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Hanesbrands Inc.'s Formula for Double-Digit Earnings Growth

By Adam Brownlee – Mar 31, 2016 at 1:14PM

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Management of the underwear manufacturer has its hands on three key levers. Will it deliver the goods?

Hanesbrands (HBI -7.18%) chairman and CEO Richard A. Noll spoke recently at the Credit Suisse Investor Luncheon in London and revealed key strategies behind Hanes' push for double-digit EPS growth: Sell more, spend less, and make acquisitions. What lies beneath? 

Sell more
Although Hanesbrands is one of the largest apparel companies in the world, with a current market cap of approximately $11 billion and 2015 sales of nearly $6 billion,the company's core products of underwear and T-shirts, which represent approximately 25% of sales, are slow growers with low-single-digit expectations, according to Noll. They are reliable, though.

"When you look at our business, it's very stable on an annualized basis," says Noll. "[Usage consumption] hasn't changed in over a decade in some of the innerwear categories, so from an annual basis it's very, very stable and will grow slightly with population."

"Sell more," therefore, depends on two the key strategies of innovation and e-commerce.

Product innovation at Hanes can't just be product specific, said Noll, it must be platform driven. This means that it can be applied to multiple products. Take Hanes' X-temp technology as an example. This product was originally launched as an activewear product in 2013, but it has since woven its way into Hanes underwear, T-shirts, and socks. Products like this allow the company to charge 70% more than its base products and helps to drive up its average revenue per unit, explained Noll. 

Another strategy that feeds Hanes' "sell more" initiative is its drive to generate more revenue online. Online sales grew in the high teens last year and represented 7% of total sales. This is why the company is dedicating resources to this channel. Among other things, it's building its own websites and using them as digital hubs for users to learn more about its products.

Spend less
In addition to the company's consumer brands, which include Hanes, Champion, and Playtex, Hanes' competitive advantage also lies in its supply chain, which is composed of 53,000 employees and 50 large-scale facilities based in Central America, the Caribbean basin, and Asia. 

By owning its supply chain, Hanes has been able to improve its manufacturing processes and reap continued improvement. This has produced efficiency gains of $35 million to $40 million a year. Management has found that by internalizing production it's able to lower product costs by roughly 15% to 20%.

A second "spend less" strategy for Hanes involves tight cost controls and driving productivity. Noll stated in the conference that he expects general expenses to increase at half the rate of sales going forward.

Make acquisitions
When it comes to acquisitions, Hanes is only interested in businesses that meet four criteria:

  1. The products of the business must already be in one of Hanes' core categories.
  2. The business must provide complementary growth opportunities in consumer segments, channels, or geographies.
  3. The acquisition must have a high-probability for cost synergies that leverage the supply chain and/or SG&A.
  4. It must be accretive in the first year, excluding integration costs.

Once a company is acquired, management applies both its "sell more" and "spend less" initiatives to generate substantial multi-year cost savings.

Regarding the financing of acquisitions, debt is Hanes' tool of choice, and the credit markets smile upon the underwear manufacturer. Past acquisitions have been viewed favorably as they were seen as measures that made the company bigger, stronger, and more diversified. According to Noll:

When you talk to people in the debt markets, they love our paper. The only complaint they have is that they can't get enough of it. Our debt doesn't trade. And the reason it doesn't trade is when people actually get it they hold it and they won't give it up. So we have really great access to the credit markets.

The bottom line
As it ties to double-digit earnings growth, each of these strategies has led to a branded business with long-term stability that generates substantial cash flows. The stable consumer franchise of Hanesbrands has allowed the company to generate a cumulative cash flow of $3.2 billion over the past decade, and its over-arching strategies to sell more, spend less, and make acquisitions should help the company reach its goal of generating double-digit earnings growth.

Adam Brownlee owns shares of Wal-Mart Stores. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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