Hanesbrands (HBI)

Headquartered in Winston-Salem, NC, Hanesbrands Inc. (HBI) is a manufacturer and marketer of innerwear, outerwear, and hosiery apparel, which are sold under the brand names of Hanes, Champion, Playtex, Bali, Just My Size, Barely There, L'eggs, Outer Banks, and Wonderbra. The company sells T-shirts, bras, panties, men's underwear, children's underwear, socks, hosiery, casual wear, and activewear. Approximately 90% of the company's sales are in the United States. The company was spun-off from Sara Lee Corporation in September 2006. Since the spin-off, management has utilized cash flow to reduce long-term debt by $285 million and voluntarily contributed $96 million to the company's qualified pension plans. Management of Hanesbrands does not provide quarterly or annual EPS guidance.

Management's long-term financial goals are for double-digit growth of non-GAAP diluted earnings per share. The company's growth model is expected to generate strong, consistent cash flow, which is an attribute of the replenishment nature of the company's core categories of underwear and hosiery. The business model looks for long-term annual sales growth between 1% and 3% (excluding acquisitions) driven by investments in the company's large brands and retail partnership programs, particularly for the back-to-school and the year-end holiday seasons. Management's goal is for the non-GAAP operating profit margin to increase by 50 to 100 basis points (bps) per year, driven by cost-reduction initiatives, which are ultimately targeted to generate gross annualized savings of $200 million.

Management's business model requires only modest sales growth to create substantial EPS growth. The company's cash flow and cost-reduction initiatives are producing positive results. Also, lower interest expense from reduced debt and lower interest rates are contributing to earnings growth. At the company s Analyst Day in February 2008, management hinted that it may announce a more explicit EPS goal of 15% to 25% growth in 2009, by stating that if all of the long-term growth goals are achieved, EPS could "double in three to five years."

The company's brand-building initiatives include major marketing programs in core categories, but especially with the large brands of Hanes, Champion, Playtex, and Bali. For example, the Champion brand launched the "How You Play" advertising campaign in November 2007, the first campaign for the brand since 2003. Earlier in the year, the company launched the "Live Beautifully" campaign for the Bali brand and the "Girl Talk" campaign in support of the Playtex 18 Hour and Playtex Secrets product lines. Also, the core brands are being used to advance strategic partnerships with key retailers. In October 2007, Hanesbrands announced a 10-year strategic alliance with The Walt Disney Company that includes basic apparel exclusivity for the Hanes and Champion brands, product co-branding, attraction sponsorships, and other brand visibility and signage at Disney properties. The alliance also included the naming rights for the stadium at Disney's Wide World of Sports Complex, which is now known as Champion Stadium.

Hanesbrands is taking advantage of the integration from the spin-off and the company's global reach to reduce costs and leverage scale. Management is consolidating both the organization and the distribution network, in addition to developing a global supply chain in lower-cost countries and seeking savings from leveraging the collective size of the purchasing organization. As part of the global supply chain strategy, management is transitioning facilities of the company's supply chain to lower-cost locations in Central America, the Caribbean Basin, and Asia in an effort to optimize the cost structure. The company is closing over 45 manufacturing facilities and distribution centers in the Dominican Republic, Mexico, the United States, Brazil, and Canada while acquiring low cost textile plants, two of which are in El Salvador. Also, management plans to build a textile production plant in Nanjing, China, which will be the first company-owned textile production facility in Asia. The cost savings from the consolidation actions and supply chain projects are being selectively invested in the company's brand-building initiatives.

As with most consumer products companies, product innovation is a growth driver and a competitive advantage. New products may be based on the improvements in product features, such as stretch in t-shirts or tag-less garment labels, or in an increased variety of available products, such as offering new sizes or styles that enhance consumer appeal. In 2007, new product launches included Hanes All-Over Comfort Bra with ComfortSoft straps and the Hanes ComfortSoft Collection for Men. Management supports new product launches by extensive marketing and promotional spending.

In the current fixed income market, Hanesbrands is benefiting from low interest rates. The interest expense of three-quarters of the company's long-term debt ($1.7 billion) is based on a London Interbank Offered Rate (LIBOR) of 3.55%, producing a blended interest rate of 7.1%.

Between September 2006 and December 2007, the company's excess cash (after investing in the core businesses) was utilized to reduce debt. In 2007 alone, the company generated 359 million in cash flow, and since the spin-off in September 2006, the company has reduced debt by $285 million. As of December 31, 2007, Hanesbrands had $2.3 billion of long-term debt. However, under the current conditions in the debt market, management is maintaining the current debt structure until the financial markets normalize. The company's long-term debt doesn't start to mature for at least four years, at which time management plans to refinance the debt. During the first six months of 2008, the company repurchased shares worth $18 million ($26.30 average price per share). Hanesbrands has voluntarily contributed $96 million to the qualified pension plans (which are now 97% funded). After the company's debt is refinanced, the company may increase share repurchases or make strategic acquisitions. The Board does not plan to offer a dividend at this time.

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