Hanesbrands (HBI)

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Hanesbrands manufactures and sells of low-cost innerwear (t-shirts, bras, and underwear) and hosiery. The company sells its products at wholesale prices to mass-market discount retailers like Wal-Mart and Target, as well as department stores. Hanes is heavily dependent on a few large customers. In 2006, Wal-Mart and Kohl's (KSS) accounted for 29% and 12%, respectively, of the company's sales. With revenues of over $4.5B in 2006, Hanes is one of the largest players in the innerware industry and enjoys economies of scale that allow it to offer its products at prices below those its competitors. This advantage has become especially important in recent years, as department stores have begun to offer their own private label brands. Private label brands typically provide department stores with higher margins than third party brands. Hanes is the exception to this rule because it is able to offer its products at prices below what it costs department stores to manufacture/purchase their own private label merchandise.

Once a subsidiary of Sara Lee, Hanes was spun off in 2006 as part of a restructuring within the parent company. Since the spin-off, Hanes has struggled with increasing operational costs, steady decreases in its hosiery business, and over $2B in debt. In its first year as an independent company, Hanes began retooling its operations to increase operating margins and aggressively attacked its debt, paying off $75M in the third quarter of 2007 alone^[1].

[edit] Company Overview

[edit] Breakdown of Holdings

Hanesbrands Operating Results by Business Segment, FY2004-2006^[2]

Over recent years, the composition of Hanesbrands' revenue has been relatively stable. However, this short-term stability masks a slow, but steady decline over the past decade in one particular business segment: hosiery sales. Once a staple in any working woman’s wardrobe, women are trading sheer hosiery for dress slacks, leggings, or simply bare legs. This change in fashion choices has had a clear impact on Hanesbrands’ bottom line. As a source of revenue, the hosiery segment has seen declines every year for over ten years, from $895M in 1995, to $290M in 2006^[3].

Hanesbrands Net Sales by Distribution Channel, FY2006^[4]

As a purveyor of low-cost wardrobe basics and intimate apparel, wholesaling to big companies is the core of Hanesbrands’ business. Sales to these companies accounted for 92% of net sales in FY2006^[5] . The company is at present highly dependent upon large orders from mass merchants such as Wal-Mart, Target, and Kohl’s (which accounted for 29%, 12% and 6% of FY2006 total sales, respectively^[6]). In addition to these discount retailers, Hanesbrands has relationships with Sears, J.C. Penney, and other department store chains, which accounted for 19% of revenue in FY2006.

[edit] Recent Earnings

Hanesbrands Net Revenue and Operating Income, FY2002-2006^[7]

Recent earnings for Hanesbrands have been somewhat erratic. As a company with strong brand name strength and sizable market share, Hanesbrands holds a strong position within its industry. But a confluence of factors impeded growth. The separation from Sara Lee, left the company struggling with $2.4B of debt^[8]. A decentralized system of operations and a high cost structure kept operating costs high, an important problem for a company that largely competes on the basis of product price. However, after cutting jobs and closing factories, Hanesbrands has been able to increase operating margins, which were up 10% for the first three quarters of 2007^[9].

[edit] Trends and Forces

[edit] Department Store Consolidation

Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from companies like Hanesbrands. For example in FY2006, department store orders for Hanes hosiery were down 22%^[10].

Besides competing with other major brands for department store business, Hanesbrands has to contend with the rise of private label merchandise as well. As private labels become an increasing part of department store sales ^[11], big companies may scale back on the traditional brands they order from companies like Hanesbrands. Although traditional brands will remain a vital part of the department store business, they have a strong incentive to prefer private labels wherever possible because they can be sold at higher margins than outside brands. As the low-cost undergarment industry is essentially commoditized (with cost being the biggest factor for consumers), companies have an even stronger incentive than is usual to create and sell private label undershirts and intimate apparel to keep costs low and margins high. However, Hanesbrands serves as a key exception to this trend: as a very large company that manufactures its own clothing, it can often price its product below private label merchandise.

In addition, a series of mergers and acquisitions in the industry (e.g. Macy’s 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with Hanesbrands, thereby lowering revenue. With its high dependence of wholesaling, a small change in Hanesbrands’ business dealings with its large customers would greatly affect the company’s earnings.

[edit] Changes in Fashion Trends

Trends in the fashion world tend to change very quickly. Consumer tastes can vary widely from one season to the next, leading to large swings in a company's profits. On the whole, Hanesbrands is essentially immune from these fluctuations. Its basic undergarments are wardrobe staples and compete on the basis of price, not style. But in spite of this competitive advantage, Hanesbrands has been significantly exposed to changing fashion trends through its hosiery business. Today’s working women wears hosiery less then her mother did. The company’s own research shows that working-age women wear panty hose almost half as much as they did ten years ago^[12]. If this trend continues, the market for Hanes hosiery will continue to shrink, decreasing revenue.

[edit] Competition

Two of Hanes' biggest competitors are Fruit of the Loom and Jockey, two privately held underwear companies best known for their namesake labels. Other competitors include the publicly traded Maidenform Brands and Warnaco Group.

[edit] References

1. ↑ “Hanesbrands Continues To Pay Down Debt”, Seeking Alpha (October 30, 2007)
2. ↑ Data from Hanesbrands 2006 10-K, p. 36 and p. 41
3. ↑ “Pantyhose makers suffering sales snag”, Associated Press (December 26, 2006)
4. ↑ Data from Hanesbrands 2006 10-K, p. 3
5. ↑ Hanesbrands2006 10-K, p. 7
6. ↑ Hanesbrands 2006 10-K, p. 7
7. ↑ Data from Google Finance
8. ↑ “S&P Raises Outlook on Hanesbrands”, Associated Press (November 27, 2007)
9. ↑ “Hanesbrands 3Q Profit Falls 23 Percent”. Associated Press (October 25, 2007)
10. ↑ Quicksilver2006 10-K, p. 37
11. ↑ "Stores boost sales with own labels" (San Francisco Chronicle, May 5, 2006)
12. ↑ “Pantyhose makers suffering sales snag”, Associated Press (December 26, 2006)
13. ↑ These figures were taken from Yahoo! Finance.