We recently downgraded the shares of Hanesbrands Inc. (HBI) from Outperform to Neutral. This is because intense competition from established players, a debt-heavy balance sheet and exposure to adverse foreign currency translations limit the above-market performance of the company.

Hanesbrands faces intense competition in both domestic and international markets from other established players Incorporatedluding Berkshire Hathaway Inc. (BRKA and BRKB, through subsidiaries Russell Corp. and Fruit of the Loom Inc.), Nike Inc. (NKE), Adidas AG, Warnaco Group Inc. (WRC), Maidenform Brands Inc. (MFB) and Gildan Activewear Inc. (GIL).

Moreover, the company also competes with private label products of specialty retailers, such as Victoria’s Secret, Old Navy and Gap (GAP). Consequently, the company is under severe stress to maintain profitability.

The company’s balance sheet is highly levered, as indicated by a debt-to-capitalization ratio of 85.4% at the end of fourth quarter of 2009. The significant debt levels led to an outflow of $38.7 million or about 50% of operating income during the fourth quarter in net interest payments, which reduced the company’s overall profitability.

However, the company’s focus on continuous product innovation acts as a key differentiating factor in an industry characterized by frequent changes in customer preferences. The company has two design and product development facilities located in North Carolina and New York, which together employs a team of over 300 professionals.

Furthermore, Hanesbrands is in the midst of a multi-year global restructuring program aimed at reducing costs and boosting profitability. The program involves shifting production facilities to lower cost
locations in Asia, Central America and the Caribbean Basin, workforce reductions and consolidation of distribution centers. In addition, the company is undertaking prudent steps to optimize inventory levels in accordance with sales trends.

Hanesbrands Inc. engages in the design, manufacture, sourcing and sale of apparel essentials for men, women and children in the U.S. and internationally.

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