Hanesbrands (NYSE:HBI) has been a tale of two businesses. On the one hand, its namesake innerwear segment has struggled to grow sales amid a weak domestic retail environment. On the other, Hanesbrands has one of the hottest athleisure brands in the industry with Champion, which continues to enjoy strong momentum around the world.

The latest quarterly results showed both of these trends continuing their course. Innerwear sales were down 3.5% year over year, but robust growth from Champion and modest growth in the international segment pushed total sales and earnings up 1% and 9%, respectively. 

The shares are trading below 10 times forward earnings estimates, but with the business posting growth on the top and bottom lines, Hanesbrands looks like one of the most undervalued stocks in the apparel industry at the moment. 

Champion store in a shopping mall

Image source: Hanesbrands.

It's all about Champion

The more that Champion and the international segment grow as a percentage of total sales, the less important the domestic innerwear segment is to the company. The international segment, which includes sales from innerwear and activewear, saw sales increase 7.1% year over year in the third quarter. Adjusted for currency, sales were up 11%, and it is now the company's largest operating segment. 

CEO Gerald Evans sees a long-term growth story taking shape internationally, as he explained on the third-quarter conference call: "Looking out over the next several years, we expect International to represent an even larger mix of total company revenue and profit through a combination of organic growth initiatives, cross-regional opportunities, and complimentary acquisitions."

Global Champion sales, excluding the mass retail channel, increased by 26% year over year. This compares to 30% growth reported in the year-ago quarter, which shows that the brand is maintaining momentum even as it scales into a larger business. What's more, Champion's margins are improving, as prior investments to build the brand and enhance distribution capabilities start to normalize. 

Champion is on track to generate $1.9 billion in sales this year, or 27% of total company sales. This is well ahead of management's goal to reach $2 billion in sales by 2022. 

Evans doesn't see Champion's momentum slowing down: "We see strong secular trends within the activewear category. Champion's brand equity scores are growing particularly with gen Z and millennials." 

Management believes Champion will generate double-digit sales growth well beyond 2020. 

Positive trends in innerwear

The innerwear segment is a work in progress, but management believes it is getting close to stabilization in sales of that business. Evans cited successfully expanding innovations with Comfort Flex Fit, X-Temp, and bras, along with growing sales in shapewear. 

Based on these trends, Evans guided for further improvement in innerwear in the fourth quarter: 

We expect sequentially improving revenue trends and strong margin improvement as we benefit from our brand investments in innovation. We anniversary a large retailer bankruptcy and we benefit from our price increases as commodity pressures have peaked.

Guidance

For the full year, management is calling for adjusted revenue and adjusted earnings to both increase by 4% over 2018 at the midpoint of guidance. Full-year operating cash flow is expected to be up 17% year over year. 

Hanesbrands is in good financial shape. Free cash flow has more than doubled through the first three quarters of the year, as management has made significant improvements to inventory management. Strong cash generation has allowed the company to reduce its net debt by $470 million. 

Healthy cash flow levels should also support its dividend payout. The current yield of 3.94% makes Hanesbrands a solid income investment