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Hanesbrands Inc. (HBI) reported earnings per share of 91 cents for its third quarter 2011, which was 44.4% higher than the prior-year quarter. The result surpassed the Zacks Consensus Estimate of 82 cents by 10.9%.

Profits were primarily impacted by strong net price, mix of products sold, and cost control measures.

The company expects fourth-quarter net sales of $1.2 billion - $1.3 billion and diluted EPS of $0.47 - $0.57. For the full year, the company expects to generate earnings of $2.75 - $2.85.

Revenues and Operating Profits

Total revenue for the quarter increased 4.8% to $1,230.18 million from $1,173.36 million in the year-ago period. The growth in net sales was driven by strong performance of the Socks and male underwear segment. This segment posted the best sales figure boosted by the largest price hike in it in the quarter.

Multiple price increase did not affect demand and unit elasticity was running as per expectation.

Hanesbrands delivered a record operating margin expansion of 270 basis points (bps), coupled with a gross profit margin inflation of 360 basis points, despite higher cotton and commodity costs.

Segment Details

Hanesbrands’ Outwear segment posted maximum year-over-year growth of 11.1%, followed by the International segment with growth of 12.3%. Net sales for the Innerwear segment crawled up 0.5% from the year-ago quarter, while both Hosiery and Direct to Consumer reported year-over-year decline of 7.9% and 2.8%,respectively.

The strong performance of the Outwear segment was fueled by ‘Gear For Sports’, but was partly offset by other brands, particularly like Just My Size brand that suffered due to wrong managerial  policy .

Outerwear’s operating profit soared 45.0% to $55.6 million compared with $38.34 million a year ago. All other segments also logged an uptrend in operating  income in the quarter, except the International and Hosiery segment, which suffered a decline of 21.7% and 5.4% respectively.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $47.99 million and long-term debt of $2,005.73 million. The company used $26.87 million for operating activities. The amount used for investing activities totaled $65.23 million.

The company expects free cash flow in the year 2011 to be in the range of $100 million to $200 million and its leverage ratio to improve to between 3.0 to 3.5 times EBITDA. 

Our Recommendation

Hanesbrands is a leading player in the innerwear, casual wear and active wear markets in the U.S. Moreover, the company commands a portfolio of well-recognized flagship brands, including Hanes, Champion, Playtex and Bali, which provides a competitive advantage to the company and reinforces its well established position in the industry among stiff competitors like Limited Brands Inc. (LTD) and Maidenform Brands Inc. (MFB).

Hanesbrands is undertaking prudent steps to optimize inventory levels in accordance with sales trends, thereby improving margins and operating cash flow.

However, Hanesbrands’ debt-ridden balance sheet and unfavorable foreign translations may weigh upon both the top and bottom lines.

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
 
LIMITED BRANDS (LTD): Free Stock Analysis Report
 
MAIDENFORM BRND (MFB): Free Stock Analysis Report
 
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