Hanesbrands in-sourcing to cut costs at Pacific Brands
Plugging in to Hanesbrands' large-scale, low-cost global supply chain is expected to drive down unit costs at Pacific Brands by at least 20%With agreements for two acquisitions totalling around $1bn in the space of just 21 days, Hanesbrands is positioning itself as the largest basic apparel company in the world.
And the power of its company-owned supply chain is seen as the catalyst for substantial savings.
Shares in the T-shirt and underwear maker on Thursday (28 April) surged by up to 9.5% after it agreed to buy Australian rival Pacific Brands, which owns underwear and bra brands Bonds and Berlei, for around $800m.
The deal will make an immediate contribution to earnings, and deliver around $100m in additional operating profit within three years.
But significantly Hanesbrands, whose products include categories ranging from T-shirts, bras and panties to socks, hosiery and activewear across brands such as Hanes, Champion, Playtex, Maidenform and Wonderbra, also expects to drive substantial savings by plugging in to its large-scale, low-cost global supply chain.
Pacific Brands sources most of its underwear and intimate apparel production from third-party manufacturers, while Hanesbrands makes more than 80% of its apparel products through a network of large-scale company-owned manufacturing facilities or those of dedicated contractors in Central America, the Caribbean basin and Southeast Asia, particularly Vietnam and Thailand.
And it estimates that better manufacturing efficiencies and incremental scale can drive down average unit costs by 20% or more over three years.
"We see a significant synergy opportunity by plugging their underwear business into the Asian cluster of our company-owned supply chain, especially in Vietnam," Hanesbrands said in a briefing following the acquisition announcement.
Nearly 40% of the company's annual unit volume of nearly 2bn units is produced in Asia, where Hanesbrands employs over 12,000 people – 8,500 of whom are based in Vietnam, where the company is thought to be the largest US employer. With that scale, Vietnam is also the central hub of its Eastern manufacturing cluster, where it benefits from the combination of lower wages combined with large-scale efficient factories.
The company plans to continue to build capacity in Vietnam, adding capabilities to produce an even a wider variety of products over the next few years. And of course it also believes it will have "an incredible operating advantage" if the proposed Trans Pacific Partnership (TPP) being negotiated between 12 countries including the US and Vietnam, goes ahead.
But the opportunities with Pacific Brands also go beyond "the typical 15-20% cost reduction we expect to achieve by in-sourcing only their high volume styles. Their products are very similar to our Hanes Europe products, which means as we harmonise these products we'll increase the total number of high volume styles that can be brought in-house.
"In other words, this acquisition not only drives manufacturing synergies on its own, it also creates incremental synergy benefits for prior acquisitions, which underscores the power of our company-owned supply chain."
The deal will also add to Hanes' global product design, development and innovation capabilities that span the Americas, Europe and the Pacific Rim.
"In the span of ten years, we have transformed the company through acquisitions and our Innovate-to-Elevate initiatives," explained Hanes CEO Richard Noll. I2E underpins all aspects of the business through a combination of powerful brands, innovative products and a global supply chain designed to deliver them.
Supply chain the "secret sauce" for Hanesbrands
"We have tripled operating profits and expanded from a $4bn company concentrated in the US to a $7bn global underwear and activewear powerhouse spanning the Americas, Europe and Asia-Pacific. This foundation will serve as a catalyst for even further growth and value creation for the foreseeable future."
Pacific Brands will be Hanesbrands' first major operation in the region, and immediately gives it a leading market share in underwear and intimate apparel in Australia and New Zealand.
The business, which has three units – Underwear, Sheridan and Tontine & Dunlop – has undergone significant restructuring over the past two years to streamline its portfolio to focus on the core underwear and Sheridan homewares businesses.
And the work seems to be paying off, with the Melbourne-based company in February posting an interim net profit of AUD24.3m (US$17.2m), its highest since 2012. It also upped its full-year guidance thanks to sales growth across all major brands.
Hanes says it intends to divest the non-core Tontine pillow business and Dunlop Flooring business, which account for 12% of sales and operating profit.
Of the core business, the underwear unit accounts for three-quarters of sales and includes underwear, bras, socks, hosiery, babywear and outerwear. It is currently executing growth strategies to reshape its wholesale business, expand distribution, and increase retail and online sales. The group operates more than 150 company retail stores and retailer shop-in-shops.
Underwear has a three-year compound annual sales growth rate of 7%, with Bonds holding the number one market share for men's underwear, women's underwear, children's underwear, babywear and socks, as well as the number three position in bras. The Berlei brand of premium bras sold in department stores is second in overall bra market share and number one in sports bras.
Bonds sales have increased 40% since 2013, with retail sales at Bonds stores increasing 39% in the first half of fiscal 2016, driven by store openings and 22% comparable-store sales growth.
And over the next three years, once synergies are fully realised, Pacific Brands is expected to contribute over US$700m in revenue and over US$100m in operating profit each year.
Hanesbrands latest acquisition trail began earlier in April when it took full control of the Champion athletic apparel brand after agreeing to buy Champion Europe, which owns the trademark for the Champion brand in Europe, the Middle East and Africa.
Hanesbrands takes control of global Champion brand
And according to Noll, the group has already added $120m in operating profit from completed acquisitions such as Maidenform, Hanes Europe Innerwear and Knights Apparel, and expects to add an additional $170m from synergies.
Acquisitions boost Hanesbrands Q1 profit
Champion Europe and Pacific Brands are expected to add to these returns by contributing an additional $125m in combined operating profit once full synergies are achieved.
"With eight acquisitions in less than six years, our Innovate-to-Elevate and acquisition strategies have significantly remade our company since 2010," Noll notes. "Back then, there were only five countries where we held the number one or number two market position.
"We had roughly $4bn in sales, only 11% of which came from outside the US, roughly $381m in operating profit, a 9% operating margin and roughly $133m in cash flow from operations.
"Going forward, if you take our current 2016 guidance and layer in the full synergies from all of our acquisitions, including Champion Europe and Pacific Brands, we'll be the largest basic apparel company in the world with the number one or number two market position in 12 countries. We'll have more than 30% of our revenue in international markets.
"Annually we expect to have $7bn in sales, over $1.1bn in operating profit, a mid-teens operating margin and over a billion dollars in cash flow from operations. That's a remarkable change.
"But the reality is, we've only begun to hit our stride. Given the scalability our business model and the potential of our acquisition pipeline, there is ample opportunity to continue to create value for many years to come."
Michael Binetti, analyst at UBS Investment Bank, describes the Pacific Brands deal as "a key acquisition" and "a big step" for Hanesbrands.
"In our view, this combination makes HBI the first legitimately global basic apparel manufacturer with 30% of revenues from International (up from 11% just three years ago)."
He also notes that the acquisition "reduces HBI's exposure to risks like high exposure to retailers like Walmart and Target in the US that have been prone to destocking basics categories in recent years.
"Adding Pacific Brands to the HBI portfolio diversifies away this risk – while growing HBI's total addressable market (re-emphasising that geography is no barrier) and proving it can operate as a truly global company."