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Hanesbrands Focuses on Innerwear Growth Initiatives

Hanesbrands plots international growth, acquisition of midsized brand and new retail partnerships in response to profit decline.

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After declines in annual profits and sales, Hanesbrands Inc. wants to leverage its brand muscle in the innerwear sector.

The apparel giant has set a goal of growing through international expansion in countries such as China, India, Brazil and Japan, acquiring a midsized company with annual volume of $200 million and tapping several retail partnerships, including a multiyear contract with Wal-Mart Stores Inc. to be the sole supplier of plus-size women’s apparel and select innerwear through the Just My Size brand. The deal is projected to generate sales of $50 million to $75 million this year.

Hanesbrands, which spun off from Sara Lee Corp. in September 2006, is seeking to generate annual net sales growth of 2 to 4 percent and yearly earnings per share gains of between 10 and 20 percent over the next several years. In fiscal 2009, the Winston-Salem, N.C.-based company reported profits of $51.3 million, or 54 cents a share, compared with $127 million, or $1.34 a share, in the previous year. Revenue fell 8.4 percent to $3.89 billion. The company in January reported a fourth-quarter loss of $1.1 million.

In an industry that’s been transformed by consolidation for almost two decades, Hanesbrands retains a powerful portfolio that includes Hanes, Champion, Playtex, Bali, Wonderbra and L’eggs. The innerwear unit, which consists of intimate apparel, men’s underwear and socks, generated wholesale sales $1.83 billion in 2009.

The growth strategy was unveiled last month at the Hanesbrands annual investors’ meeting in Manhattan by chairman and chief executive officer Richard A. Noll. His mantra: sell more, spend less and generate free cash flow.

“We have spent the last few years building this growth platform,” Noll said at the meeting. “We are now at an inflection point as we move from this high-investment ‘build it’ phase to the growth-focused ‘leverage it’ phase.”

The company is projecting annual net sales will grow 5 to 8 percent and EPS will rise 25 to 35 percent in 2010, exceeding its goal. Analysts said the yearly sales growth estimate is realistic, and generally agree the EPS target is attainable based on additional retail partnerships, strong free cash flow and $708 million in long-term debt that’s been paid off since the Sara Lee spin-off. The debt reduction will generate $20 million to $25 million in interest savings this year.

The sales growth estimates are based on significant shelf-space and distribution gains and a potential rebound in consumer spending that would add $50 million to $100 million in business this year and beyond, company officials said.

Hanesbrands plans to spend about $88 million on advertising this year, compared with $82 million in 2009, a spokesman said.

In addition to the Wal-Mart partnership and global expansion, a chunk of the anticipated growth involves several other retailers this year: Dollar General stores began selling Hanes this month as its exclusive underwear brand for men, women and children; Macy’s will expand assortments of Playtex foundations and J.C. Penney will add men’s underwear by Hanes.

These partnerships started primarily in the first quarter and will extend into the second quarter, said a company spokesman. He added shipping for “new or expanded programs is under way for Hanes men’s underwear programs in Target and J.C. Penney, Hanes bras in Wal-Mart, and Playtex bras in Target.”

Also in the mix are first- and second-quarter programs initiated for Hanes socks at Target, Family Dollar and Wal-Mart, and several channels for Champion: men’s and women’s activewear at Macy’s, men’s activewear at Kohl’s, and Champion men’s and women’s activewear at The Sports Authority. Other programs for Kohl’s and Macy’s are scheduled for the second and third quarters. The retail partnerships are projected to generate $200 million in sales this year.

Hanesbrands estimated two-thirds of the $200 million will come from innerwear and one-third from outerwear. “We also expect a lot of growth in the first-half for Just My Size, mainly innerwear, while Champion will have a lot of space and distribution gains in the second half in sports bras, and men’s and women’s activewear,” a company spokesman said.

Several analysts and brand specialists forecast a strong upside for Hanesbrands.

“It’s the only real innerwear brand and company that has aggressively marketed its brands right now to drive consumers to stores, and retailers are responding to it,” said Eric Beder, senior vice president of Brean Murray, Carret & Co. “Over the last three years, Hanesbrands has done a solid job with their brands. They’ve completely redone their supply chain and paid down debt.”

In addition, the company has the ability through its self-sustained global supply chain in Central America and Asia to serve 70 percent of world consumption for its products, allowing Hanesbrands to get maximum benefit of trade laws in the markets it wants to penetrate. Its newest facility is a textile plant in Nanjing, China, which opened in October 2009. The company paid $281 million in restructuring charges from 2006 to 2009 and closed nine plants across five countries last year. That resulted in the elimination of 8,100 workers in the U.S. and Central America, and ending production of knit textiles in the U.S. The company more than doubled the number of workers in Asia to 7,000.

As for acquisitions, Hanesbrands’ chief financial officer E. Lee Wyatt, told analysts they “are a potential tactical and opportunistic use of our cash flow to create value by leveraging our new low-cost supply chain.” The criteria: companies that would complement Hanesbrands’ core product categories of bras, underwear, T-shirts, socks and casualwear.

“They don’t need acquisitions to achieve their goal, but it’s interesting they have the ability to do that,” Beder said. “With the new supply chain, it would be completely opportunistic for Hanesbrands to buy a midsized company similar to what Hanes does, an innerwear company or a company that works with Champion. Conceptually, it would be a company that would give them international exposure in countries like India, Brazil and China.”

Eric Tracy, senior vice president of equity research and consumer research at FBR Capital Markets & Co., said although Hanesbrands supplies major retailers such as Target, Kmart, Sears and The Sports Authority, it “sees opportunities” in other channels.

“Hanesbrands is looking at midtier stores such as Penney’s, Kohl’s and Macy’s who are looking to trade down, looking for more price-value products,” he said. “They are turning to vendors such as Hanes for better price points.”

Tracy said Hanesbrands is shopping for a domestic acquisition “to leverage the infrastructure they have established. A complementary basic apparel asset is something they would be interested in.”

Financial executives said Hanesbrands could be eyeing GoldToeMoretz, which makes GoldToe-branded socks for men and women as well as licensed socks by Kenneth Cole, Nautica, Jockey, Izod and Under Armour athleticwear. Stephen Lineberger, president and chief operating officer of Newton, N.C.-based GoldToe, is a former senior vice president and general manager of Hanesbrands’ international business. A GoldToe spokeswoman declined to comment.

“We have put our criteria out there, but we have no specific comment,” said a Hanesbrands spokesman.

Regarding Just My Size, which rang up estimated retail sales in excess of $700 million last year, Hanesbrands is looking for the brand to be a key player in the plus-size apparel market, which generated retail sales of $17.89 billion in 2009 against $18.32 billion in 2008, according to The NPD Group’s Consumer Tracking Service. The plus-size market declined 2.3 percent compared with the total women’s apparel market, which was down 4.9 percent.

Fifty-four percent of women who shop at Wal-Mart wear plus sizes, and Just My Size ranks as the number-one plus-size brand in the U.S., said the Hanesbrands spokesman. Its main competitors in the intimates mass arena are the full-figure Vassarette and Curvation brands, which are part of Berkshire Hathaway Inc.’s portfolio along with Fruit of the Loom. Officials at Fruit of the Loom declined to comment. Wal-Mart sells Vassarette bras at its stores, but Vassarette and Curvation are not sold on walmart.com.

Just My Size will be aggressively marketed at Wal-Mart, said the spokesman. The business model will be “similar” to that of C9 by Champion at Target, an exclusive six-year-old line of women’s sports apparel that was expanded to include products for men and children.

 

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