Despite a challenging retail environment for some brick-and-mortar stores, Hanesbrands (HBI -0.85%) continues to post revenue and earnings growth. In the third quarter, revenue grew 1%, and adjusted earnings increased by 4% year over year. That doesn't look like much, but it's a good sign for a value stock that's trading for around 10 times trailing earnings.
Investors are completely focused on the negative side of Hanesbrands, which is driven by poor performance from the innerwear segment. U.S. innerwear sales (which is one-third of total sales) slid 3.5% year over year last quarter, reflecting a tough environment for brick-and-mortar stores.
However, 7.q% growth in the international segment more than offset the decline in the rest of the business. Management expects international to increase as a mix of total sales, which is already the company's largest segment. A key part of the growth strategy is expanding the Champion brand, which continues to experience tremendous momentum, with sales up 26% excluding the mass retail channel last quarter.
Champion is a diamond in the rough. If the brand keeps growing, it could send the stock price to new highs. Here is management's strategy to keep the momentum going.
Investing in mobile and expanding the assortment
Champion is expected to generate $1.9 billion in sales this year, but management is already targeting $3 billion (nearly half of the company's total sales) over the long term. CEO Gerald Evans made it clear on the latest earnings conference call that he sees tremendous potential with Champion: "We see strong secular trends within the activewear category. Champion's brand equity scores are growing particularly with Gen Z and Millennials."
To capitalize on the growth opportunity, the company is redesigning the Champion website to fit what Evans described as a "mobile first approach to significantly improve the consumer experience and increase engagement globally."
The next item on the agenda is to expand the assortment, especially for kids and women. Evans also said the company is planning to expand into casual footwear and accessories, similar to lululemon athletica's recent efforts to expand into skincare. This is another sign of how much demand exists in the athleticwear market right now. Leading brands are being seen more as lifestyle brands, which creates additional demand for noncore product categories like accessories.
Most growth will come from Asia
International expansion might have the biggest impact. Management is looking to increase distribution in large markets like Asia. Hanesbrands just announced a distribution deal with LF Corporation, a leading operator of apparel stores and e-commerce platforms. LF operates more than 1,400 stores in South Korea and will expand Champion's presence in that country significantly.
Currently, Hanesbrands has more than 300 stand-alone Champion stores and shop-in-shops worldwide. The company is gradually opening stores in Europe, the U.S., and Australia. With more than 200 of that global store count in Asia alone, it's obvious management sees an enormous opportunity to expand further into countries like China and South Korea.
With the expertise of LF Corporation, Hanesbrands plans to more than double, or open more than 200 Champion stores, across Japan, China, Thailand, Taiwan, Hong Kong, and South Korea within the next two years.
It's a tall order in a short time, but LF Corporation Managing Director Yoo Hyosang believes they are up to the task, saying, "We believe Champion has the positioning to be an upscale brand in Korea, and we plan to utilize a dual distribution strategy of opening Champion stores and expanding points of distribution in other store channels and online platforms. We are eager to tap the growth potential of Champion in Korea."
It's an ambitious strategy, but given that international is the company's fastest-growing segment, there seems to be a healthy appetite for Champion apparel across the world.
Management believes the brand can achieve double-digit sales growth for many years. During the recent call, Evans said, "We are very optimistic and very bullish on this brand, because we see lots of ways to keep growing it."
Considering that it is improving the online shopping experience, expanding the assortment to kids' and women's apparel and accessories, and expanding its presence in large markets like China and Korea, Champion is the best reason to consider buying shares of Hanesbrands.