Why Hanesbrands Stock Soared 24% in February

A cheap valuation and improving operating results caused investors to take the lid off the stock price last month.

John Ballard
John Ballard
Mar 6, 2019 at 4:13PM
Consumer Goods

What happened

Shares of Hanesbrands (NYSE:HBI) climbed 24% in value last month, according to data provided by S&P Global Market Intelligence.

Investors got excited about the company's turnaround efforts when it issued a better-than-expected fourth-quarter earnings report in early February.

A brightly lit sign displaying the Champion U.S.A. logo.

IMAGE SOURCE: CHAMPION.COM.

So what

Hanesbrands stock steadily declined 40% last year, as the innerwear segment struggled to find growth. Investors weren't sure if the company was destined to grow over the long term, since the mass retail channel is highly competitive and major retailers have been investing more in private-label brands lately. 

However, Hanesbrands proved the skeptics wrong in the fourth quarter. Not only did the activewear segment continue to show strength, but the innerwear segment picked up the pace. Overall, total revenue increased 6% year over year (on a currency-neutral basis), adjusted operating profit grew 10%, and non-GAAP earnings per share were in line with management's expectations of $0.48, compared to $0.52 in the year-ago quarter. 

But the highlight of the quarter was continued robust growth of the Champion brand, which saw sales climb 50% year over year, excluding the mass retail channel. 

Here's how CEO Gerald Evans summed up the quarter: "Our three growth initiatives, Champion, Consumer Direct, and International, delivered stronger than expected results in the quarter. And our US Innerwear business saw meaningful improvement from the third quarter with revenue and profit results that were in line with our guidance." 

Check out the latest earnings call transcript for Hanesbrands.

Now what

Management sees tremendous potential for the Champion brand. Across all retail channels, it grew more than 30% in 2018, and management guided for Champion sales to increase at a double-digit growth rate in each quarter through 2019. By 2022, management expects Champion to reach $2 billion in annual sales, which represents about a third of the company's total revenue. 

The company's outlook for 2019 calls for organic constant currency sales growth of approximately 2.5% at the midpoint of guidance. Operating cash flow is expected to increase approximately 17% this year, which will help support the stock's above-average dividend yield of 3.23%. 

With improving growth prospects, a low forward P/E of 10.23, and a generous dividend yield, the stock could have further room to climb in 2019, especially if the innerwear segment remains stable and the Champion brand continues its impressive momentum.