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Hanes Has The Right Fit

Posted: Jun 03, 2008 10:32 AM by Gregory S. Davis

Tickers in this Article: HBI, VFC, WMT, TGT

Hanesbrands (NYSE:HBI) aims to provide the highest level of comfort for the garments closest to our skin. Michael Jordan, Cuba Gooding Jr. and Martin Sheen have all put their celebrity behinds behind Hanes' promise of quality and good fit. While the Hanes television ads are entertaining, the prospect for future growth is equally compelling for investors.

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Tough Retail Sales Environment
The downturn in the economy has hurt retail sales in the

U.S

. As a result Winston-Salem, NC based Hanesbrands net revenue dropped 5% to $988 million for the first quarter of 2008. Hanesbrands Innerwear which includes undergarments for men and women decreased nearly 8% from the prior year to $544 million. Meanwhile, the Outerwear segment, which sells under the Champion brand to collegiate teams and through Target (NYSE:TGT), saw its net revenue decline 4% to $272 million.

The Move to Even Cheaper Factories
On a bright note, Hanes' operating profit increased nearly 28% to $88 million during the first quarter. The increase in operating profit was primarily due to plant closures in Costa Rica and Mexico. (For more on this metric, read our tutorial Operating Performance Ratios.)

The closures were inline with the company's attempt to refocus on lower cost manufacturing facilities in Central America, the Caribbean and Asia. It also helps that consumers tend to replace the items they buy from Hanes suggesting that a recovering U.S. economy could lead to improved sales at home. Stronger sales are typically expected in the second half of the year as the weather cools and the gift giving season approaches.

Growing International Presence
Hanes largest foreign markets include Japan, Canada and

Mexico

. Total sales for the international segment totaled $105 million for the first quarter of 2008 up 15% from the prior year. Take note that the slumping U.S. dollar played a major role in the increase in international sales recorded. Hanes has taken additional steps to increase its international reach by establishing sales offices in China and India.

One Competitor Gives Up The Fight
VF Corporation (NYSE:VFC), owner of Wrangler, North Face and Nautica brands, is in a slightly different category than Hanesbrands since a large part of its business is driven by outdoor gear. VF Corporation was also able to increase its operating income by 13% during the first three months of the year to $244 million on $1.8 billion in revenue driven by sales from its Jeanswear, Outdoor and Contemporary Brand segments. VF sold off its women's intimate apparel business in April of 2007 which left this market bare for Hanes to cover Hanes - so to speak. VF believes that lifestyle businesses have higher growth and profit potential.

In August of 2007 Hanes opened a business office in Bentonville, Arkansas to support its growing operations with Wal-Mart (NYSE:WMT), its number No.1 customer. In the process Hanes was awarded the Leadership in Energy and Environmental Design for its sustainable interior design. Hanes also executed a stock buyback during the first quarter of 2008 making the existing shares in the market place more valuable.

2008 Looks Solid
Hanes stock has turned in a solid performance, up approximately 20% since the beginning of the year. Remember, investing is not about chasing performance, but rather it should be about investing in companies with solid brands and quality products. With sales of nearly $1 billion for the first quarter with little exposure to China and India, it may be time to dollar-cost average your way into Hanesbrands if you haven't already let the company get its Hanes on you.

To learn how to make this strategy work, read Dollar-Cost Averaging Pays.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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