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Moody’s Lifts Hanesbrands Ratings

Better operating margins pull family mark up to highest speculative grade.

Moody’s Investors Service has upgraded Hanesbrands Inc.’s corporate family credit rating a single notch to the highest non-investment grade.

Moody’s said Tuesday that the corporate family rating has been raised to “Ba1” from “Ba2” based on “improved operating margins resulting from a combination of lower overall production costs and a modest increase in revenues.” Scott Tuhy, vice president and senior credit officer of Moody’s corporate finance group, noted that the current debt-to-EBITDA ratio of 3.2 and interest coverage of 4.7 times are the strongest since the 2006 spin-off of the company from its former parent, Sara Lee Corp.

Moody’s maintained its stable rating outlook for the company based on the expectation that it “will be able to sustain its high operating margins and that it will continue to make progress achieving cost savings associated with the Maidenform acquisition that occurred in October 2013.” Moody’s expects free cash flow to be used to fund additional acquisitions, share repurchases or both.

In the first quarter ended March 29, the company’s operating margin, excluding nonrecurring items related to the Maidenform purchase and other actions, hit a record 10.8 percent of sales. Net income in the quarter fell 19.1 percent to $41.6 million, or 41 cents a diluted share, but adjusted EPS hit 76 cents, 18 cents above analysts’ consensus expectations. Revenues rose 12 percent to $1.06 billion and were essentially flat on a constant-currency basis excluding Maidenform sales.

Among its concerns, Moody’s noted that three of the firm’s largest customers currently account for more than half of its revenues and that it continues to have high exposure to “volatile input costs, such as cotton.”

In addition to raising the corporate rating, Moody’s lifted to “Baa2” from “Baa3” the ratings on the company’s senior secured revolving credit facility and its senior unsecured notes.