Hanesbrands' (HBI -3.63%) first quarter saw sales and profits plunge over the COVID-19 outbreak. Through mid-March, sales were pacing ahead of management's expectations, but the store closures nationwide caused sales to drop 17% year over year for the quarter.
While demand for socks and undergarments has taken a hit, Hanesbrands did stumble onto a new business line making face masks and other protective medical garments. Like many other companies, Hanesbrands shifted its manufacturing to make COVID-19 face masks during the quarter.
It's going so well that CEO Gerald Evans sees a new growth opportunity emerging. "We believe our mask and protective garment business could be a sizable revenue opportunity with growth potential over the next several years," he said.
Adapting to new environment
Hanesbrands is currently making more than 320 million cloth face coverings and more than 20 million medical gowns for the U.S. government, but the company is receiving interest from several other parties, as Evans explained:
Over the past several weeks, we have seen a strong influx of inquiries across a number of geographies from governments, retailers, large corporations, and individual consumers.
Management believes its medical garment program will generate $300 million in sales in 2020, and it will continue to ramp up production to address the need. "Looking forward, there is an expectation that the COVID-19 pandemic will result in more widespread mask usage by consumers and businesses globally," as Evans explained.
Evans said the manufacture of medical garments could grow to become "a substantial contributor of incremental profit and cash flow over the next several years."
Hanesbrands has a distinct competitive advantage to grow this new business over the long term. The company owns its global manufacturing network, which allows it to quickly shift gears to new clothing products and pursue new opportunities. Perhaps the most important advantage is the trust and value consumers place in the Hanes brand.
Speaking about these advantages during the call, Evans said:
When we look across it, the opportunity to bring a trusted brand like Hanes in combination with innovation and run it through our large-scale production and sell it through our international network, really tells us this is a business to build upon.
Recovery on the horizon?
Hanes said it will begin ramping production for cotton face masks targeted for consumers and businesses that seek to reopen soon. The company is not giving full-year guidance, but management has tested different scenarios of the economic fallout from this outbreak, and Hanesbrands was found to have plenty of liquidity to survive even if stores remain closed through early October, which would be a worst-case scenario.
Hanesbrands roughly broke even on the quarter, reporting a net loss of $0.02 per share, but management currently expects the second quarter to be the low point before sales and profit begin improving. However, no one really knows how long it will take consumer discretionary spending to fully recover to pre-COVID-19 levels.
Hanesbrands is taking the necessary steps to remain financially strong, including reducing costs and inventory. Cash from operations improved by $111 million over the year-ago quarter, as a result of cuts to inventory spending, and management expects to generate positive cash flow in the second half of the year.
With a promising new business opportunity and enough financial stability to get through the economic turbulence, this value stock could potentially be very rewarding from current levels.