die/Nur Der, Alternative, L'eggs, JMS/Just My Size, Wonderbra, and Gear for Sports. The company's segments are: Innerwear, which includes apparel products, such as men's underwear, women's panties, children's underwear, socks and intimate apparel; Activewear, which includes T-shirts, fleece, performance apparel, sport shirts and thermals; and International, which includes innerwear, activewear, hosiery and home goods products, sold outside of the United States.
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