S&P Global Ratings affirmed its debt ratings for Hanesbrands due the company’s recovery from the pandemic while upgrading its forecasts to account for higher global growth of the company’s key brand, Champion.
The affirmed ratings came as Hanesbrands reported year-end earnings in line with S&P’s expectations, specifically leverage near 3.5x, confirming its recovery from the onset of the pandemic and its discontinuation of manufacturing personal protective equipment (PPE).
Forecasts were adjusted slightly upward due to Champion’s increased outlook and Hanesbrands’ new $600 million three-year authorization.
S&P projects leverage to be maintained in the 3x-4x range over the next 12 months as the company manages through a challenging macro environment while pursuing its strategic initiatives.
S&P affirmed its ‘BB’ issuer credit rating on Hanesbrands and ‘BB’ issue-level rating on its senior unsecured debt. The stable outlook reflects our expectation for the company to manage leverage near 3.5x and generate $375 million of free operating cash flow (FOCF) in 2022 that will be used for dividends and share repurchases.
S&P said, “The stable outlook reflects our view that credit metrics have returned to normal from the onset of the pandemic. We believe Hanesbrands has recovered from volatility caused by the pandemic and the company’s discontinuation of manufacturing PPE. We believe credit metrics have returned to normal and been restored to pre-pandemic levels, including leverage falling below 4x. Revenue grew 2 percent year-over-year, demonstrating the company’s ability to grow its core apparel offerings despite discontinuing its PPE manufacturing which had been buoying sales volumes capacity utilization during the pandemic. It added $820 million of PPE sales primarily in the second quarter of 2020 when most apparel companies suffered drastic declines. Moreover, we believe last year’s sales growth was lower than the majority of our rated apparel manufacturers primarily because Hanesbrands’ revenue did not decline as steeply during the pandemic given its PPE production, and not because of underperformance. The company’s activewear segment, which includes its key Champion brand, grew strongly in the low-double-digit percent area, comparable to rated peers in the same categories. Hanesbrands turned to produce PPE to fill the demand created by the pandemic and keep its manufacturing facilities running. We project the company will grow at a mid-single-digit rate, largely due to Champion expanding into new product categories and into international markets. This is in line with the company’s new 2024 $8 billion revenue targets, which include raising its Champion sales to $3.2 billion from $3.0 billion.
“Cash flow generation also has exceeded expectations. Hanesbrands also generated near $550 million of FOCF in fiscal 2021, above our $375 million estimates from when we affirmed our ratings in spring 2021. This level of cash flow is consistent with pre-pandemic levels and even includes higher levels of inventory in transit due to supply chain challenges. We expect this to continue to be a headwind for the company in 2022, but it should lessen throughout the year. We also believe the company has the pricing power to offset input cost inflationary pressures, higher supply chain costs, particularly in its faster-growing higher-margin Campion business. While we believe there could be some trade down to private label and recognize the company has less ability to take pricing in the innerwear segment, the favorable outlook for Champion nonetheless supports healthy cash flows, including our 2022 forecast for FOCF of $375 million.
“Hanesbrands’ share repurchase authorization does not change our expectation for a balanced capital allocation over the next 12 months with a preference to dispositions over acquisitions. Hanesbrands announced the authorization of a $600 million three-year share buyback program. Therefore, we expect any excess cash flow will be applied to share repurchases over the next three years, but with discretion. We expect the company will buy back less in years in which there is macroeconomic uncertainty or any operating headwinds, as may occur in fiscal 2022. As such, we do not expect the company to increase leverage to buy back shares, but to maintain a balanced capital allocation policy going forward.
Hanesbrands has a relatively new management team, having announced the appointment of new CFO Michael Dastugue in May 2021. Management reiterated its financial goals to manage net leverage of 2x-3x. Given its current plan to spend on investments in the company, we do not expect mergers and acquisitions (M&A) in the near term. We expect share repurchases absent M&A opportunities. According to management’s calculations, the company is currently leveraged at 2.7x and does not need to repay any further debt. We do not expect Hanesbrands to raise debt to pursue M&A over the next 12-18 months and would view that as shift a in financial policy.
“The company announced that it has sold its European Innerwear business for a de minimis amount, and it plans to sell its hosiery business in fiscal 2022. We do not expect either transaction to have an impact on credit measures. We view these actions to be credit positive because Hanesbrands is focusing on repositioning its portfolio toward brands with greater growth prospects. We note that the hosiery business has been in decline as consumers have shifted away from this product and to alternative or updated options not offered by Hanesbrands.
“The trend toward casual clothing will continue to support Champion’s growth. The activewear segment led by Champion and Hanes has been the growth driver as innerwear, which accounts for about one-third of total sales, has declined the past few years due to the challenging U.S. retail environment, weak consumer traffic at retail locations, lean inventory management by wholesale partners, and retail store closures. We expect the casualization and health and fitness trends to continue to support growth for activewear even as consumers become more mobile outside of their homes as the pandemic lingers. Hanesbrands plans to invest in Champion and diversify its products into footwear, socks, and innerwear. It is allocating a significant portion of its investment budget to continue Champion’s growth trajectory toward a $3.2 billion brand by 2024.
“Hanesbrands’ plan for $300 million in growth capital investments and to double its marketing spending to increase revenue and market share would improve its overall product mix and manufacturing execution, but that could weaken credit measures if unsuccessful. Its scale and vertically integrated manufacturing have been competitive advantages because the company distributes to wholesale customers. Hanesbrands needs to adapt to changing consumer preferences for more on-trend apparel in younger generations who purchase online. To address this, Hanesbrands recently laid out a plan to segment its manufacturing so it can be more flexible to produce consumer-led innovations and supply the direct-to-consumer (DTC) channel to reach the younger demographic. Although not a complete manufacturing overhaul, it does involve significant capital for automation and increased capacity to reduce lead time and lower operating costs. It will also expand its U.S. West Coast fulfillment center to reach customers more efficiently. Speed to market is a competitive differentiator for the DTC channel and younger consumers.
“In addition, Hanesbrands will raise its marketing spending to 4 percent of sales from 2 percent by 2024 to reinvest in its brands and make them more relevant to younger consumers. Its innerwear brands, such as Hanes and Maidenform, skew toward an older demographic. Hanesbrands believes there is a $1 billion revenue opportunity to capture in the under-39 generations. Moreover, we believe the company has recently revamped its Champion brand successfully. It forecasts that Champion will be a $3.2 billion global brand by 2024, expanding at a low-double-digit percentage rate. Hanesbrands promoted Chief Digital Officer Cindy Miller, who will help build new data capabilities to work toward adding $1.8 billion of incremental revenue by 2024. Although we expect the company to self-fund these projects as it generates over $500 million of cash flow from operations, that still needs to be converted to higher sales to increase EBITDA and margins in line with our base case expectations for a sustained high-teens percentage EBITDA margin. Moreover, Hanesbrands will require increased working capital, which could pressure free cash flow if sell-through is materially below expectations. Still, if these investments do not yield their targeted returns, we believe the company remains committed to its financial policy targets and would manage expenses appropriately to keep leverage within those targets.
“The stable outlook reflects our expectations for leverage to be near 3.5x and for the company to generate at least $375 million of FOCF to apply to dividends and share repurchases over the next 12 months.”
Photo courtesy Hanesbrands/Champion
