By Thomas J. Ryan
<span style="color: #999999;">Bank of America Merrill Lynch downgraded Hanesbrands Inc. to “Underperform” from “Neutral” due to concerns that a slowing logo trend will cause Champion’s sales to decelerate.
“We think the brand is still popular but its distribution is relatively saturated in the U.S., and we worry that changing fashion trends could rein in brand momentum,” wrote Bank of America’s lead analyst Heather Balsky in a note. “Champion has benefitted from both the shift to comfort and the retro logo trend. Comfort is still in, but the logo trend has started to wane based on our channel checks.”
Bank of America’s outlook assumes core Champion sales growth will slow to 15 percent in 2020 to $2.2 billion (up 14 percent excluding the 53rd week in 2020) versus an expected gain of 42 percent in 2019.
The analyst added that Hanesbrands’ management has cited opportunities in women’s, kid’s and technical athletic apparel for Champion and her outlook assumes some growth in these categories. Balsky added, “However, if underlying demand deteriorates further, it will be harder for Champion to grow these categories.”
In other segments, Bank of America’s outlook assumes Hanesbrands’ Innerwear remains challenging due to ongoing disruption at the department store channel and weakness in the bra business. “Minimal disruption” is expected in Hanesbrands’ men’s underwear business due to Walmart’s increased emphasis on private label as well as Walmart’s ongoing reconfiguration of its men’s underwear section by product type rather than brand. Walmart accounts for about a third of Hanesbrands’ innerwear sales.
Finally, Balsky wrote that the exit of C9 Champion from Target, set for January 31, 2020, will constrain 2020 sales and EPS growth. Her team estimates that 2019 C9 U.S. Activewear sales were $355 million, or about 5 percent of Hanesbrands’ sales. She assumes core Champion margins are higher than C9’s given the brand’s recent strength.
Bank of America lowered its price target on Hanesbrands to $13 from $16. The investment’s firm’s EPS estimate was trimmed by 2 cents for the current year to $1.76, and by 8 cents for 2020, to 1.74 due to a lower sales and margin outlook including faster deceleration at Champion. A 2 percent decline is now expected in 2020.
Shares of Champion closed at $14.64, down 22 cents, Tuesday on the New York Stock Exchange. Bank of America’s note came out December 13, and the stock closed at $15.18 the day before its release.
<span style="color: #999999;">In reporting third-quarter results, Hanesbrands said that excluding the C9 line that is being phased out of the Target chain, Champion’s global sales on a currency-neutral basis jumped 26 percent in the third quarter, ahead of expectations for the third straight quarter this year. Gerald Evans, CEO of HanesBrands, said he believes Champion is well-positioned to generate another $1 billion in growth over the next several years.
“We have several factors supporting our view,” said Evans. “We see strong secular trends within the activewear category. Champion’s brand equity scores are growing with Gen Z and Millennials. We’re expanding Champion’s product portfolio, including a broader assortment within our performance, kids and women’s lines as well as in casual footwear and accessories, and we’re increasing distribution in large economies such as China and South Korea, all of which positions us for continued double-digit Champion growth in 2020 and beyond.”
He added, “We believe we have strong momentum and long runways in each of our growth initiatives. This along with contributions from allocating our strong cash generation to drive continued long-term revenue, profit and cash flow growth for the total company.”
Photos courtesy Champion
