Since its September 6th spin-off from Sara Lee (SLE), Hanesbrands (NYSE:HBI) has initiated changes that should create long term value for shareholders. HBI is up about 21% since the spin-off, or 4% since we published our initial analysis.
The company is increasing the efficiency of its manufacturing facilities and distribution networks, while shifting away from low margin products which have caused a slight short-term decline in sales. We don't think it's too late to take advantage of the HBI opportunity.
About The Quarterly Report
On November 13, Hanesbrands reported quarterly earnings. As expected, earnings were down 39% as a result of the increased costs associated with running a public company and one time charges related to the spin-off. The most significant portion of this earnings announcement was the outline of management's strategic goals. Audio and slides from the conference call can be found on the Hanesbrands website. We believe that the clearly outlined goals are achievable.
Management discussed the leverage inherent in the business model. With long term sales growth rates of 1-3% they expect to see double digit EPS growth. This is a result of cost efficiencies and the repayment of debt, which reduces interest expense. The "base year" will be 2007, meaning that there will likely be short-term declines in profitability while the necessary investments are made. After 2007 we expect to see the investments begin to pay off in the form of increased sales and cost reduction.
In a nutshell, Hanesbrands' strategy is to stop selling low margin product lines, promote the higher margin lines, improve its international distribution network, reduce manufacturing costs, and eliminate unnecessary levels of bureaucracy. These initiatives will reduce the cost structure while returning Hanesbrands to sales growth. The company will be leaner, more entrepreneurial, and better able to react to changes in the industry.
Since we initiated coverage, Hanesbrands has clarified how it intends to move forward. As time passes we will see the approach of the "base year" which will provide analysts with the numbers they so eagerly await [because this is when the long term growth rates will take effect]. We will also begin to see returns on some of these early investments. These factors should contribute to price appreciation, along with the factors we described when we initiated coverage. We think that you can benefit by purchasing HBI shares now, while analysts wait for the "base year".
Disclosure: Author is long HBI