Hanesbrands or L Brands: Which One Is a Better Buy?

Hanesbrands (NYSE: HBI  ) and L Brands (NYSE: LB  ) are the two leading players in the intimate apparel market space. So, investors who are looking at opportunities in the intimate apparel market should take a closer look at these players, which have been expanding at a good pace.

Hanesbrands' moves
In the first week of October this year, Hanesbrands formally completed the acquisition of Maidenform Brands for approximately $583 million. This acquisition adds brands like Maidenform, Flexees, and Self Expressions to Hanesbrands' market leading brands like Playtex, Bali, Just My Size, Hanes, Barely There, Wonderbra, Champion and L'eggs.

With the acquisition completed, one can expect earnings to grow in the long run. Hanes has already made considerable progress in integrating Maidenform Brands. Just after the acquisition was completed, Hanesbrands was already selling Maidenform's products on its e-commerce sites and in over 100 of the company-owned outlet stores.

Hanesbrands also has been actively pursuing its "Innovate to Elevate" strategy. The strategy fueled margin expansion in the previous quarter to the tune of 200 basis points . The strategy focuses on value-added, higher-priced and higher-margin items that can be sourced at a cheaper cost, and the company has successfully implemented it in its Activewear and Gear For Sports segments.  As a result of this strategy, Hanesbrands beat consensus estimates on earnings despite missing revenue estimates in the previous quarter. Earnings per share increased 10.8% versus the same period a year ago to $1.23 per share. The consensus estimate for the same was pegged at $1.14.

Sales declined across all segments of the company. As a result of this, consolidated revenue declined by 1.8% year over year to $1.19 billion, missing consensus estimate of $1.23 billion. The domestic performance was affected due to a weak retail spending environment during the back-to-school period and also due to macroeconomic headwinds like higher payroll taxes, an inconsistent employment scenario etc. International sales were affected by unfavorable foreign currency movements.

A good strategy
Hanesbrands is confident about the success of its "Innovate to Elevate" concept. This strategy helped it bump up the high end of its EPS range by $0.20. Hanesbrands expects that as a result of the Maidenform acquisition, adjusted annual revenue will be over $5 billion within three years' time. It will also add $0.60 per share in earnings , while increasing the market share of Hanesbrands in the shape-wear industry.

Hanesbrands distributes its products through the United States' two largest discount retailers, Wal-Mart and Target. About 28% of sales are made to Wal-Mart and 18% to Target. The wide store network of these two retailers should help Hanesbrands' distribution in the future and help it compete against L Brands.

However, investors should also keep in mind that since a large part of revenue comes from Target and Wal-Mart, they might create pressure on Hanesbrands to reduce prices and thereby pressure its margins.

A closer look at L Brands
L Brands commands a leading position in the lingerie, personal care, and beauty segments with brands like Victoria's Secret and Bath & Body Works. It has managed to perform well in a sluggish consumer environment due to sustained focus on cost control, inventory management, merchandize, and speed-to-market initiatives.

L Brands' strength is evident from its third-quarter results. It delivered a 25% increase in net income from the year ago period as total sales increased 6% to $2.2 billion. The company is looking to benefit from growth in the intimate apparel market by tapping into international markets.

The global underwear industry is estimated to be worth over $30 billion . Aging populations in developed nations such as the U.S. are slowing the market down. Therefore, the growth potential is higher in emerging markets due to increasing income levels, trend toward Western fashion, a larger young population, and rising standards of living.

L Brands' foray into international markets is likely to provide long-term growth opportunities. The company has been expanding its Victoria's Secret and Bath & Body Works in global markets and has seen positive results so far. Driven by such expansion, L Brands was able to raise its fiscal 2013 earnings guidance to a range of $3.06 to $3.21 per share from an earlier range of $2.95 to $3.15 per share.

Bottom line
Both L Brands and Hanesbrands look like good bets in the intimate apparel market. But Hanesbrands is cheaper with a P/E of 18.71. L Brands is comparatively more expensive at a P/E of 22.82. Also, Hanesbrands acquisition of Maidenform Brands and its margin expansion strategy look encouraging and should lead to earnings growth. Thus, investors looking to benefit from the intimate apparel market should definitely consider Hanesbrands for their portfolio.

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