Why Hanesbrands shares fell 15% in August

What happened

Shares of Hanesbrands ( HBI 1.69% ) fell 15.1% last month, according to data provided by S&P Global Market Intelligence. Sometimes stocks make sudden moves based on a surprisingly good or bad earnings report, and other times stocks move for reasons that don’t make much sense. The drop in Hanesbrands shares last month can be attributed to the latter.

The company reported a strong second quarter in early August, with the loungewear segment performing in line with management’s expectations. But the star of the show continues to be growth in the activewear segment, where the Champion brand is on fire. If that wasn’t enough to encourage investors, management also reaffirmed its previous guidance, calling for revenue and bottom line growth for the full year.

IMAGE SOURCE: HANE BRANDS.

So what

To put Hanesbrands’ stock performance in context, the SPDR S&P Retail ETF, which tracks all retail stocks in the S&P500 index, was down 6.62% in August. This significantly underperformed the S&P 500 loss of just 1.81%.

Retailers have come under pressure recently due to the Trump administration’s latest round of tariff hikes, which took effect Sept. 1. Some investors fear the tariffs could negatively impact a range of consumer goods companies doing business in China, such as Hanesbrands.

Still, even with short-term headwinds from trade wars and retail store closures, Hanesbrands expects revenue to grow through the end of the year. For 2019, management expects revenue growth of 2% at the midpoint of the forecast. Earnings per share are expected to be up 5% and operating cash flow is expected to increase 17% year-over-year.

Now what

Growth forecasts on the top and bottom lines make the stock look like a bargain with a forward price-to-earnings ratio of just 7.4 times next year’s earnings estimate. The stock also pays a dividend yield of 4.39%, which looks sustainable based on the company’s trailing 12-month free cash flow of $546 million.

Hanesbrands continues to feed a stagnant loungewear market, while investing in the fast-growing Champion brand. In the second quarter, the popular athleisure brand saw sales growth, excluding sales to other major retailers, of more than 50% year-over-year. Champions sales currently account for about a quarter of total revenue at $1.8 billion, but management is looking to grow the brand to $3 billion in annual sales.

Investors interested in find valuable stock in the apparel industry should keep their eyes on Hanesbrands, given the huge growth opportunity with the Champion brand and an ultra cheap valuation.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Shirley Hudson

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