Closings and delays

Hanesbrands riding high on purchases, share price

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WINSTON-SALEM, N.C. — Richard Noll, top executive of Hanesbrands Inc., proclaimed in September 2011 that the Winston-Salem basic apparel manufacturer was “a great company once again” as fruit was being borne from its innovate-to-elevate strategy, according to the Winston-Salem Journal.

More than three years later, several analysts are demonstrating their belief in the strategy – combined with two aggressive purchases of Maidenform Brands Inc. and DBApparel – by setting share price targets in the $125 range.

That is a stunning sixfold increase over Hanesbrands’ initial public offering share price in September 2006.

The strategy emphasizes value-added products within its brand portfolio, which features several of the Top 20 U.S. apparel brands in Hanes, Champion, Playtex, Maidenform, Bali and L’eggs.

Hanesbrands makes the products at a lower cost at its facilities in Asia, the Caribbean and Central America, and then sells them at a higher price to retailers.

Prominent examples are high-performance, comfort-cooling apparel innovations in underwear, T-shirts and socks sold at Target, Walmart and Kohl’s, as well as its growing Hanesbrands, Champion and Maidenform outlet store network.

Investors are on board as well. They have sent the share price to record highs on a weekly basis recently. The share price has been above $60 for more than a year, above $80 since April 28 and above $100 since Aug. 19.

The building of Hanesbrands’ competitive muscle has been painful and bittersweet locally, where the company’s manufacturing heritage goes back 112 years.

About 2,400 jobs in Forsyth County, out of 4,900, were eliminated in a massive supply-chain restructuring from 2006 to 2010 that enabled Hanesbrands to become a major global competitor.

Noll has stressed the restructuring was critical to providing more security for the remaining 2,230 local jobs – still among the Triad’s largest employers.

Hanesbrands already has raised its fiscal 2014 adjusted earnings guidance three times this year, the latest to a range of $5.40 to $5.60 a share.

“We remain confident in our business model and our performance momentum,” Noll said in the company’s second-quarter report in July.

Christian Buss, an analyst with Credit Suisse, initiated coverage of Hanesbrands on Oct. 2 with an “outperform” rating and a $125 target price. Wunderlich Securities initiated coverage Sept. 12 with a $124 target price.

“We are compelled by the potential for sustained double-digit earnings growth and upside to consensus estimated, driven by benefits from a mix shift toward premium-priced products, accretion from acquisition in the intimates space, and benefits from deployment of excess cash for debt pay down, incremental dividend payout and eventual share repurchase,” Buss wrote.

“We see opportunity for nearly $7.5 billion in revenue and $10-plus earnings per share in fiscal 2019.”

To put that bold forecast in perspective, Hanesbrands reported $4.63 billion in revenue in fiscal 2013 and earnings per share of $3.91.

Paying down spinoff debt

Buss said estimates of how much the Maidenform and DBApparel purchases would bolster Hanesbrands’ revenue “may be too conservative.”

Hanesbrands said that for fiscal 2014, Maidenform will contribute $500 million in sales. DBApparel had $875 million in sales in fiscal 2013, and there is little overlap between DBApparel in Europe and Hanesbrands in the U.S. and the rest of its global markets.

“We expect Hanesbrands to generate $4 billion in free cash flow over the next five years,” Buss said.

Such an accomplishment could allow Hanesbrands to further pay down its spinoff debt to Sara Lee Corp. As of November, Hanesbrands had $1 billion in bond debt, down from the $2.6 billion it took on in the spinoff.

Hanesbrands issued a 30-cent quarterly dividend in September. That’s up 10 cents from when Hanesbrands began offering a dividend in April 2013.

Steven Marotta, an analyst with C.L. King & Associates, said he expects Hanesbrands will remain in acquisition mode after integrating DBApparel.

BMD Asset Management and Research said in an Oct. 2 report that Hanesbrands’ “strong brands, ability to leverage innovative platforms and positive free cash flow has greatly improved its performance.”

Even though the stock has jumped nearly 74 percent this year, BMD said “the stock still has around 13.9 percent upside remaining before it is considered fairly valued based on the current numbers.”

“When you add everything up looking at Hanesbrands’ valuation, dividend and the DBApparel takeover, there’s no doubt that being a bear on Hanesbrands offers very little upside and lots of downside risk, making this company worth a buy.”

Future stock split?

However, the spike in Hanesbrands’ share price may curtail analysts and investors’ anticipation of the company launching its first share-repurchase program.

A company typically buys back its shares from the marketplace to reduce the number of outstanding shares. Because there are fewer outstanding shares, those remaining in the marketplace can become more valuable. Companies also buy back shares when they believe the shares are undervalued.

It’s clear in recent months that Hanesbrands’ shares are not undervalued. Noll has said the company continues to consider a program when it makes sense for the company.

That means Hanesbrands may conduct a stock split first in order for a share-repurchase program to make more financial sense.

Companies use the stock-split strategy to make their stock more affordable to potential investors.

Hanesbrands spokesman Matt Hall said last week there has been “no formal talk” of a stock split.

VF Corp., a Greensboro apparel marketer, did something similar in December with a rare four-for-one stock split. That meant shareholders received three additional shares for each share they owned.

VF’s share price was trading at $202.95 a share when the board of directors made the announcement in October 2013. It was at $244.80 when the split was recognized by the New York Stock Exchange on Dec. 23.

VF’s share price was trading at $–.—a share on Friday – up from $61.20 on Dec. 23.

Tony Plath, a finance professor at UNC Charlotte, projects Hanesbrands taking the 4-for-1 split route.

“The run-up in share price since 2012 hasn’t been at all volatile. It’s basically straight up from $30 to $110 with nary a downward bump along the way,” Plath said.

“It’s likely management will view the current price as outside its favorable trading range for its class of investors, and make plans to split the stock back into the range of a $20 to $30 share price.

“It sends a signal to the market that the two-year run-up in price since 2012 is sustainable over time, which will likely boost the price up into the $125 range,” Plath said.