Hanes Up?

Last Friday, Geoff Gannon wrote briefly about his positive opinion on Hanes Brands(HBI). Gannon noted “I’ve yet to find someone who agrees with me on Hanes. I’m not sure if that’s a good sign or a bad sign.”

Well, I’m not sure if it’s a good sign or a bad sign either, but I’ll throw my hat in the ring as agreeing with Gannon on Hanes.

The company was saddled with a large amount of debt as part of its spinoff from Sara Lee(SLE). At almost $2.5 billion,debt is roughly equivalent to its current market cap at Friday’s close of $26.10. Sara Lee was also kind enough to leave Hanes with an unfunded pension liability of over $200 million.

Despite this heavy burden, the company has begun to make strides in its first few quarters as a public company. It has funded its pension liability with over $80 million which should be sufficient for fiscal ’07 and allow it to pay down debt over the balance of the year.

Though positive, the company’s earnings have been impacted not only by a large interest expense,but also by serial restructuring charges. Though like The Stalwart, I worry that moving out of the Dominican Republic in search of lower costs is a short term fix at best, I believe the company’s plan can be effective if it rationalizes the huge number of plants that it currently operates.

The business itself is a solid business. Hanes owns some of the most recognized brands in both innerwear(Hanes,Playtex, Bali,barely there,Wonderbra,L’eggs) and outerwear(Champion). It has excellent distribution for its products. While it will take several quarters to start seeing benefits(I don’t expect anything spectacular this Thursday), this is a company that can fairly quickly establish an accelerating virtuous cycle of increased profitability as it deleverages.

Anyone else care to agree or disagree with Mr. Gannon and I?

Disclosure: I hold a position in HBI and SLE