Hanesbrands to Buy Gear For Sports – Analyst Blog

In an effort to strengthen its Outerwear business, Innerwear maker Hanesbrands Inc. (HBI) is acquiring privately held, Lenexa-based GearCo Inc. (popularly known as Gear For Sports). The deal is valued at $225 million. The acquisition is expected to close in the fourth quarter of fiscal 2010 and will be immediately accretive to earnings per share (EPS).   Hanesbrands will pay $55 million in cash, funded by its free cash flows and assume $170 million in debt. After closing, the acquisition is expected to boost EPS by 20 cents in the first 12 months and 30 cents in the next 12 months. Hanesbrands’ shares shot up 6% or $1.51 to $26.91 on the news. 

Gear For Sports is one of the largest providers of college and athletic licensed logo apparels, selling clothing in college bookstores, golf pro shops, and leisure resorts and destinations. Gear for Sports generated revenues of $225 million in its fiscal 2010 ended June 30. 

The Hanesbrands-Gear For Sports association is not new. In addition to other brands, Gear For Sports has been embellishing licensed apparel for Hanesbrands’ Champion label since 2001. With this acquisition, Hanesbrands will boost its outerwear business and sales of higher-margin graphic apparel. Following the acquisition, approximately 20% to 25% of Hanesbrands’ Outerwear Segment sales will comprise graphic apparel.   

Hanesbrands delivered impressive second quarter 2010 results, as earnings shot up 109% year over year in the quarter to 67 cents a share from 32 cents, reflecting elevated sales, operating margin expansion and benefit from restructuring. The quarterly earnings were in line with the Zacks Consensus Estimate. 

Total revenues for the quarter jumped 9.1% to $1,075.9 million from $986.0 million in the year-ago period, attributable to promotional initiatives, increase in shelf space, a  jump in retail sales, inventory restocking and favorable currency translation. The Outerwear segment represented 24% of total revenues in the quarter, with segment revenues increasing 16.1% to $263.3 million from $226.8 in the year-earlier period. 

Based on sales growth, Hanesbrands raised its fiscal 2010 earnings range to $2.25−$2.35 per share from an earlier range of $2.15−$2.27 per share. The Zacks Consensus Estimate of $2.32 per share for the fiscal year is at the higher end of the company’s guidance. 

Hanesbrands ended the quarter with $36.8 million in cash. During its earnings call, Hanesbrands stated that it expects to generate free cash flows of $200−$250 million in fiscal 2010. The company had then professed to leverage its cash flows to reduce debt to the $1.65−$1.70 billion level in fiscal 2010 from $1.87 billion in the reported quarter. The company will now utilize $55 million of the free cash flow for the acquisition and plans to retire the assumed $170 million debt. 

The acquisition fits well with Hanesbrands’ Outerwear business and will boost the segment’s top-line. The acquisition has a very low risk profile given that there is little actual integration risk as it is already a key Champion licensee. Further, Gear For Sports will operate almost as a separate entity with its management remaining in place and the administrative, operational, production and sales structure remaining intact. 

The acquisition requires no restructuring or write-offs and will, therefore, not have any dilutive effect on Hanesbrands’ fourth-quarter fiscal 2010 earnings or to the company’s current fiscal 2010 earnings guidance. 

Hanesbrands continues to gain market share on the back of numerous sales enhancement initiatives and increase in shelf space. The company is also employing various measures, including price hikes, to abate input cost inflation and spiraling promotional expenditure. These efforts along with the accretion from acquisition will help boost earnings.   On the flip side, the overt emphasis on higher sales growth comes at the cost of additional working capital to fund inventory, which in turn increases interest expenses. Moreover, the debt-ridden balance sheet and exposure to adverse foreign currency translations may limit the above-market performance of the company. Thus we maintain the Zacks #3 Rank (‘Hold’) and Neutral long-term recommendation on Hanesbrands. 

Headquartered in Winston-Salem, North Carolina, Hanesbrands Inc. engages in the design, manufacture, sourcing, and sale of apparel essentials for men, women, and children in the U.S. and internationally.