Hanesbrands’ Actions Are Supporting Its Brands and Financial Health Despite a Weak Market

Senior Equity Analyst

David Swartz

Narrow-moat Hanesbrands is the market leader in basic innerwear (about 60% of sales) in multiple countries. We believe its key innerwear brands like Hanes and Bonds (in Australia) achieve premium pricing. While the firm faces challenges from inflation, slowing demand for apparel, higher interest rates, and a highly competitive athleisure market, we think Hanes' share leadership in replenishment apparel categories puts it in position for improving results in the coming years. In May 2021, the firm unveiled its Full Potential plan to expand Champion globally, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

Even so, Champion’s sales have clearly been very disappointing. Hanes’ management is considering options for the brand, including a possible sale. If Champion is sold, the proceeds could be used for faster debt retirement. If, instead, Hanes decides to keep Champion, we believe it has expansion opportunities as it and other activewear apparel brands have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. 

One of Hanes’ major initiatives is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past five years. The company, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the firm each year are manufactured in its own plants or those of dedicated contractors. We believe the combination of strong pricing, new merchandise, and production efficiencies should allow Hanes to return to operating margins above 20% for its American innerwear business by 2026.

Business Strategy & Outlook

Our narrow moat rating is due to the strength of Hanesbrands' intangible brand asset. Hanes’ key apparel brands have leading market share in their categories in the US and a few other countries. The popularity of its brands allows it to maintain strong retail distribution and premium pricing. We believe the company can generate returns on invested capital above its weighted average cost of capital over the next 10 years.

Hanesbrands serves the competitive but concentrated category of mass-market basic apparel. While inventory, inflation, and other challenges have affected recent results, the company’s brands have held up during many economic cycles and ownership changes. They have, in some cases, even survived years of mismanagement and neglect. Hanes’ brands have leading market share in multiple countries and multiple categories. For example, in men’s underwear in the North America market, Hanes’ estimated 2023 share of about 28% was more than the combined shares of Fruit of the Loom and Jockey, the second- and third-largest manufacturers (Euromonitor). Similarly, in Australia, Hanes’ Bonds brand is by far the market leader and has been gaining share (to 25.8% in 2023 from 13.9% in 2016, according to Euromonitor). A decline in consumer spending on apparel and reduced ordering by wholesale partners has hurt Hanes but, in most categories, not more so than peers. 

Hanes has high market share in socks, men’s underwear, T-shirts, children’s underwear, women’s intimates, and women’s hosiery in North America and Australia. While the price points in most of these categories are relatively low, the volumes are great as these are replenishment products that people buy on a regular basis. According to Euromonitor, Hanes was third in the US and first in Australia in total retail apparel sales in 2023. In the US, Hanes, at 1.9% share in 2023 (estimated), had more than double the apparel market share of direct competitor Fruit of the Loom (0.9%). In Australia, at 5.1% share, it had more than double the share of no-moat PVH (1.8%), owner of Calvin Klein and Tommy Hilfiger. We believe Hanes’ leading market share in several areas allows it to maintain shelf space at key retailers and achieve premium pricing over weaker brands.

We think Hanes’ brands are especially important in its primary innerwear categories (underwear, undershirts, bras, socks). Although private-label apparel has become a major factor in many categories, these products only accounted for 7.7% and 2.4% of men’s and women’s underwear sales, respectively, in North America in 2023 (Euromonitor), suggesting a strong preference for branded items. 

Per-capita consumption of underwear, bras, and socks varies little from year to year. In the US, market growth is not much different than overall population growth of approximately 0.8% per year. But unlike other categories, much of this apparel is unaffected by fashion trends and is more of a replenishment product. While there is significant competition, consumers are reluctant to change innerwear brands. They are more concerned about comfort and fit than price. While basic apparel has limited growth, per capita consumption of athletic-inspired apparel has been growing. This is a benefit for Champion and other activewear brands. Activewear sales (both domestic and international) represents about 40% of Hanes’ total sales.

Hanesbrands has invested in product innovation, which should support its brand intangible asset. New products are important for Hanesbrands because they allow for product differentiation and premium pricing. As an example, men’s and women’s Hanes Premium X-Temp underwear sells for as much as double the price of basic Hanes underwear at Target and other stores. Consistent innovation is important because brand extensions allow Hanes to expand shelf space. Hanesbrands also supports its brands and product introductions with marketing. The firm spends about 3% of its annual revenue on advertising. Hanes’ larger revenue base allows it to spend more on R&D and advertising than rivals. Its spending on measured media in the US is more double that of direct competitor Fruit of the Loom. As increased investment is part of the Full Potential strategy, we anticipate both marketing and R&D spending to continue to increase.

We do not believe the current difficult environment will have much impact on Hanes’ pricing. The company sells high-volume products with low price points. As an example, Hanes’ men’s underwear at wide-moat Walmart is typically priced 20%-35% more per unit than the Walmart brand. While a sizable difference in percentage terms, the difference in dollar terms is only around $0.50-$0.85 per unit. Innerwear is a sector based on low prices all the time and mass retailers run on lean inventory. This has been an issue for Hanes, which has had to adapt to Walmart’s unwillingness to hold inventory over the past few years. Also, Walmart and no-moat Target have put a priority on private-label apparel. Nonetheless, Hanes’ innerwear operating margins are typically in the low 20s in a healthy market, higher than the operating margins of some higher-priced branded apparel, due to the introduction of innovative product with better pricing and low-cost manufacturing.

The threat of private-label apparel is often cited as a risk to Hanesbrands, but this is nothing new and should not affect the company's ability to compete. It is true that to improve margins, many retailers have replaced brand-name clothing with their own brands. Walmart and Target, for example, have been looking to offset investments in grocery and e-commerce by finding margin opportunities in other parts of their stores. As both the unit and dollar growth of private apparel brands continue to outpace the growth of national brands in these and other stores, captive brands could constitute 40% of the market within a few years. Hanes, in theory, could participate in this business if it chose to do so. The firm has manufactured private-label products in the past but largely exited the market in 2012. Hanes has avoided private-label deals in recent years because of the significant investment required, depressed profitability, and short contract lengths (typically rebid on an annual basis), providing little visibility on their long-term value and return on investment. 

Although we do not ascribe a moat based on production cost advantage, we still view Hanes as a low-cost producer. While Asia-based competition has upended apparel manufacturing in many categories, this has not been as much of a factor in innerwear. Hanes, unlike most apparel producers, primarily operates its own manufacturing facilities. It produces roughly 2.2 billion units per year and can supply markets that account for roughly 70% of the world’s GDP. Hanes operates 27 manufacturing and 42 distribution facilities in 30 countries in Asia, Central America, and the Caribbean. More than 70% of the apparel units sold by the company are manufactured in its own plants or those of dedicated contractors, which perform some of the steps in the manufacturing process such as dyeing, cutting, and sewing. At its 2021 investor event, the firm said its manufacturing output had increased 15% since 2018. The firm has also lowered production costs through technological streamlining (using fewer systems) and more efficient sourcing. It can negotiate good terms with suppliers because its buys in large volume and its production is largely predictable. Moreover, the company, as a large producer itself, knows the exact cost associated with each stage of the production process, ensuring that it does not overpay its outside suppliers. Thus, we do not believe there is an argument that Hanes’ competitive position is likely to be undercut based on cost.

Hanes’ activewear segment is led by Champion. The brand has benefited from strength in the US athletic apparel category as it has moved into specialty and more upscale retail, has grown internationally, and has expanded its assortment. Its lifestyle apparel assortment has brought new distribution and driven incremental shelf space with existing wholesale accounts. Hanes has pursued three major goals for Champion: greater distribution in existing markets, increased consumer-directed sales, and geographic expansion. In the last few years, Champion has added retailers that had not previously carried the brand. The label’s growth has been fueled by the athleisure trend and a renaissance of 1990s fashion. Champion and many others, including Nike, Adidas, Vans, Supreme, and Off-White, have benefited from the rise of apparel known as streetwear—casual clothing worn by urban subgroups. In 2019, PwC estimated the global yearly retail streetwear market to be $185 billion and reported that 60% of streetwear consumers are under the age of 25, Champion’s primary demographic.

Champion has benefited from the athleisure fashion trend and is being supported by new retail stores. The brand has expanded in multiple territories through acquisitions and organic growth. In the US, Hanes has recently opened some specialty Champion stores in major cities and a few temporary pop-ups and expanded the brand’s wholesale distribution to specialty stores. Much of its growth, though, is expected to come from international markets, especially in parts of Europe and Asia. Until recently, a large percentage of Champion’s sales in Europe were in Italy. Now, though, the brand is available in about 1,000 sporting goods stores in Europe, up from 100 in mid-2017, and it is expanding in the larger European markets. Japan has been the primary market for Champion in Asia, but Hanes is expanding Champion in South Korea and China with the help of local partners. Hanes claims awareness of the brand in China has risen 18 percentage points (to 57% from 39%) since 2019. 

Although we think the brand continues to have promise, Champion’s recent results have been disappointing. Consequently, there is a possibility that Hanes will sell the brand soon to fund debt reduction and to focus on its core innerwear. 

Hanes’ recent performance has left much to be desired, but we anticipate the firm will generate ROIC above its WACC over the next 10 years, as it has historically done. Hanes’ adjusted ROIC including goodwill averaged 10% over the past five years, above our WACC estimate of 8%. We forecast Hanesbrands' average annual adjusted ROIC including goodwill at 14% over the next decade. Hanes has reported uneven results in recent years due to store closures, lower retail inventories, weakness in intimate apparel, the pandemic, and slower consumer spending on apparel. However, our view is that it will recover from these issues and that its margins will begin to improve in second-half 2024 as demand picks up and its cost-saving initiatives take effect. 

We classify Hanesbrands’ moat as narrow rather than wide. The company’s brand portfolio is strong enough that we think it can maintain its premium pricing and shelf space over the next decade and its brands are supported by heavy advertising and innovation. In the long term, however, Hanesbrands faces competitive threats from rising brands and copycat products, so we view a wide moat rating as inappropriate. Moreover, the company lacks other factors that would allow for a wide moat. There are no switching costs in its apparel categories, barriers to entry are low, and there is no network effect. While Hanes’ production process is cost-efficient, some competitors have similar production models, so we do not think it has a cost advantage over them.

Narrow

Economic Moat

Hanesbrands

Hanesbrands, Inc. is a consumer goods company, which engages in the design, manufacture, sourcing, and sale of everyday basic innerwear and activewear apparel in the Americas, Europe, Australia and Asia Pacific. It operates through the following three segments: Innerwear, Activewear, and International. The Innerwear segment includes core apparel products, such as men's underwear, women's panties, children's underwear, socks and intimate apparel, sold in the United States (US). The Activewear segment consists of activewear products, such as T-shirts, fleece, performance apparel, sport shirts and thermals, sold in the US. The International segment comprises innerwear, activewear, hosiery and home goods products, sold outside of the US. Its brands include Hanes, Champion, Bonds, Maidenform, DIM, Bali, Playtex, Bras N Things, Nur Die/Nur Der, Alternative, L'eggs, JMS/Just My Size, Lovable, Wonderbra, Berlei, and Gear for Sports. The company was founded by J. Wesley Hanes in 1901 and is headquartered in Winston-Salem, NC.

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Hanesbrands beats Q4 sales forecast, targets margin improvement in 2023

Hanesbrands navigated Q4 2022 with sales exceeding forecasts despite macroeconomic challenges and inflation, focusing on long-term transformation and debt reduction strategies.
The company anticipates higher margins and operating cash flows in 2023, targeting mid-14% operating margin and sequential margin improvement throughout the year.
Despite challenges in various markets and headwinds from inflation, Hanesbrands is strategically managing short-term obstacles and focusing on generating savings for future growth.
Analysts raised concerns about leverage improvement, inventory management, and achieving target leverage range by 2025, highlighting the company's proactive strategies and opportunities for growth.

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Hanesbrands faced sales declines but exceeded guidance for revenue and profit, focusing on long-term growth globally despite challenges in the U.S.
Efforts to simplify the business, expand into new categories, and manage costs are strengths for the company.
Challenges include sales impact from consumer spending slowdown and inflation pressures on gross margins.
Opportunities lie in global growth strategies, improving gross margins, and using cash flow to enhance financial stability.

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Hanesbrands delivered as expected in Q2 2023 with notable progress.
Strong global retail performance offset challenges in the U.S. market.
Focused strategies on iconic brands and cost-saving initiatives are in place.
Anticipated challenges in Activewear and debt management require attention.
Opportunities exist in margin improvement, new product launches, and channel management.

HanesBrands excels in Q3, eyes global growth amid challenges

HanesBrands delivered a strong performance in Q3 2023, with improvements in gross margin, cash flow, and market share.
The company's strategic focus on debt reduction, product segmentation, and international growth opportunities positions it for future success.
Challenges in the Champion business and high inventory levels require ongoing management, but opportunities in LatAm and Australia offer growth potential.
Overall, HanesBrands remains resilient in navigating macroeconomic headwinds and is poised for recovery and growth in key markets.

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Hanesbrands navigated sales challenges in 2023 with progress in gross margin and inventory reduction. Despite an anticipated challenging sales environment in 2024, the company expects strong operating profit growth and margin improvement. Sales guidance for 2024 anticipates improvement driven by innovation and strategic actions.

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Hanesbrands delivered solid Q1 results, facing challenges in Champion sales but showing improvement. The company is focused on enhancing financial performance, reducing debt, and winning across channels. Strategic shifts and cost reductions aim to drive value creation and margin expansion.

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Hanesbrands, Inc. engages in the business of designing, manufacturing, sourcing, and selling basic apparel such as T-shirts, bras, panties, shape wear, underwear, socks, and activewear. It operates through the following segments: Innerwear, Activewear, and International. The Innerwear segment includes basic apparel including men’s underwear, women’s panties, children’s underwear, and socks, and intimate apparel such as bras, and shape wear. The Activewear segment focuses on T-shirts, fleece, sport shirts, performance T-shirts and shorts, sports bras, thermals, and team wear. The International segment provides activewear, underwear, intimate apparel, socks, and home goods. The company was founded by J. Wesley Hanes in 1901 and is headquartered in Winston-Salem, NC.

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