Hanesbrands Inc. (HBI) has delivered robust second quarter results of 2010 and lifted its revenue and earnings projection for fiscal 2010. Earnings shot up 109% year over year in the quarter to 67 cents a share from 32 cents a share registered in the year-ago period, reflecting elevated sales, operating margin expansion and benefit from restructuring. The quarterly earnings were in line with the Zacks Consensus Estimate.
Based on sales growth, Hanesbrands advanced its fiscal 2010 earnings range to $2.25−$2.35 per share from $2.15−$2.27 previously. The Zacks Consensus Estimate of $2.31 per share for the fiscal is at the higher end of the company’s guidance.
Revenues and Operating Profits
Total revenue for the quarter jumped 9.1% to $1,075.9 million from $986.0 million in year-ago period, attributed to promotional initiatives, increase in shelf space, jump in retail sales, inventory restocking and favorable currency translation. However, quarterly revenue fell short of the Zacks Consensus Revenue Estimate of $1,152 million.
Hanesbrands is optimistic about its sales enhancement program, lifting its annual net revenue growth target to 8%−10% from the prior estimate of 6%−8% growth. Moreover, a positive revision in the guidance is expected to be supported by shelf-space expansion, improvement in consumer spending and retail inventory replenishment. The company expects year-end sales to come at the higher end of the guidance.
Hanesbrands delivered operating margin expansion of 290 basis points (bps) to 11.4% in the quarter. For fiscal 2010, the company expects operating margin to expand 50-100 bps. The guidance incorporates $25 million−$30 million of costs associated for insuring products, and enhance customer service. Management expects margin to come at the higher end of guidance.
Hanesbrands’ largest segments — Innerwear, Outerwear and International — represent 52%, 24% and 12%, respectively, of total revenue in the quarter. These three segments individually posted double-digit revenue growth in the quarter, partially offset by a decline in its Hosiery segment (3% of total revenue). However, the sales at Direct to Consumer segment, providing 9% of total revenue, moved up a bit.
In terms of segment operating profit, Innerwear registered a 6.5% growth, together with increased promotional expenditure; Outerwear jumped 152%, reflecting outperformance of Just My Size, Champion and Hanes brands; and International had a 50% expansion, partially offset by a 20% decline at Hosiery. However, the operating profit at Direct to Consumer moved up slightly.
Other Financial Update
At the end of the quarter, Hanesbrands’ inventories increased 5% year over year to $1.3 billion. The company anticipates inventories to shoot up by about 9%−10% annually in fiscal 2010, almost in line with the sales growth, resulting in higher working capital requirement.
For fiscal 2010, Hanesbrands projects free cash flow generation of $200 million−$250 million, which will be fully used to bring down debt to $1.65 billion−$1.70 billion from $1.87 billion in the reported quarter. The expected debt reduction will improve the debt-to-EBITDA ratio to less than 3.5 times, down from 4.6 times at the end of 2009.
To abate input cost inflation, Hanesbrands is entering into various joint efficiency initiatives and price increases. Sales enhancement initiatives assist the company to gain market share. To drive sales and profitability growth, the company invests in promotional activities and maintains a huge inventory, thus incurring higher interest expense.
Hanesbrands’ shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. Our long-term recommendation for the stock remains Neutral.