Morningstar | Champion and Direct Channels Produce Surprising 2018 Finish for Hanesbrands; Shares Still Attractive
Hanesbrands wrapped up 2018 with a good fourth quarter led by its activewear and direct-to-consumer businesses. We may increase our $27 fair value estimate by about $1 and view Hanesbrands’ valuation as attractive, even after the share price's high teens percentage move higher post earnings. Hanesbrands’ activewear, led by Champion, produced $485.4 million in fourth-quarter sales, 7% above our forecast. Although activewear faces a tough 2019 due to the expiring (in January 2020) C9 contract at no-moat Target, we view Champion as an increasingly popular athletic fashion brand across the globe, resulting in its tracking ahead of Hanesbrands’ stated target of $2 billion in sales (excluding C9) in 2022. We maintain our view that Hanesbrands’ brand intangible asset supports a narrow moat.We view direct to consumer (25% of sales) as a big opportunity for Hanesbrands. Online represented 12% of total sales in the fourth quarter of 2018, up from 11% in 2017’s fourth quarter. We believe Hanesbrands can mitigate some of the weakness at traditional department stores by expanding its online and specialty store businesses. We think Hanesbrands enhanced the Champion brand and supported online sales by opening four flagship stores in the United States in 2018.
Hanesbrands’ U.S. innerwear met our forecast with 0% growth in the fourth quarter. We remain cautious on innerwear (1% long-term growth), especially as we expect further closures from J.C. Penney and other department stores and increasing private-label competition. Hanesbrands is implementing an innerwear price increase, which we believe will be accepted by the market.
Hanesbrands guided to 2019 GAAP EPS of $1.59-$1.67, in line with our $1.63 forecast. Hanesbrands is making progress with debt reduction. Although we forecast the company will close 2019 with debt/EBITDA of around 3, we do not expect major stock buybacks until its debt/EBITDA is cut to around 2.5 in 2021.
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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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