The athletic apparel industry has been one of the best places to invest in the broader retail industry in recent years. Top brands like lululemon athletica and Adidas have seen sales boom and margins expand this year thanks to strong demand. 

The athleisure trend doesn't seem to be going away. Instead, it's becoming a wardrobe staple for many. The trend has culminated with sportswear, streetwear, and luxury fashion all meshed together, and Hanesbrands' (HBI -1.69%) Champion apparel line has been a major beneficiary.

A brightly lit Champion logo on a grey wall inside a store with clothing racks in the foreground.


Those grey sweatshirts and sweatpants you wore in the 1990s are now considered high fashion. In even better news for investors, Hanesbrands stock is as cheap as a pair of socks.

Champion rides the athleisure trend

In the third quarter, Champion sales grew 30% year over year on a constant-currency basis, and 40% excluding the "mass channel" (i.e. sales at mass-market retailers like Walmart and Target). During the conference call to discuss the results, CEO Gerald Evans said, "Even though we're cycling tougher comparisons, Champion's growth rate continues to accelerate, with this quarter's 40% growth coming on top of last year's 33% increase." 

This growth was broad-based across all regions of the world where Hanesbrands operates, and across all sales channels, including wholesale, owned retail, and online. The brand has generated $1.2 billion of sales outside the mass channel over the last year, which is 18% of Hanesbrands' total sales. 

However, the rest of the business -- which is basically sales of underwear and socks -- is not doing that great. The innerwear segment made up a third of total sales in the third quarter. But some sales of underwear and socks are also included in the international segment, which made up 34% of total sales last quarter and grew 11% year over year. 

Segment TTM Through Q3 2018 Growth (YOY)
Innerwear $2.38 billion (3.2%)
Activewear $1.73 billion 7.1%
International $2.28 billion 13.2%
Other $285.7 million (7.5%)
Total sales $6.68 billion 3.2%

Data source: Hanesbrands. TTM = trailing 12 months. YOY = Year over year. Chart by author.

All in all, this is not a stock you want to buy for the growth in socks and underwear. It's a highly competitive category, and large retailers are starting to invest more in private-label brands, which will be a headwind for the innerwear segment moving forward. The growth story right now is all about the Champion brand.

Champion's long-term trajectory is up

Management expects the Champion brand to reach $1.3 billion in total sales outside the mass channel for 2018. By 2022, Champion sales outside the mass channel are expected to reach $2 billion. By contrast, Champion's mass channel sales were up only 5% year over year last quarter. 

The 40% growth of the Champion brand referenced above is based on the growth happening through the Champion website, Champion stores, and specialty athletic apparel stores. This is where the action is, and Hanesbrands has a big opportunity to expand the brand through these channels going forward.

One of the ways management plans to accomplish this goal is through opening stand-alone Champion stores. So far, the company has opened three, and it just announced plans to open a fourth. Where management is placing the stores says a lot about how hot this brand is.

The first three stores were opened in highly populated locations in Los Angeles -- in a shopping district next to Beverly Hills -- as well as New York and Chicago. The fourth will be opened in Boston on Newbury Street, which includes a long stretch of shops, salons, boutiques, and restaurants. 

During the third-quarter conference call, Evans mentioned the benefits of these highly populated locations: "They are certainly selling locations for us and we open them for profit, but they also then extend the brand." 

Champion is expanding into China, as well. Asia is a hot growth market for athletic apparel, and Lululemon and Nike have seen strong growth there, too.

The stock is cheap

Even if the innerwear segment never grows from its current sales level, Hanesbrands has a bright future within activewear and in international markets. The combined growth of those two segments should keep overall sales trending higher over the long term.

The stock offers good return potential from here, as it trades for less than eight times next year's earnings estimates. Meanwhile, the dividend currently yields 4.4%, and it should be sustainable, given the dividend was 58% of trailing-12-month free cash flow. 

Hanesbrands is definitely worth considering if you're looking for a way to invest in the growing $300 billion athletic-wear market.