Hanesbrands Inc - Zacks Small Cap Institutional Research

January 23, 2015

Hanesbrands Inc (HBI-NYSE)

Current Recommendation

Prior Recommendation Date of Last Change

NEUTRAL

Outperform 01/23/2015

Current Price (01/22/15) Target Price

$113.04 $119.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2015 Estimate P/E using 2016 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$115.72 $64.17 69.63 1.05

557,426

100 $11,292

3.44 86 3

$1.20 1.06

3.9 22.3 N/A

21.8 17.4 15.5

3 - Hold

SUMMARY

We return to a Neutral recommendation from Outperform on Hanesbrands Inc. following its slightly soft third-quarter fiscal 2014 results. Although earnings per share of $1.73 improved 44% from the year-ago results and beat the Zacks Consensus Estimate by a penny driven by higher nmargins, sales missed the consensus mark by 1%. Sales increased 17% from the year-ago results, but currency continued to affect the top line. Overall, we remain encouraged with the company s favorable pricing and successful implementation of the margin boosting Innovate to Elevate strategy. Hanesbrands continues its strategic acquisitions and the recent DBApparel takeover prompted it to raise the fiscal 2014 outlook. However, we remain cautious about the slowdown in the business momentum of the company.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg

Large-Growth Textile-Apparel 117 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

945 A 1,059 A 1,281 E

1,199 A 1,342 A 1,581 E

Q3 (Sep)

1,197 A 1,401 A 1,569 E

Q4 (Dec)

1,286 A 1,557 E 1,605 E

Year (Dec)

4,628 A 5,358 E 6,036 E 6,296 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013 2014

$0.51 A $0.76 A

$1.19 A $1.71 A

$1.23 A $1.73 A

$0.98 A $1.45 E

$3.91 A $5.65 E

2015 2016

$0.94 E

$2.02 E

$1.88 E

$1.65 E

$6.49 E $7.28 E

Projected EPS Growth - Next 5 Years %

12

? 2015 Zacks Investment Research, All Rights reserved.



10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

Headquartered in Winston-Salem, NC, Hanesbrands Inc. engages in the design, manufacture, sourcing and sale of apparel essentials for men, women and children in the U.S. and internationally. The company offers products under well-established brands such as Hanes, Champion, Playtex, Bali, Just My Size, Barely There and Wonderbra.

Hanesbrands distributes its products through various channels, including mass merchants, national chains and department stores and other retail channels, such as third-party embellishers, specialty retailers, warehouse clubs and sporting goods stores.

Hanesbrands reports its operating results under four major segments:

Innerwear segment: This segment manufactures and sells core apparel products, such as women's intimate apparel, men's underwear, kids' underwear and socks, marketed under well-known brands like Hanes, Bali, Playtex, Barely There, Just My Size and Wonderbra. Innerwear segment also includes the Hosiery segment, which makes women's sheer hosiery in the United States.

Outerwear segment: The segment consists of casual wear and active wear products. The casual product category provides comfortable clothing for men, women and children under the Hanes and Just My Size brands. The active wear products include T-shirts and fleece sold to both retailers and wholesalers. The company sells this segment s products to both retailers and wholesalers.

International segment: The International segment includes sales from Latin America, Asia, Canada, Australia, Japan, Mexico and Brazil. The company also has sales offices in India and China. The segment produces and sells products under brands such as Hanes, Champion, Wonderbra, Playtex, Stedman, Zorba, Rinbros, Kendall, Soly Oro, Ritmo and Track N Field.

Direct to Consumer segment: This segment includes sales from value-based store outlets and Internet operations that sell products to its customers directly.

REASONS TO BUY

Strong Brand Portfolio: Hanesbrands is a leading player in innerwear, casual wear and active wear markets in the U.S. The company commands a portfolio of well-recognized flagship brands, including Hanes, Champion, Playtex and Bali, which reinforces its well established position in the industry. The company s customer-specific programs, such as C9 and Just My Size, at stores like Target and Wal-Mart, are in high demand. Hanesbrands flagship brand Hanes commands a major market share in the intimate apparel sector.

Hanesbrands further strengthens its brands by collaborating with several renowned designers. This helps the company to place the brands at premium retail outlets. Interacting with customers at these outlets helps the company to know their preferences and current trends. The company ensures efficient distribution of its products which spans from retail outlets like Target Inc. targeting middleclass consumers to high-end retailers, such as Urban Outfitters and Supreme. This reflects the broad appeal of the company s products.

Hanesbrands focuses on continuous innovation to boost sales and gain shelf space in retail outlets. Tagless underwear, Hanes ComfortBlend undershirts and underwear, Smart Sizes line of bras, Champion sweetheart compression sports bra, Hanes Convert-A-Tight and Activewear line of

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sportswear were some of the originals produced by the company in 2014, which gained huge popularity soon after launch. Moreover, X-temp garments, first introduced in men s underwear, and later expanded to women s socks and panties in fall 2014, as well as bras, legwear, base layer and children s underwear and socks later in the year received favorable response from the consumers.

Innovate-to-Elevate Strategy Helps to Maintain Margins: The Innovate-to-Elevate strategy (which focuses on value-added, higher-priced and high-margin items that can be supplied at lower costs) has helped the company to increase its adjusted operating profit margin and generate significant cumulative cash from operations. This substantial amount of cash helped the company to prepay its debts, initiate a regular quarterly cash dividend and acquire Maidenform Brands (acquired in Oct 2013).

Management aims to boost sales by 10% and operating profits by over 8% from the 2014 level. It also aims to generate approximately $0.5 billion of cash in 2015.

Strong e-commerce Business: Moreover, Hanesbrands has a strong e-Commerce business.

Nowadays, customers are increasingly resorting to online shopping as it saves time. E-Commerce

sales contribute almost one-third of the company s total revenue in the third quarter of fiscal 2014.

The online shopping sites of the company

, and

account for a significant share of the company s online sales.

Strategic Agreements Strengthening the Company s Portfolio: The company entered into deals with several retailers to gain shelf space. Hanesbrands completed the takeover of DBApparel in Sep 2014 which also enriched the company s portfolio. It will be accretive to fiscal 2014 results and will help in expanding in Europe. The C9 brand by Champion has an exclusive deal with Target stores under which the departmental chain shelves the active wear garments. With the acquisition of underwear apparel chain Maidenform Brands Inc in October 2013, the company added Maidenform s popular brands like Flexees, Lilyette, Self Expressions and Sweet Nothings to the company s portfolio. Similarly, the acquisition of licensed logo apparel seller Gear for Sports in 2010 added the Champion brand to the company, which occupies a large market share in the college bookstore channel. These deals boost the categories and gain market share against national competitors.

Replenishment-Driven Nature of Product Ensures Consistency: Sale of basic apparel is primarily based on replenishment and not on fashion. This ensures consistency and fewer markdowns since it is an essential commodity and does not conform much to the changing fashion trends. Moreover, in case of basic apparels, people usually return to the brand they use which ensures a group of loyal customers.

REASON TO SELL

Focus on Premium Brands has Inherent Risks: The Intimate Apparel/Innerwear industry is highly competitive and extremely price sensitive. The company s strategy to focus more on premium brands and increase prices in these categories come with the inherent risk of consumers shifting to more competitively-priced brands offered by competitors like Warnaco s Calvin Klein and Warner s brands. Moreover, it has been observed that the Innerwear segment takes longer to recover after a macroeconomic downturn.

Lower International Penetration: The slow recovery of the U.S. economy has lowered consumer discretionary spending. Further, the slowdown in Europe is also adding to the woes. In such a scenario, the U.S. companies are looking toward the developing markets to remain afloat. However,

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Hanesbrands generates insignificant portion of its sales from international sales, much lower than its peers. Moreover, unlike its peers, it does not have any manufacturing operations in key growth markets like Asia and Latin America.

RECENT NEWS

Hanesbrands Tops Earnings, Lags Revenues; Ups FY View Oct 30, 2014

Hanesbrands third-quarter fiscal 2014 adjusted earnings per share of $1.73 beat the Zacks Consensus Estimate by a penny and increased 41% from the prior-year quarter.

Profit was driven by strong sales and higher margins backed by the success of the Innovate-to-Elevate strategy. Increased supply chain operating efficiencies and lower selling, general and administrative costs toadied quarterly earnings.

The Innovate-to-Elevate strategy focuses on value-added, higher-priced and higher-margin items that can be supplied at lower costs.

The adjusted earnings per share exclude pre-tax charges of $0.57 per share related to the acquisition of Maidenform Brands, DBApparel (DBA) and other actions.

Revenues and Operating Profits

Quarterly revenues gained 17% and came in at $1.40 billion driven by strong performance of most of the segments, especially 62.7% growth in International sales. However, sales marginally lagged the Zacks Consensus Estimate of $1.42 billion. Currency continued to affect the company s sales results negatively. This is significant as sales missed consensus for the first time in two year. Hanesbrands has been surpassing estimates consistently backed by its Innovate to Elevate strategy.

On a constant currency basis, net sales went up 1% versus the year-ago period. The Maidenform acquisition, completed in fiscal 2013, contributed almost $115 million to total quarterly sales while the DBA takeover, closed in Aug 2014, contributed $81 million.

Operating profit went up 22.6% to $217.0 million year over year. Operating margins increased 70 bps to 15.5%

Segment Details

Innerwear: Net revenue for the Innerwear segment climbed 15.7% year over year to $648.3 million driven by the Maidenform acquisition and growth of the company s base business. Sales were partly offset by the uneven and challenging retail environment. Strong performance of categories like socks, boys underwear and panties were offset by softness in other Innerwear segment.

Activewear: Activewear segment sales went up 5% from the year-ago period to $424.7 million on the back of strong performance by the retail, Champion business, branded printwear and Gear for Sports businesses.

International: Net sales in the International segment went up 63% to $215.0 million. Sales were negatively impacted by foreign currency movements. On a constant currency basis, international sales slipped 3% year over year. Sales excluding the DBA buyout increased 1% year over year.

Direct to Consumer: Direct to Consumer segment s sales went up 13% to $112.7 million backed by contributions from the Maidenform acquisition.

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Other Financial Updates

During the quarter, Hanesbrands acquired Europe-based intimate apparel company DBA on Aug 29 for 400 million or $528 million. The acquisition is expected to be accretive to fiscal 2014 results. The buyout

is in accordance with Hanesbrands acquisition strategy as DBA sells intimate apparel a core category of Hanesbrands. The takeover has opened opportunities in Europe for Hanesbrands.

Guidance Upped

Hanesbrands raised the full-year fiscal 2014 earnings outlook. The company expects the business momentum to continue in the fourth quarter of fiscal 2014 backed by the Innovate-to-Elevate strategy and back to back acquisitions.

Hanesbrands now expects earnings per share in the range of $5.55 to $5.65 up from $5.40 to $5.60. The company expects operating profits within $750 to $770 million versus $735 to $755 million. The company, however, maintained its sales guidance and expects net sales to be between $5.350 billion and $5.375 billion.

VALUATION

Hanesbrands current trailing 12-month earnings multiple is 21.8x, representing a discount of 11.4% to the industry average of 24.6x. Over the last five years, Hanesbrands shares have traded in the range of 8.2x to 22.3x trailing 12-month earnings. Based on 2014 earnings estimate of $6.49, the stock is trading at 17.4x, which is an 17.9% discount to the industry average of 21.2x.

At the end of the third quarter of 2014, the P/B multiple of the stock was approximately 7.5x premium to the industry average of 3.4x. On a ROE basis, the stock looks attractive given a trailing 12-month ROE of 39.7%, which is way above the industry s 11.5%.

The stock carries a Zacks Rank #2 (Buy). Our target price of $119.00 is based on approximately 18.3x our 2014 earnings estimate.

Key Indicators

HANESBRANDS INC (HBI)

P/E F1

17.4

P/E F2

15.5

Est. 5-Yr EPS Gr%

14.9

P/CF (TTM)

21.8

P/E (TTM)

21.8

P/E 5-Yr

High (TTM)

22.3

Industry Average S&P 500

21.2 18.6 16.2 15.2

15.6

15.7

24.6

86.3

10.7

15.9

18.7

19.4

RALPH LAUREN CP (RL)

19.8 17.4

11.9

14.5

20.4

25.2

TEIJIN (TINLY)

17.8

4.5

17.2

94.8

GRASIM INDS-GDR (GRSXY)

12.1

9.1

7.4

13.4

16.8

COACH INC (COH)

20.1 18.7

8.1

9.7

13.1

23.3

TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/E 5-Yr Low (TTM)

8.2

13.8 12.0

13.9 8.1 9.5

11.0

HANESBRANDS INC (HBI)

P/B Last Qtr.

7.5

P/B 5-Yr High

7.9

P/B 5-Yr Low

3.1

ROE (TTM)

39.7

D/E Last Qtr.

1.3

Div Yield Last Qtr.

1.1

EV/EBITDA (TTM)

21.2

Industry Average S&P 500

Equity Research

3.4

3.4

3.4

11.5

0.2

5.1

9.8

3.2

24.8

HBI | Page 5

0.6

-1.3

2.0

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