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Hanesbrands Inc. (HBI) reported earnings per share of 87 cents for its second quarter 2011, which were flat with the prior-year quarter.

However, the result surpassed the Zacks Consensus Estimate of 86 cents by a penny.

Profits were primarily impacted by acquisitions, organic growth and operational efficiency.

The company believes third-quarter EPS could increase by as much as 30% over last year’s 63 cents. It reiterated its full-year 2011 diluted EPS guidance of $2.70 to $2.90. EPS is expected to grow at a rate of 25 -34% over fiscal 2010.

Revenues and Operating Profits

Total revenue for the quarter climbed 14% to $1,225.23 million from $1,075.85 million in the year-ago period. The growth in net sales was driven by strong performance of the acquired ‘Gear For Sports’ business, as well as growth in the organic Outerwear segment and Internationally.

For the quarter, the company expects net sales growth in the third and fourth quarters to be in the low double digits to mid teens. For the full year 2011 Hanesbrands expects net sales growth of 14-16%. It reiterated full year net sales guidance of $4.9 billion to $5 billion.

Hanesbrands delivered an operating margin expansion of 70 basis points (bps), despite $51 million in higher cotton and commodity costs and an operating profit decline in the Innerwear segment.

Segment Details

Hanesbrands’ Outwear segment posted maximum year-over-year growth of 25.9%, followed by the International segment with growth of 23.7%. Net sales for the Innerwear segment climbed 8.1% from the year ago quarter, while Hosiery and Direct to Consumer both reported year-over-year increases of 6.4% and 3.8% respectively.

The strong performance of the Outwear segment was fueled by ‘Gear For Sports’ as well as Champion active wear sales growth.

Outerwear’s operating profit soared by 109.0% to $35.91 million compared to $17.18 million a year ago. All other segments reported an upward trend in operating income in the quarter, except the Innerwear segment, which reported a decline of 0.6% from the year ago quarter.

Other Financial Updates

The company exited the year with cash and cash equivalents of $44.65 million and long-term debt of $1,998.23 million. The company used $68.25 million for operating activities. The amount used for investing activities totaled $44.69 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.  However inventory units are estimated to be at a lower level than the year-ago period.

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 #4 Rank (Sell). On a long-term basis, we maintain a ‘Neutral’ rating.

 
HANESBRANDS INC (HBI): Free Stock Analysis Report
 
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