A big part of retailer Target's (NYSE:TGT) strategy is to expand its assortment of exclusive, private-label brands. The company has already launched more than a dozen new brands since the beginning of last year, and three of them are on pace to top $1 billion in annual sales. Target's latest brand launches include Heyday electronics accessories, Wild Fable women's apparel, and Original Use apparel aimed at young men.
This private-label push has the potential to ruffle some feathers among Target's suppliers. In the case of Hanesbrands (NYSE:HBI), Target's strategy has caused investors some real pain. Shares of Hanesbrands tumbled last week after the apparel company disclosed that Target doesn't plan to renew a contract for C9 by Champion, an exclusive line of athletic wear that Target has sold for more than a decade.
What it means for Target
In a statement to CNN Money, a Target spokesperson said that the discontinuation of the C9 line is part of the company's strategy to "overhaul the exclusive brands it sells in its stores. Target "plans to announce adding a new lineup of performance brands soon," according to the spokesperson. In all likelihood, Target will be adding more private-label athletic brands, particularly one aimed at men. Target launched JoyLab, its own line of women's fashion athletic wear, late last year.
C9 is a popular line for Target. Hanesbrands disclosed in its second-quarter report that C9 sales totaled $380 million over the past 12 months. But with some of Target's brands on track to surpass $1 billion in annual sales, the retailer may believe it can do better. And since private-label products generally carry higher margins for a retailer than national brands, dropping C9 could ultimately benefit the bottom line. The C9 contract doesn't end until 2020, so Target has some time before it needs to replace those sales.
Target's focus on its own brands may be, at least in part, a response to Amazon.com's increasing push into apparel. Amazon could become the largest U.S. apparel retailer by the end of this year, according to Morgan Stanley. The e-commerce giant has dozens of private-label brands of its own, including many apparel brands like Lark & Ro, Mint Lilac, and Goodthreads. New brands could help Target steal away market share from declining department stores and fend off Amazon, maintaining its status as one of the top apparel retailers in the country.
What it means for Hanesbrands
A $380 million revenue hit is nothing to sneeze at. The good news is that Hanesbrands doesn't expect the end of the contract to meaningfully affect its 2019 outlook. The bad news is that the company will need to replace those lost sales in 2020 and beyond.
Champion has been a bright spot for Hanesbrands, helping to offset weakness in the core innerwear business. Global champion sales increased by more than 30% in the first half of 2018, adjusted for currency, and the company expects total Champion sales to reach $2 billion by 2022. Hanesbrands doesn't expect the C9 contract expiration to affect that outlook, so the company appears confident that growth opportunities will ultimately offset the loss of C9 revenue.
Hanesbrands CEO Gerald Evans pointed out during the company's earnings call that brands still matter, in response to a question about the private-label trend: "And in all cases, for example, in a category like Basics, the branding percentage was in the 80% to 90% in 2013. It was the same in 2017. Consumers do care about brands, young and old."
The loss of the C9 contract is certainly bad news for Hanesbrands, but it's far from the end of the world. It's possible the C9 brand will live on through a new partnership in 2020. Evans didn't rule it out in the earnings call, saying that there's equity in the brand. The company has yet to decide on a plan.
Hanesbrands stock is now even cheaper
After the Target-related tumble, Hanesbrands stock trades for around $18 per share. That's about 10 times the company's guidance for full-year adjusted earnings. Hanesbrands is not a fast-growing company -- sales grew by just 4.2% in the second quarter, and some of that growth came from acquisitions. Still, it's a solid company with good brands, including Champion and Hanes.
Hanesbrands operates many of its own manufacturing facilities, with 73% of units sold in 2017 coming from facilities owned and operated by the company. These facilitates are also spread out geographically in Asia, Central America, and the Caribbean. Manufacturing its own products gives the company a cost advantage, and having facilities around the world may help Hanesbrands minimize any damage caused by the brewing trade war between the U.S. and China.
Retailers closing stores and private-label pushes from Target and Amazon are creating headwinds for Hanesbrands. But with the Champion brand growing quickly outside of the Target C9 relationship, I don't see any reason for Hanesbrands investors to panic.