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Activewear is driving the apparel company’s growth, but investors shouldn't ignore the value of its core innerwear business.
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The growing popularity of athleisure-wear has been a big positive trend for apparel manufacturer Hanesbrands (HBI +0.00%). Sales of the company's Champion brand have been rising fast, despite some setbacks in the mass-retail channel. The activewear business and the international business are now the company's key growth drivers.
But Hanesbrands is best known for the underwear and basic apparel sold under its Hanes brand, and the performance of that line has been underwhelming in recent quarters. The company's U.S. innerwear sales fell 3.4% in 2018, and segment operating income plunged 9.3%.
The wider upheavals in the retail industry are certainly playing a role. Store closings and terrible results from department-store chains, which Hanesbrands depends on for its intimates business, are knocking down sales. None of those issues are likely to be resolved anytime soon.
But those headwinds mask an underlying stability that the market is ignoring. While the growth rate of the U.S. innerwear business will never match that of Hanesbrands' other segments, the unit is still something to love about the company.
A good pair of jeans can be worn for many years, but even the best pair of underwear or socks won't last nearly that long. Hanes is the U.S. market leader in men's underwear and socks, and it's no. 2 in intimates. Products in all three categories need to be replaced often.
In the U.S., per capita consumption of men's underwear was 8.3 units in 2018, down only slightly from 8.4 units in 2013, according to NPD. Consumption of bras was 3.4 units, flat compared to 2013. And consumption of socks was 10.3 units, down a bit from 10.6 units in 2013. Those declines are small enough that they may just be noise, instead of indicating a trend.
A high and stable overall consumption rate doesn't prevent Hanesbrands from losing market share, but it does make this business highly attractive.
Another thing that should make the innerwear business attractive to investors is the lack of private-label penetration. Last year, 90% of U.S. sales in that niche were of branded goods. That's up from 82% in 2013.
And while one might expect that the ongoing rise of e-commerce would promote more private label innerwear sales, the opposite seems to be true: Online sales are even more heavily tilted toward branded items. A full 93% of online U.S. innerwear sales last year were branded, compared to 89% at physical stores. E-commerce may be pushing down the average retail prices, but it's not because its encouraging people to try private-label alternatives.
This all bodes well for the long-term health of Hanesbrands' core business.
While sales of innerwear are generally stable when the economy is doing fine, the category is not recession-proof. While underwear and socks eventually need to be replaced, they're largely hidden articles of clothing, so replacing them may not be a priority for consumers when household finances are tight.
Hanesbrands' U.S. innerwear revenue was down 6% in 2008, and it fell another 5.8% in 2009. Stability broke down as consumers grappled with the impact of the financial crisis on their personal finances. But sales rebounded strongly by 9.8% in 2010, driven by pent-up demand.. If the U.S. enters a recession in the next couple of years, Hanesbrands' innerwear sales will certainly dip. But that will be a temporary phenomenon, and the sales declines probably won't be all that big.
Despite that risk, the underlying strength of Hanesbrands' U.S. innerwear business makes it one good reason to buy the stock. The fast-growing activewear business is another. A price-to-earnings ratio around 10 is a third. And a dividend yield above 3% is a fourth.
There's a lot to love about Hanesbrands stock.