Cotton Costs Dampen Hanesbrands' 1Q - Analyst Blog

Hanesbrands Inc. (HBI) reported loss per share of 27 cents in its first quarter 2012, down 155.1% from the prior-year quarter. However, the company fared well as compared with the Zacks Consensus Estimate of a loss of 33 cents per share.

Sharp uptick in cotton prices during the quarter affected the margins, eventually dragging the company to report loss.

Revenues and Operating Profits

Total revenue for the quarter slipped 2.7% to $1,008.3 million from $1,036.4 million in the year-ago period. It surpassed the Zacks Consensus Estimate of $1,004.0 million.

Hanesbrands’ gross profit margin and operating profit margin both contracted owing to higher cotton and commodity costs.The quarter’s operating profit contracted to $6.1 million, 94.0% lower than the year-ago level.

Segment Details

As the hosiery segment has reduced in size, HanesBrands decided not to report it as a separate segment starting this quarter. It is included within the Innerwear segment.

Net revenue at the Innerwear segment went up 1% from the previous year on the back of decent performance of men’s underwear, women’s panties and sheer hosiery. Operating profit slid 31% compared with last year.

Outerwear segment sales shrank 9% from the year-ago period due to poor performance of the imagewear segment. Strong Champion retail activewear sales and new Hanes retail casualwear programs partially offset lower Just My Size sales. Outerwear segment reported operating loss of $23.9 million in the quarter.

Net sales at International segment slipped 5% in the quarter, owing to soft results in the European imagewear category. Operating profit fell 84% in this segment.

Direct to Consumer segment sales increased 2% and operating profit increased 231% in the quarter

Other Financial Updates

The company exited the first quarter of 2012 with cash and cash equivalents of $34.6 million compared with $35.3 million in the previous quarter and long-term debt of $1,935.8 million compared with $1,807.8 million in the fourth quarter 2011. Operating activities used $94.1 million of cash compared with $101.0 million in the previous year.

Guidance

The company expects fiscal 2012 diluted EPS to be in the range of $2.50 to $2.60 based on net sales growth assumption of 2-4%. Gross margin percentage is expected to be in the low-30s in the second half of the year.

For 2012, the company expects free cash flow to be in the range of $400 million to $500 million. The company’s near-term priority for the usage of free cash flow is to reduce long-term debt and de-leverage its balance sheet.

Our Recommendation

Hanesbrands is a leading player in the innerwear, casual wear and active wear markets in the U.S. It is well established in the industry among stiff competitors like Limited Brands Inc. (LTD) and Maidenform Brands Inc. (MFB).

However, Hanesbrands’ debt-ridden balance sheet and unfavorable foreign translations may weigh upon both the top and bottom lines. Its soft guidance also hurts investors’ confidence.

Hanesbrands currently holds a short-term Zacks #3 Rank (Hold). On a long-term basis, we maintain a ‘Neutral’ rating.

HANESBRANDS INC (HBI): Free Stock Analysis Report

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