Just when you were enjoying the comfort of boxers, tighty-whities are threatening to make a comeback. Fashions are cyclical, and the Gen Z crowd is bringing back the unexpected thanks to pop culture, social media, and celebrity influencers. This fashion movement is giving one old faithful, HanesBrands (HBI -0.76%), a new lease on life.
Champion is a Hanes brand and has been a decades-long Walmart and Target staple for budget shoppers. However, the Champion brand is now a force in its own right as a result of urban nostalgia and a rising demand for loungewear. Back in late March, a new Champion store opened in Philadelphia -- with plenty of media buzz. The store featured retro styles with neon colors on neutral backgrounds exciting a throng of young fashionistas.
This was the fifth retail store to be opened for the Champion brand and, located in an elite shopping district, proved that Champion had shed its budget stigma. For Hanes, which was pushed to the sidelines for years in the competitive retail clothing market, it is a remarkable reversal.
From chump to champ
Champion has chosen well when it comes to design partnerships. The brand's clothing is versatile; sweatshirts, and skateboard culture in a way that others have not. According to Bloomberg, teenage boys rank Champion in their top 15 favorite fashion brands alongside bastions such as Gucci and Tommy Hilfiger.
Also, influencers such as Kendall Jenner, Chance the Rapper, and Beyoncé, all of whom have millions of Gen Z social media followers, have fueled the retro craze. To this generation, what influencers are wearing on Instagram matters.
The athleisure market is also growing largely in response to a demand from another demographic. Women are increasingly donning yoga pants and designer tops that can be worn for working out, running errands, and socializing. Lululemon and Athleta of Gap can attest to this trend. Lululemon reported a 14% increase in same-store sales in the first quarter of 2019 while the Athleta brand plans to open 25 new stores in 2019. Then, there is the youth movement that is eschewing jeans for more relaxed sportswear reflecting an active lifestyle.
Initial growth occurred along with the improved economy after the financial crisis. Champion's domestic sales jumped from $600 million in 2010 to $1.4 billion in 2017. Since then, Champion has continued to hit the mark. By 2022, outside sales from stores like Target and Walmart, are expected to reach $2 billion in a still-growing market. A 2017 report published by Allied Market Research stated that the global activewear market was valued at $3.5 billion in 2017 and was expected to reach $5.5 billion by 2024.
Nevertheless, retail is a fierce market. Trends come, are quickly saturated, and then go; many competitors die out quickly. However, Champion is ahead of the pack and stands a better chance than most at retaining that position.
Hanes' latest earnings
Hanes' second-quarter earnings report for 2019 were strong and at the high end of guidance. Second-quarter net sales of $1.76 billion showed an increase of 3%, and this was the eight consecutive quarter of sales growth. Innerwear, not the company's strongest point at the moment, increased by 3%; activewear by more than 10%; and international growth was better than expected at 4% with international sales growing by 50%. The GAAP EPS increased by 8% and earnings per share was the same as a year ago at $0.45.
The company expects to meet guidance for the whole year and feels confident that it will meet cash flow and debt obligations with an expanding operating margin. In the second quarter, cash flow from operations more than doubled to $137 million because of improved working capital and net income growth. Debt levels were down; debt leverage at the end of the quarter was down almost 3.9 times at the end of the year-ago quarter.
Riding the wave
The Champion brand is obviously the cash cow for Hanes during this era of retro fashion, but Hanes' innerwear is also showing growth. The company is producing new innerwear products using new fabrics and designs.
With respect to international expansion, the demand from China for US brands shows no signs of slowing. In China, Hanes has added a retail partner and plans to expand its stores and online sales in 2020.
Thankfully, for the older generations, donning tighty-whities might not be necessary if this fashion cycle is short-lived. However, Hanes looks to remain strong for as long as retro is the choice of Gen Z and social media influencers.