Ryan Fuhrmann, CFA
April 24, 2008
Despite recent uninspiring sales trends, apparel company Hanesbrands (NYSE: HBI) has a number of profit-motivated tricks up its sleeve, and investors are starting to notice. Total first-quarter sales fell 5%, but reported earnings nearly tripled to $0.38 a share on cost-reduction efforts, lower debt, and share repurchases, which proved to be a nice encore to the improving profit trends the company reported to exit 2007. No wonder the stock has risen 23% so far this year.
Quarterly sales, though, were anemic across the board, with innerwear falling 7.9%, outerwear down 4%, and hosiery plummeting 9.4% Management said the results are “consistent with broad-based macroeconomic point-of-sale trends,” which is another way of saying that, for a number of reasons, consumers are shopping less, and department stores that carry the company’s products are feeling the resulting pinch.
Meanwhile, the international segment posted a decent 15.3% jump in sales but accounted for only 10.6% of the top line. The company said the big gains for the quarter came from “cost reductions, supply chain initiatives, and lower interest expense.” The latter item was a welcome development, because investors have been preoccupied with how Hanesbrands was going to be able to handle the hefty debt that Sara Lee (NYSE: SLE) saddled it with during a 2006 spinoff. Interest costs fell almost 22% for the quarter, and there is plenty of room for further reductions as management pays down its indebtedness.
Hanesbrands doesn’t offer quarterly guidance, but I think management has a plan to further boost profits. Of course, cost cuts can last for only so long, so the company will eventually have to post more inspiring top-line growth. But as it stands, returns on invested capital already exceed 10%, and free cash flow is bumping up against $3 per share, to put Hanesbrands at just past 11 times trailing free cash flow. So even with the current stock run, the company is quite reasonable for a market leader, and it’s really starting to prove that it can excel as a standalone company. Â Â Â Â Â Â Â Â
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