In the apparel sector, like many others, scale is an important edge over smaller competitors. In this article, I will look into three companies in the clothing industry, Hanesbrands Inc. (NYSE:HBI), Gildan Activewear Inc (USA) (NYSE:GIL), and Coach, Inc. (NYSE:COH), that provide compelling growth prospects for years to come and trade at reasonable valuations relative to peers, thus standing as good options you should consider adding to your portfolio.
Large volume sales and low cost structure
Hanesbrands Inc. (NYSE:HBI) is a $4.9 billion market cap company that holds a very popular and strong brand portfolio that includes Hanes, Champion, Playtex, and Wonderbra, among others. Unlike many of its closest competitors, Hanesbrands focuses on high-volume sales, mostly selling apparel basics. The essential nature of its products makes it less susceptible to decreased spending power among consumers, fashion cycles, and change in shopper tastes and trends.
Another strong point for this company is its decreasing cost structure. Over the last year, supply chain realignments and transfer of operations to low labor-cost countries, particularly in Asia and Central America, have resulted in substantial savings and synergies. Furthermore, management’s efforts to generate substantial cash flows will complement the expense reductions, driving earnings growth in the upcoming quarters.
The company’s focus on core, wide margin sectors was intensified even further after the sale of its European imagewear division a year ago. Turning its attention fully to the U.S. market, Hanesbrands Inc. (NYSE:HBI) acquired Gear For Sports, adding value to its specialized apparel portfolio and providing encouraging early results.
After reporting strong first-quarter results, with margins widening considerably on the back of the company’s Innovate-to-Elevate initiatives and lower cotton costs, the stock still trades at 16.4 times earnings, at about one-fourth the industry average. I’d recommend buying Hanesbrands Inc. (NYSE:HBI) not only for its valuation and long-term prospects, but also for its strong cash position and balance sheet, all of which prove that the consensus annual growth rate fixed at 14% for the next five years could even look like a conservative calculation.
Three key decisions have increased potential
Gildan Activewear Inc (USA) (NYSE:GIL) is a dominant, focused apparel producer, that, similar to Hanesbrands Inc. (NYSE:HBI), derives most of its revenue from wholesale transactions. As stated by Morningstar analyst Peter Wahlstrom, “Gildan achieved its success in this market by making three important decisions: Focus on high-volume products, manufacture in low-cost markets, and invest heavily and consistently in the latest manufacturing technology.”
Actually, its operations in Central America have proved to be one of the biggest advantages for this company. By producing in low labor-cost markets that are still close to the U.S., the firm has gained an edge over its peers operating in Asia due to lower shipping costs and beneficial tariff regimes. Offering quality products at low prices, the firm is poised to grow in the upcoming years, especially as it moves into less commoditized and higher-performing products that could lead to structural improvements in both the top and bottom lines (Morningstar).
To further establish the brand and its recognition, Gildan Activewear Inc (USA) (NYSE:GIL) has been focusing its efforts on expanding the distribution of its branded products, a segment that grew 27.4% year over year, mainly on the back of the Anvil acquisition. The company is also looking to establish its dominance in the sock sector, where a highly fragmented production context provides plenty of upside for a firm this big, mainly since retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT)demand substantial production volumes.
These two factors — the branded apparel and sock segment expansion — make considerable growth opportunities available for years to come. Already offering wide margins — an operating margin of 13.5% and a net margin of 13.1%, both considerably above average — these should further improve on account of the aforementioned advances.
Trading at 18.1 times earnings, a 71% discount to the industry mean, and offering a projected average annual growth rate above 11% for the next five years (Zacks), I’d recommend buying this stock.
A well positioned brand
Coach, Inc. (NYSE:COH) is another interesting investment opportunity. Holding an established brand with considerable pricing power and a fair moat that helps keep competitors out while trading at 15.6 times its earnings, about a 9% discount to the industry average, I’d recommend buying this stock. Its cost effective sourcing model and distribution advantages have provided the firm a big advantage over its peers. While its peers faced cost pressures, Coach focused its efforts on overhauling its sourcing model, thus maintaining high margins. Currently, the firm offers substantially above-average margins and returns as well as long-standing strong financials.
Looking forward, store remodels, which have proven profitable in the past, should contribute strongly to productivity, sales, and margins. Same can be said about overseas markets; penetration in Japan and China has been pretty successful (especially if compared to its competitors), although these markets still offer plenty of room for expansion.
Its recent incursion in Europe should also help drive growth in coming years. Further expansion opportunities are provided by Coach, Inc. (NYSE:COH)’s men’s apparel segment and its online business, both of which are expected to deliver incremental results in the years to come.
Moreover, its balance sheet is something to love. With a substantial cash balance and zero long-term debt, cash is available for spending. An active management of cash flows has been improving shareholders’ value and returns while the company pursued strategic acquisitions. This is a trend that seems likely to continue in the years to come. Yielding 2.34% in the form of dividends, trading below the industry average valuation, offering great financials and growth prospects, and showing effectiveness in keeping competitors at bay, I’d recommend buying and holding this stock.
Bottom line
Big apparel producers and distributors have plenty of growth opportunities, as their scale and brand recognition secure and support their leading positions. Although all of the above mentioned companies provide plenty of upside potential for shareholders, I’d go with Hanesbrands Inc. (NYSE:HBI), which is expected to deliver the highest growth rate among these three while trading at the cheapest valuation. I
ts long-term prospects and its strong balance sheet make it a worthy investment to add to your portfolio.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach.
The article 3 Apparel Retailers for Your Portfolio originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
