The share price of Hanesbrands (HBI 1.04%) has been on a downslide for five years, falling 75% from its high in 2015 to the current share price of roughly $9.80 per share. A substantial fall in the share price may signal a screaming value for shareholders, however, let's dig into Hanesbrands further before hitting the buy button.
Gerald Evans Jr., CEO of Hanesbrands, recently announced he plans to retire from the company effective Jan. 2, 2021. Evans has been with the company since 1983 but has only been the CEO since 2016. CFO Barry Hytinen left the company at the end of 2019 after serving two years.
Shareholders would be right to be concerned. A leadership changeup can mean significant change for the company, and one wonders why the executives are leaving. If management does not see growth potential in a company or that a company's survivability in the market is depleting, executives may leave the company.
From Target to Amazon
In 2018 Target (TGT -0.88%) dropped Hanesbrands athleticwear brand C9 by Champion, which accounted for $380 million in net sales for Hanesbrands in 2019. The agreement, which was in place from 2004, ended in January 2020. Retail Dive asserts the reason Target dropped Champion was to promote the forthcoming Target private label JoyLab.
After losing the contract with Target, Hanesbrands struck a multiyear exclusive agreement with Amazon.com (AMZN -0.15%), which was announced in March 2020. This agreement allows the C9 athleticwear brand to be available globally, however, it also increases the competition dramatically, as Amazon carries many athleticwear brands, diluting the marketplace for Hanesbrands.
A Hanesbrands investor presentation in September 2019 showed a 2018 U.S. market compound annual growth rate (CAGR) for Hanesbrands Activewear, popularly called "athleisure," of 8%. In 2019, PR Newswire projected the athleisure market size was $155 billion in 2018, with an expected market size of $257 billion by 2026 -- giving a 6.7% CAGR for the segment.
The success of this new deal with Amazon will be determined over time with tailwinds from the growing athleisure wear segment. As the athleisure segment is projected to be successful, a global e-commerce presence has the ability to prop up the sluggish revenue growth.
A mixed bag
A forward price-to-earnings ratio of 4.84 puts Hanesbrands at a large discount in comparison to the sector median of 8.75. However, the low price-to-earnings comparison is somewhat understandable given year-over-year revenue growth of 2.4%. A trailing 12-month earnings before interest and tax (EBIT) margin of 13.4% is impressive against the sector median of 6.8% in addition to the 7.2% forward dividend yield driven from the drop in the share price -- giving investors the impression that Hanesbrands is a mature company with low revenue growth, impressive profitability, and a massive dividend yield.
The dividend yield is sustainable given the interest coverage (the ability for Hanesbrands to pay the interest on the debt outstanding). Hanesbrands's debt coverage ratio is 5.82 -- which is below the sector median of 6.69. That indicates to investors that Hanesbrands carries a higher debt load than the majority of the sector but is not alarmingly high.
Is it time to buy Hanesbrands?
Overall, Hanesbrands is a mixed bag of results that leans toward deep value with growth opportunities. The recent shifts in executive management, contract moves, and low revenue growth should concern shareholders, but shouldn't dissuade investors from purchasing Hanesbrands given the current share price value.
Given the deeply low forward price-to-earnings of 4.84 and a high forward dividend yield of 7.2%, Hanesbrands is a buy at the current value. The impressive trailing 12-month gross profit margin of 39.9% and earnings-per-share growth year over year of 10.8% are hard to ignore, setting long-term investors up for a good starting price point.