Shares of Hanesbrands (HBI -8.03%) have traded up sharply in the past week after several analysts upgraded their price targets for the stock. The biggest call was from an analyst with Raymond James, who upgraded the stock to a strong buy rating with a $20 price target, representing about 40% upside over the current level of $14 per share.
Before the COVID-19 pandemic, Hanesbrands was facing a difficult challenge to turn around its struggling innerwear business, which has experienced a decline in sales in recent years. But the Champion brand has more than doubled revenue over the last three years to $1.9 billion in 2019.
Besides that strong showing, Raymond James likes Hanesbrands' in-house global supply chain, its ability to ride the strong e-commerce growth at mass retailers during the pandemic, and the potential to gain market share.
Image source: Hanesbrands.
Strong brands
Champion was red hot going into COVID-19 with sales (excluding the C9 label in the U.S. mass retail channel) climbing an impressive 40% last year. Champion is not just any old sweatpants brand anymore -- it has important collaborations with high-end streetwear labels like Supreme and Off-White, among others.
Then, there is Hanes -- the No. 1 selling apparel brand in the U.S. Hanes could benefit from more people working at home who are shopping for comfortable clothing. Management reported continued demand for Champion and also cited good performance for Hanes.com and Maidenform.com during the first-quarter conference call.
An analyst with Bank of America upgraded the stock partly based on the increased demand for comfortable clothing.
Scale and supply chain
Raymond James cited Hanesbrands' global scale as an important advantage to navigate COVID-19. Hanesbrands owns a global network of supply chain operations that provides a low-cost means to manufacture its own products.
During the first-quarter earnings report, management announced it would be shifting its manufacturing to making face masks. On July 2, Hanesbrands announced it had delivered 450 million cloth face coverings and more than 20 million medical gowns for the U.S. government.
CEO Gerald Evans, who will be stepping down as CEO on Aug. 3, sees the protective garment business as a "sizable revenue opportunity with growth potential over the next several years."
Increase in online shopping
Raymond James also believes strong e-commerce trends at Walmart and Target will benefit Hanesbrands, since the company sells a lot of product into those mass retail channels. Walmart and Target both reported approximately 10% comparable-store sales growth in the first quarter as well as big sales numbers from the e-commerce channel.
Potential market share gains
Hanesbrands' roster of intimate brands should position the company to gain market share in 2020, as other retail stores close. L Brands announced in May that it would close approximately 250 Victoria's Secret stores this year. Raymond James sees this as an opportunity for Hanesbrands to fill the void and win more customers.
Data by YCharts.
This value stock has upside
One cause for concern at Hanesbrands is its debt, which stood at $4.5 billion at the end of March. The company held only $1.1 billion of cash and equivalents to offset it. The debt load and the weak performance of the innerwear segment heading into 2020 could limit the stock's upside, according to Bank of America's analyst.
But overall, the pros outweigh the cons. The best thing about this situation is the stock was already cheap heading into 2020 with a valuation of just 8.5 times forward earnings before the pandemic caused analysts' estimates to crater. If Hanesbrands can take advantage of the opportunities outlined above, including higher demand for comfortable clothing, strong e-commerce activity, new categories such as face masks, and market share gains from competitors exiting the market, it's not difficult to imagine the stock reaching that $20 target.
