Investors are witnessing carnage in innovation and disruption stocks, whether it's telemedicine, streaming, cloud, data analytics or the always prevalent “something” as a service-type stocks. Investors of all ages may be turning to less complex stories like food and clothing, which can often make solid long-term investments. One of these “comfort food” type companies may be Hanesbrands Inc. (HBI, Financial), a leading producer of innerwear and athletic wear with such iconic brands as Hanes, Champion, Maidenform, Playtex and Bali.
Innerwear is the industry term for clothing items such as underwear, bras, panties, t-shirts and socks, and the company is the U.S. market share leader in that category. The majority of total company sales are through wholesale channels such as department stores or sporting goods stores. Approximately 17% of revenue is done through consumer-direct channels such as its own stores or e-commerce websites. Walmart (WMT, Financial) as a single customer represents about 17% of total sales.
Hanesbrands employs 61,000 people in 47 countries with about 70% of sales coming from North America and the rest in various international markets. The company is best known for its advertising campaigns with basketball legend Michael Jordan, with whom it has had a relationship going back over 30 years.
The company was founded in 1901 and currently has a $4.7 billion market capitalization.
2024 Full Potential plan
In May 2021, the company announced its three-year Full Potential growth plan, which is a series of initiatives and plans to drive incremental revenue growth by $1.2 billion and expand operating margins to 14.3% (since increased to 14.4%). Highlights of the plan include increasing the Champion athletic brand to sales of approximately $1 billion and reinvigorate innerwear to the tune of $200 million in incremental sales. Total company sales are expected to be $7.4 billion by 2024, but the company recently increased that target to $8 billion.
The implementation of these goals centers around five key initiatives. The first is enhancing design and innovation to meet current consumer trends and needs. Next is supply chain segmentation, which increases efficiency and lowers logistics and operating costs across most segments. Another one is simplification of processes and management layers in order to make better and faster decisions. The company is also investing in data analytics and technologies that not only improve internal processes, but also improves the e-commerce experience for consumers.
This plan is self-funded and the company’s investment is expected to be roughly $90 million in brand marketing, $40 million of depreciation related to growth-oriented capital investments and $30 million for technology and people. Cumulative three-year free cash flow from these initiatives is expected to total $1.6 billion.
2021 was a strong rebound year for the company, with revenue increasing 11% from the prior year and 5.8% over 2019, the last normalized year prior to the Covid-19 pandemic. Constant currency earnings per share for the year were $1.80 compared to $1.45 in 2019. Hanesbrands generates strong free cash flow, even in a difficult year such as 2020. Free cash flow over the past three fiscal years was $554 million, $395 million and $702 million.
The company has a strong liquidity position of $1.75 billion, which consists of $536 million of cash and equivalents and approximately $1.2 billion of available capacity under its line-of-credit facilities. The leverage ratio declined to 2.7 times on a net debt-to-adjusted Ebitda basis as compared to 3.5 times at the end of 2020 and 2.9 times at the end of 2019.
Analysts' earnings per share estimates for the 2022 calendar year are $1.75, which puts the company selling at only 7.8 times this year’s earnings. The company’s current enterprise value/Ebitda ratio is approximately 7 times based on my Ebitda estimates of over $1 billion. The company rarely gets a high multiple as it is not in a sexy business, all jokes aside. Underwear is typically a replacement and population growth-driven business that doesn’t usually generate high growth rates. However, the company’s Full Potential growth plan may change that dynamic.
The average target price among analysts that follow the company is approximately $21 with a low of $18 and a high of $27. The GuruFocus discounted cash flow calculator comes up with a $22 value based on a discount rate of 10%, starting earnings of $1.80 per share and a 5% 10-year growth rate.
The company is comfortable with its free cash flow and liquidity position and indicated it planned on buying back shares in the first quarter of 2022. Lastly, the company’s dividend yield is currently over 4% with a payout ratio of only 33%.
Gurus who have purchased Hanesbrands' stock recently include Lee Ainslie (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies. Gurus who have reduced their positions include Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Hanesbrands appears to be undervalued at this time as investors are not giving it credit for potentially higher growth and a steady return of capital to shareholders. If the company reaches its Full Potential goals by 2024, then I would use the phrase significantly undervalued at this time. Based on recent market activity, investors may be better investing in underwear then an innovative technology company that doesn’t generate profits.