On Aug. 1, Hanesbrands Inc. (HBI, Financial) announced that it would not be renewing a contract to sell an exclusive line of Champion activewear to Target (TGT, Financial). The contract expires January 2020.
The stock dropped more than 20% that day, because at the moment, the big-box retailer accounts for 13% of Hanesbrands total sales, and 25% in the activewear segment. However, the company didn't change its projection for the Champion line of sales at all, which is above $2 billion by 2022.
In the last 12 months, Hanesbrands brought in over $375 million in sales from its deal with Target, but retailers need brands more than brands need retailers at this point, thanks to the internet. This drop in price is actually just a buying opportunity for investors looking for a solid dividend and long-term value position.
There's little competitive advantages for a textile company, but Hanesbrands' brand power is right up there with Berkshire Hathaway's Fruit of the Loom subsidiary, even beating it in many categories.
In the U.S., Hanesbrands is the leader in intimate apparel, with Hanes, Maidenform, Bali, Playtex, JMS/Just My Size, Donna Karan and DKNY brands. It's also the leading maker of men’s underwear and children’s underwear in the U.S. under the Hanes, Champion and Polo Ralph Lauren brands. Its international brands are also market leaders in Australia and Europe, accounting for about 38% of sales in 2017.
In the latest quarterly release, also on Aug. 1, Hanesbrands reported second quarter earnings per share of 45 cents, missing analyst estimates by a penny, but beating those estimates by $10 million on the top line. That's the real story. Hanesbrands continues to grow its top line, which will lead to bottom line growth as well. Not renewing with Target was likely a good move long term if the company can invest in building its internet presence, which is rather paltry, or bring in another retailer to fill the gap, or both.
The company continues to increase shareholder value through buybacks and dividends. It could pay out more than $10 a share in the next decade and get the share count down below 300 million, further boosting the price per share.
More importantly, Hanesbrands continues to expect full-year sales between $6.72 billion and $6.82 billion; net cash from operations between $675 million and $750 million; and per-share earnings between $1.72 and $1.80. The forward price multiple is 10x where the historic multiple is closer to 23x. Even if those meet somewhere in the middle, the stock could trade in the mid-$20s if these earnings meet or exceed expectations. Also, with a 15% short interest in the float, any good news from Hanesbrands could prompt these sellers to start buying back stock at higher prices to cover their positions. In either event, the stock is a bargain.
Disclosure: I am not long/short any stock mentioned in this article.
