Morningstar | Champion Global Growth Boosts 1Q for Narrow-Moat Hanesbrands; Shares Significantly Undervalued
Narrow-moat Hanesbrands slightly exceeded our sales and earnings expectations in the first quarter. Sales of $1.59 billion beat our forecast of $1.53 billion despite an unexpectedly high year-over-year negative $46 million impact from foreign currency. Hanesbrands’ first-quarter GAAP and adjusted earnings per share of $0.22 and $0.27, respectively, both exceeded our forecast by $0.01. The sales outperformance was led by Champion, which experienced a 75% worldwide year-over-year increase in constant-currency sales (excluding the winding-down C9 business at no-moat Target). We believe Champion will continue to benefit from the casual athletic fashion trend. Hanesbrands’ first-quarter international operating margin of 14.4% exceeded our forecast of 11% as higher sales from Champion and Bras N Things (acquired last year) allowed for expense leverage. We forecast a 2019 operating margin of 15% for the segment. We do not expect to change our $27 fair value estimate as our 2019 adjusted EPS forecast of $1.76 remains in line with Hanesbrands’ guidance of $1.72-$1.80. We view Hanesbrands as significantly undervalued.We believe Hanesbrands has leading share and pricing in basic innerwear in multiple countries due to the strength of its brands. We think its international acquisitions add to its brand intangible asset. While the U.S. innerwear channel has been affected by store closures and inventory reductions, we think the Hanes brand still achieves premium pricing and shelf space. Hanesbrands’ first-quarter U.S. innerwear operating margin of 22% matched our estimate, and we forecast an operating margin of 24% for the segment in 2019, up from 22% last year. We believe the strength of the Hanes brand will allow it to maintain prime shelf space at wide-moat Walmart despite the imminent launch of new private-label men’s underwear from no-moat Gildan. We believe this product will largely replace Gildan-branded underwear.
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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