Hanesbrands is an American clothing company known for brands like Hanes, Champion, and Playtex. The document analyzes Hanesbrands as a potential investment. It finds that Hanesbrands has established a narrow economic moat through strong brand recognition and manufacturing capabilities. The company shows solid growth, profitability, and management. However, its financial health is weaker due to higher debt levels than peers. Overall, the analysis recommends Hanesbrands as a potential long-term investment based on its economic moat and strengths, while acknowledging its debt as a risk requiring monitoring.

1. Lester1
Miles Lester
Mr. Irzyk
Honors Stock Market Analysis
4 May 2017
Hanesbrands Inc.
Hanesbrands is an American clothing company that is based in Winston-Salem, North Carolina.
Hanesbrands was created in 2006, when the Sara Lee corporation decided to spin off its branded
clothing business. Hanesbrands combines a portfolio of different apparel brands. It designs,
manufactures, sources and sells apparel essentials such as t-shirts, innerwear, casualwear,
activewear, socks and hosiery. Its most notable brands are Hanes, Champion, and Playtex.
Recent notable acquisitions include: Pacific Brands for $800M (2016), Champion Europe
(2016), and Knights Apparel for $200M (2015). Hanesbrands is part of the consumer cyclical
sector and resides within the industry of apparel manufacturing. Hanes currently employs 67,800
employees. Hanes has received a 5-star rating by Morningstar and is currently trading at $22.13
compared to a fair value estimate of $34.00. I would recommend buying this company for a
variety of reasons, which will be covered within the report.
Economic Moat
When researching potential equity purchases, the first step to finding successful long-term
investments is by determining whether or not a company has an economic moat and whether it is
a wide moat, narrow moat, or no moat. Hanesbrands currently resides within the category of a
narrow moat. Hanesbrands has established a narrow moat through its strength of its intangible

2. Lester2
brand asset and also its manufacturing capabilities that give Hanesbrands the ability to achieve
returns on invested capital in the long run that are higher than its cost of capital. Hanesbrands has
created a moat because of its substantial brand recognition and the way its brands produce
returns for the company. Within the company, their brands hold the number one or two market
shares in each of the apparel categories that it competes in, and their brands are also found within
80 % of American households. Hanesbrands ability to reach a wide audience, and the comfort,
fit, and price all allow them to create a switching cost that they can utilize to continue reaping
profits as people find the switching cost’s unpleasant. Hanes’ has also created a competitive
advantage because of its ability to develop benefits of scales through its manufacturing processes
that have found low-cost production methods for new product innovations.
An important metric to pay attention to when deciding whether a company has developed an
economic moat is its ability to create cash flow, more significantly is the ability to create positive
free cash flow. Hanesbrands has continued to increase its free cash flow over the last 10 years
which is a key ingredient in identifying strong companies that can create sustainable long- term
moats. Over the past 10 years, Hanes’ has only had one year in the negative, which it was hardly
in the negative and that was in the beginning of the birth of Hanesbrands. Since then, and in
recent years F.C.F. has been very strong, and has the potential to keep increasing favorably for

3. Lester3
investors. Hanesbrands has the ability to continue increasing F.C.F. due to their low-cost
production methods and strong brand recognition.
Another key characteristic is by looking at the margins Hanesbrands has produced as well as its
ability to create return strong ROE’s and ROA’s. Hanesbrands has created increasing net
margin’s over the years, while also creating higher ROA’s and ROE’s as well. Hanesbrands has
had substantially higher than average ROE for years, which could be a potential negative, but
after digging deeper, I believe that their high ROE’s is not due to any financial foolery. ROA has
also been increasing and is currently above the industry average which is consistently positive
and greater than the industry average. Hanesbrands margins show strong profitability, and
combined with the increasing F.C.F. show that the company has the ability to sustain a long-term
economic moat, which will bring out profits for long-term investors.
Growth
The next aspect to look for in a company is their growth characteristics, and making sure they
have sustainable long-term growth outlooks. Hanesbrands has a Morningstar rating of B in this
category, which shows it fits these characteristics of being able to create growth within the
company. For the long-term, Hanesbrands has placed initiatives to sustain organic growth within
the company (Project Booster), which is a positive sign for investors as that is a critical way to
create profitable growth for investors.

4. Lester4
Although at first Hanesbrands had negative revenue growth, over time they have managed to
switch up this trend and begin creating positive growth. Over the last 5 years they have a revenue
growth average of 5.39 %, and over the last 3 years it is at 9.21 %. Both of these are higher than
the industry’s average for this time period, so that shows Hanesbrands ability to be a major
player in the market, and their ability to create long-term growth.
As far as earnings growth has gone, it has been solid over a long- term period as well. Although
there have been a couple negative years thrown in there, for the most part EPS growth has been
in the positive trend. Specifically, I am interested in looking at the 5- year average because that
shows how well they have continued earnings growth over longer periods of time. For the last 5
years, it has been around 15.79 which is extremely solid and shows the companies ability to
create strong earnings growth.

5. Lester5
Profitability
According to Morningstar, Hanesbrands received an A rating regarding profitability. Although
we already began to look into profitability while assessing whether or not the company
established a moat, there are some other characteristics to dive into that exemplify why Hanes
has such a strong profitability ranking.
As far as margins are concerned, Hanesbrands has increased operating margin over the 10- year
history, which is a very positive sign because operating margin is one of the key characteristics
investors use to identify potential companies. When doing research and comparing Hanes to
other competition’s operating margin’s, Hanes and the top companies all have around the same
number for operating margin. This exemplifies that Hanes is a large player in the markets they
compete in, and will continue to be for long periods of time. A significant part of its gross
margins revolves around SG&A. Although SG&A is fairly high, when comparing it to other
successful companies in this industry they all tend to be around this number.

6. Lester6
I already discovered that the ROA and ROE of the company have steadily increased and are
higher than the industry average which is a positive sign when dissecting profitability. R.O.I.C.
which measures the company’s ability to return capital invested in the company shows signs of
continuing to rise and be in the consistent teen range which is very beneficial to investors. Net
margin % has also increased over the last 10 years and should continue to increase for the future.
One thing of note was the large decrease in the tax rate % for the company. In 2007 the rate was
at 31.50%, yet it has been able to drop all the way to 6.00%. After doing research to see if these
low tax rates could continue, I found the companies response to a question about how successful
they can be keeping these low rates. Hanes answer was, “Yes. Assuming no changes to various
global tax laws, we believe a high‐single digit to low double‐digit tax rate is sustainable for many
years to come. Our tax rate is the by‐product of our global business model. We do not use
artificial tax management, such as inversions or earnings stripping. Our accounting and tax
strategies are sound. In fact, we were recently audited by the IRS (see our third quarter 2015
Form 10Q) and the audit was closed with no adjustments.” In summary, Hanes passes the
profitability test with flying colors as they have created high margins, and strong returns on
capital which should have the ability to continue to be successful for a long time to come.
Financial Health
As great as Hanesbrands has been so far, the most glaring weakness when assessing their
company revolved around the financial health portion. Morningstar gave them a C rating due to
many of their debt metrics being higher than the industry average. That being said, one positive I
took from my research is that their debt levels and the metrics have been decreasing steadily over

7. Lester7
the years, which gives an investor hope that over the long period Hanes will decrease the debt
levels even more.
The financial leverage is currently slightly above my recommended ratio of 5.00. But, since
2012, the leverage ratio has been lower than 5, and also the company has done a solid job of
decreasing the leverage ratio from 11.91 in 2007, so as an investor I am confident that
Hanesbrands will continue to make efforts to lower the financial leverage and keep it under 5.00.
Debt/Equity has also decreased significantly as well over the last 10 years and shows promising
signs of staying around the level it currently sits at, as it has not fluctuated much over the past 5
years. Regarding the current ratio, it is currently above my recommended ratio of 1.5 which is a
positive sign. Over the 10 -year period, it has not once dipped below 1.5 which is encouraging
news for investors. For the quick ratio, my recommendation is finding companies that have a
ratio of 1 and above. Although Hanes is slightly lower at 0.80, Hanes still earns strong marks due
to their focus on reducing the level of debt within the company.
Bear Case
When researching potential investments, a critical process is establishing possible negatives that
could occur if deciding to invest in companies, also known as the Bear Case of a company.
When doing research on Hanesbrands there was a lot of positive surrounding the company, but
still there were some items to be wary of. First, was that it may be difficult for the company to

8. Lester8
further expand their margins. As of now, Hanes margins are extremely high, especially compared
to the industry average, which is a positive for profitability, but over time there is a possibility
that those margins could slip and that would lower Hanes value as a company. Next, deals with
how much acquisitions are ingrained within the business of the company. Hanes utilizes a high
level of acquisitions, which can be helpful for a company but at the same time is something for
investors to be wary of. Multiple poor acquisitions could end up significantly lowering the worth
of the company. As an investor, I would make sure to keep an eye on any acquisitions that Hanes
makes in the future, and keep track of past acquisitions to see the effect they have on the
company. Another risk, is that in a cyclical industry, an economic downturn could cause
consumers to demand either lower prices or switch to different brands. In either case, these
would negatively effect Hanes due to its significant market power because consumers would
switch to more inferior brands unless Hanes would significantly reduce prices, which would drop
profits for the company. Another thing to be wary of is that Hanes operates using a vertically
integrating supply chain which can expose Hanes to risk. Political relationships, taxes, trade
laws, increases in energy, cotton, or shipping costs all have the potential to negatively effect the
profits the business creates. Lastly, when researching about the financial health, I believe that the
debt levels were fairly high compared to the industry averages and their main competition. An
even bigger red flag is that Hanes adjusts out acquisition-related expenses, which would increase
their debt levels even more. So, as in investor I want to take particular note to see how Hanes is
dealing with their debt and to make sure they are making the correct efforts to continue
decreasing the debt levels.

9. Lester9
Management
A company’s management is a vital characteristic in finding long-term investments. Richard
Noll was the CEO from 2006-2016. He was highly regarded and did an excellent job of helping
to create the strong characteristics that have been examined in the previous sections. He was
recently replaced by Gerald Evans who was the COO. Evans has been with the company for over
30 years, and Noll is remaining as an executive chairman, so it should be an easy transition and
the management team will continue creating the successful results in the future. Hanesbrands
management checks out well in a variety of categories.
The first thing I looked at was the Proxy Statement and how the management was compensated.
When looking through executive’s compensation, this rang true as a majority of each executive’s
salary came from equity earned through owning stocks in the company. Also, management
checked another box because they were compensated fairly as the C.E.O. (Gerald Evans) made
$9,056,825 which is fairly cheap for how well the company has done recently. When researching
how executives are compensated, Hanes utilizes a “pay-for-performance” strategy that links a
substantial percentage of executive’s compensation to the company’s performance and
shareholder’s value growth. They utilize four different methods in order to achieve this strategy.
First, they provide annual incentives for achieving long-term goals that reward stockholders
value. Second, performance-base and at-risk compensation represents over 75% of executive
officers direct compensation. Third, executive officers must deliver above target level
performance in order to receive higher than the median market compensation. Lastly, they tie in
stock-holders performance to three-year returns instead of one- year returns in order to make sure
the executives try to boost long-term stockholder returns, which is key for the long-term

10. Lester10
investors. As far as compensation goes, the management team is on extremely solid ground and
shows tremendous value for investors.
I have already discovered that management is being compensated fairly and for the shareholder’s
benefits which ties into their strong marks in character as well. Hanesbrands management does
not show any signs of using their positions to enrich friends or relatives and does not have them
on the board as well. One interesting thing I found was a summary that Hanesbrands wrote up
about possible risks that could decrease their value. I found this to be extremely unique that
Hanesbrands was willing to create their own Bear Case and allow possible investors to read it as
well. This shows Hanesbrands is clearly dedicated to being fair and accurate with potential
investors and are being candid about any possible mistakes, and any past mishaps. The C.E.O.
has also been able to retain the high-quality talent as many of the top management have been a
part of Hanesbrands for a long period of time. Hanesbrands continue to achieve high marks in
character as well.
The last aspect of analyzing management is seeing how they run the business, and the
management also checks well in this category. The management has recently began paying a
dividend, and has steadily increased that over the years. They also have made reducing debt a
focus and have continued to do that as the years have gone on. The performance speaks for itself
as management has done a terrific job with creating a valuable company. One potential pitfall
was that the company does have a lot of acquisitions so I made sure to check up on those. After
doing research, I found out that the acquisitions have been very beneficial to the value of the
company, and have only been acquired if they can boost shareholder equity and increase the

11. Lester11
strength of the F.C.F. of the business. Also, management has made the acquisitions selective and
made sure they target the core strategies of the business. Lastly, I was extremely impressed by
Hanesbrands candor, as they have pages of different information for investors to research and
help give them valuable information when deciding whether or not to invest in the company. To
conclude, management shows extremely solid results and has my faith to do what is best for the
investor over the long-term.
Valuation/M.O.S.
Over the past few sections, I have looked at what makes up the company, but now I will figure
out how to value the company, and show why it is such a great buy at its current price.
First, I took a look at the P/E ratio because at its current ratio the company is currently lower
than the industry average and its 5- year average which means this could be a great time to
purchase the company since its P/E is historically low. Its P/S is currently lower than its 5-year
average and the industry average which is also another positive as well and shows why right now
is a perfect time to purchase this stock. Same goes for the Price/Cash Flow as it is currently
lower than the industry average and the 5- year average which is solid because value investors
should look for companies with increasing cash flow, but decreasing Price/Cash Flow. All three

12. Lester12
of these metrics check well for the company, as it is currently at its lowest point and lower than
the industry average which means Hanesbrands is a potential bargain at its current price.
Hanesbrands also currently has a dividend yield of 2.4 which is higher than the industry average.
Now, I will evaluate the intrinsic value of the stock, and compare it to the Morningstar fair value
estimate.
Assumptions:
1. Current stock price: $20.42
2. Shares outstanding: 364.15 Mil
3. Estimated next year’s free cash flow: F.C.F. this year was $522 Mil and assuming it will
increase at a 5% growth rate next year it will be $548.1 Mil
4. Perpetuity growth rate (g): 3.0%
5. Discount ratio (R): 9.5% based upon using an interest rate of 5%, and the factors that help
determine the discount rate. Hanesbrands scored well in size, management, economic
moat and complexity but I raised it from 9% to 9.5% due to their slightly higher financial
leverage and also being in a cyclical industry.
Future F.C.F. estimates (millions, 5 % growth rate each year)
Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr.6 Yr. 7 Yr. 8 Yr. 9 Yr. 10
$548.1 $575.505 $604.28 $634.49 $666.22 $669.53 $734.51 $771.23 $809.79 $850.27
After calculating the discount F.C.F. with the perpetuity value, and discounting that to the
present value, I then calculated the total equity value. I received an intrinsic value of $35.75,

13. Lester13
which is extremely close to the Morningstar estimate of $34.00. I would strongly recommend to
purchase Hanesbrands at its current price. Hanesbrands is currently trading at a much higher
M.O.S. than my recommendation of 20%, so it would be worth the investment at this price. I
would recommend with my personal margin of safety to buy the company at $25.00 compared to
my fair value. This would mean purchasing it at $25.00 would would be a M.O.S. of 30%, so
anything below $25.00 would be a great bargain.
Morningstar, which utilizes the D.C.F. model estimates the stock is currently worth $34.00 and
with their M.O.S. they would purchase at $23.80. Right now, at the current price of $20.42, the
stock is trading with a M.O.S. of 40 %, which is extremely high for a company with such strong
characteristics as this one. Personally, I would recommend a M.O.S. with a company this strong
at 20%. Due to my estimation and the Morningstar one, I strongly recommend purchasing this
company because it is currently trading at a remarkable discount for a company that is as
reputable and established. Also, the strong long-term outlooks make this an even better purchase
when it is trading at such a significant M.O.S.
Other Info (Hanesbrands FAQ-May 2,2017)
An interesting piece of information that I discovered while researching about Hanesbrands was
something that they call Project Booster. They recently initiated Project Booster as a way to
deliver more consistent organic growth. Project Booster is designed to be a multiyear initiative

14. Lester14
that focuses on increasing the investment for growth, reducing costs, and also increasing cash
flow from operations. The company is focused on making this their next phase for the evolution
of their business model where they attempt to utilize their global scale to receive full revenue and
cash flow potential. Booster is also being established in order to cut around $150 million of the
annual costs from the business, so this could be an extremely rewarding innovation for future
investors. They plan on utilizing Project Booster as a way to reinvest over $50 million to create
more consistent organic growth. They also plan on using Booster to generate around $300
million of annual cash flow from operations. Project Booster is being put in place in 2017, and
should be in full force by 2019, so this is something that could be extremely intriguing for
investors and investors should definitely keep an eye on.
Conclusion
After doing extensive research into this company, I strongly recommend purchasing this stock.
Hanes narrow moat, strong growth potential, high profitability, decreasing debt, and strong
management team all make this a potential steal at its current price. The outlook on the future
and the steps management has put in place to create sustained success is also noteworthy for
investors. With its reputable brand and low-cost production, Hanes has the ability to continue a
sustained global scale and be a global leader for years to come. All of these factors combined
with the stock trading at a large discount to its fair value (40%) make this a perfect time to
purchase this company for the long haul.

15. Lester15
Works Cited
http://www.morningstar.com/stocks/XNYS/HBI/quote.html
file:///Users/mileslester/Downloads/HBI%20FAQ_05022017_FINAL%20(2).pdf
http://ir.hanesbrands.com/phoenix.zhtml?c=200600&p=irol-irhome#supplemental
http://www1.salary.com/HANESBRANDS-INC-Executive-Salaries.html