Morningstar - Q4 2021 - 65

A Rare Bargain
Hanesbrands stands to benefit from trends shaping
the activewear industry.
David Swartz
BEST IDEAS: EQUITY
This article is adapted from a Morningstar equity research report dated
Sept. 28, 2021.
Demand for activewear is high as the world emerges from the pandemic.
We have identified several changes in consumption and production that we
expect will shape the industry for years to come, including increased
casualization in fashion, the acceleration of the shift to e-commerce, and
greater interest in connected fitness. While bargains are hard to find, there are
two undervalued narrow-moat producers: One is Anta Sports Products
02020:HK, the third-largest athletic apparel and footwear manufacturer in
its home country of China, and the other is Hanesbrands HBI.
Narrow-moat Hanesbrands owns Champion, Hanes, and other brands.
Hanesbrands is the market leader in basic innerwear (69% of its 2020
sales) in multiple countries. We believe its key innerwear brands like Hanes
and Bonds (in Australia) achieve premium pricing. While the COVID-19
crisis adversely affected 2020 results, we think Hanes' share leadership in
replenishment apparel categories puts it in better shape than some
competitors.
In May, the firm unveiled its plan to expand Champion, bring growth back
to innerwear, improve connections to consumers (through greater marketing
and enhanced e-commerce, for example), and streamline its portfolio.
As part of its growth plan, Hanes intends to build on Champion's popularity in
North America, Asia, and Europe. Although COVID-19 and the discontinuation
of the C9 label at Target hurt sales in 2020, we believe Champion will
continue its growth path in 2021 as it and other activewear apparel are
increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found
a new home for C9 as an exclusive brand for wide-moat Amazon.com
AMZN. Hanes' management forecasts that Champion will reach $3 billion
in global sales in 2024, up from about $2 billion this year, which we
think is achievable.
Another key strategy for Hanes is to improve the efficiency of its supply chain.
It has already made progress in this area, having achieved a 15% increase
in manufacturing output over the past three years. Hanes, unlike many
rivals, primarily operates its own manufacturing facilities. More than 70% of
the more than 2 billion apparel units sold by the company each year are
manufactured in its own plants or those of dedicated contractors. We believe
Hanesbrands HBI
Stats 09/30/2021
Morningstar Rating
QQQQQ
Price
$17.16
Economic Moat
Narrow
Price/Fair Value 09/30/2021
$30
Fair Value Estimate Per Share
26.00
17.16
10/2018
Month-End Closing Price
10/2019
10
20
10/2020
Sector
t Consumer Cyclical
Fair Value Estimate
$26.00
Capital Allocation
Standard
Industry
Apparel Manufacturing
Uncertainty
Medium
Market Cap
$5.99 Billion
the combination of strong pricing and production efficiencies allows
Hanes to maintain operating margins above 20% for its American innerwear
business despite somewhat inconsistent sales.
Our narrow moat rating is due to the strength of Hanesbrands' intangible
brand asset. Hanes' key apparel brands have leading market share in
their categories in the U.S. and a few other countries. The popularity of its
brands allows it to maintain strong retail distribution and premium
pricing. We believe the company can generate returns on invested capital
above its weighted average cost of capital over the next 10 years.
Hanesbrands trades at a significant discount to our fair value estimate of
$26 per share. While Hanesbrands' debt has been a concern ($4 billion
at the end of 2020), we forecast significant reduction over the next few years,
even while it continues to pay dividends. K
David Swartz is an equity analyst with Morningstar Research Services LLC.
morningstar.com/lp/magazine
65
https://www.morningstar.com/authors/2243/david-swartz https://www.morningstar.com/stocks/pinx/anpdy/quote https://www.morningstar.com/stocks/pinx/anpdy/quote https://www.morningstar.com/stocks/xnys/hbi/quote https://www.morningstar.com/stocks/xnas/amzn/quote http://www.Amazon.com https://www.morningstar.com/stocks/xnas/amzn/quote https://www.morningstar.com/authors/2243/david-swartz http://www.morningstar.com/lp/magazine

Morningstar - Q4 2021

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