Inelegant Investor has a post on Hanes. The post also links to The Stalwart.
Here are a few things to keep in mind with Hanes.
Two major players, Hanes Brands (HBI) and Fruit of the Loom (a Berkshire Hathaway subsidiary), control most of the U.S. underwear market.
Hanes considers itself to be in the "apparel essentials" business which is to say the "t-shirts, bras, panties, men's underwear, kids' underwear, socks, and hosiery" business. In 2005, the U.S. apparel essentials market was about $44 billion. Apparel essentials have been growing faster than the overall apparel industry – still this isn't a fast growing market. You're unlikely to see sales growth exceed 5%.
Hanes divides its business into four segments: Innerwear, Outerwear, Hosiery, and International. The company doesn't do much international business. Hosiery is a dying business with good margins. It generates cash; but, it's going the way of the Dodo – fast.
That leaves innerwear and outerwear. Together these two segments account for something like 85% of Hanes sales.
Innerwear is underwear – and yes, it's just as profitable by any other name. This segment is the heart of the company. It generates more than $2.5 billion in sales and plenty of free cash flow. Apparently, you can achieve low double-digit profit margins in this segment, which is impressive given the volume involved.
The innerwear business is a ridiculously high volume business. Looking at it solely in dollar terms doesn't make that clear enough. So, let me give you some unit numbers.
Hanes manufactures and sells a billion socks a year – literally. That's 500 million pairs of socks a year. Even the T-shirt business is high volume; Hanes produces about 400 million T-shirts a year.
The company's biggest customers have high volume needs. Wal-Mart accounts for nearly 30% of the company's sales. Does Wal-Mart have leverage over Hanes? Maybe. Does Wal-Mart have many other options? No. Hanes supplies them with well over $1 billion in product each year. It's a cheap product that can only be produced in such volumes at competitive prices by a few companies on the planet. In the U.S., your choices are basically Hanes or Fruit of the Loom.
Furthermore, customers don't contract this stuff. They simply buy what they need. The excess inventory costs on these high volume products could easily eliminate all the profit for any company that isn't accustomed to producing on this scale. Hanes averaged total inventory reserves of just under $100 million a year over the last three years.
