One of the greatest virtues of retail and apparel stocks are their ever-changing fortunes. Investors made a killing in hot stocks such as Ralph Lauren Corp. (NYSE: RL) and Michael Kors Holdings Ltd. (NYSE: KORS) in 2012 and 2013, but were forced to rotate elsewhere in 2014 as these stocks began to underperform their benchmarks. Yet not all former winners become eventual laggards.

Case in point: Hanesbrands, Inc. (NYSE: HBI) has risen 360% over the past three years and should deliver more gains in 2015. The company is a top provider of necessities like underwear, t-shirts and socks. Among its many well-known brands ​are Hanes, Champion and Playtex. The company was spun off from food and consumer products firm Sara Lee Corporation in 2006.

 

 

Robust share price gains mean HBI is no longer the bargain it once was, nor is it a bargain in relation to peers.

	P/E Ratio	P/B Ratio	P/S Ratio	P/CF Ratio
HBI	31.6	7.4	2.2	20.3
Industry Avg.	28.4	4.5	2.2	21.8
HBI Historical Avg.	20.4	4.8	0.8	10.5

This company has been in favor for one simple reason: Undergarments are a discretionary expense, and since the economic recovery began in 2009, consumers have been steadily replenishing their socks and underwear drawers.

 

#-ad_banner-#​Hanesbrands is seeing rising demand across its product lines. Sales had been rising at a 7% annual pace since 2009, but are expected to rise a more robust 16% this year and another 13% in 2015 (to around $6.1 billion).

 

 

To be sure, the improving economy is playing a role in Hanesbrands’ up shift to double-digit sales growth. However, over the past five years, management has been pursuing what they deem as an  innovate-to-elevate growth strategy.

 

A key aspect of the strategy is the streamlining of the firm’s worldwide supply chain. An increased use of  lower-cost offshore production facilities is helping reduce operating expenses.  For instance, roughly 40% of current production comes out of Asia (mainly Vietnam), and the company plans to hike that percentage in coming years. HBI has similar low-cost production facilities in Central America and the Caribbean.

 

The new growth strategy also stresses innovation. Hanesbrands has shifted its product line toward higher-margin premium products to better capitalize on rising consumer spending.

 

Among the firm’s newest offerings are boxer briefs, t-shirts and socks incorporating a patented ‘X-Temp’ technology, a fabric made to react to body temperature changes to help keep the product user cool. A couple of years ago, Hanesbrands introduced ComfortBlend, a softer cotton blend fabric used in many of its products.

 

ComfortBlend items are about 30% more expensive than the non-premium versions, and X-Temp products have been priced as much as 75% higher. These and other premium offerings now account for 20% of Hanesbrands’ total revenue. That percentage could rise to 30% or more within a few years.

 

The emphasis on more cost-efficient distribution and pricier products has enhanced profit margins. For instance, net margins are now about 7%, compared with just 1.3% in 2009. Since then, Hanesbrands posted cumulative free cash flow of $1.7 billion, and analysts at Credit Suisse project it will generate more than twice that amount (around $4 billion) during the next five years.

 

Hanesbrands has also been getting a healthy boost from two recent acquisitions. In July 2013, the company acquired Maidenform Brands, Inc., a highly-profitable producer of women’s undergarments. Roughly a year later, Hanesbrands acquired European intimate apparel firm DBApparel Group.

 

Those deals are helping boost the top line. Maidenform is on track to generate more than $500 million in sales this year, while DBApparel’s annual revenue base approaches $900 million.

 

With growth and cost-containment initiatives progressing nicely, Hanesbrands should comfortably meet analyst estimates for earnings per share of $5.63 this year and $6.46 next year. That’s a projected gain of 15% in 2015, and it should position Hanesbrands’ stock for a similar increase. With prices of key inputs like cotton and oil plunging, growth potential could be even greater.

 

Risks To Consider: Rising input costs for items such as cotton and further slowdowns in global economic activity could both imperil current profit forecasts.

 

Action To Take –> I still rate Hanesbrands a “buy” with target price of $128 by this time next year. I wouldn’t necessarily count on commodities to push the stock much above that, though, since their prices are unpredictable and could easily head right back up. Either way, shareholders will need to monitor Hanesbrands closely and be ready to make a quick exit once it appears to have peaked.

 

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