Hanesbrands Inc. (HBI), Maidenform Brands, Inc. (MFB): An Unmentionables Merger That’s a Natural Fit

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Hanesbrands Inc. (NYSE:HBI) is acquiring Maidenform Brands, Inc. (NYSE:MFB), another women’s underwear maker, and the former’s “lift and separate” motto could now be lift and unite. This will bring much needed exposure to the average size woman for Hanesbrands, whose strength has always been the full figured woman.

Access to new markets

Hanesbrands Inc. (NYSE:HBI) is paying  $575 million for Maidenform Brands, Inc. (NYSE:MFB), a 29% premium, but believes the advantages of cost savings and Maidenform’s shapewear business (think privately held success story Spanx) will be quickly accretive within the first year. Maidenform earned $600 million in revenue in 2012, with 57% coming from average size bras and 35% from shapewear, both areas in which Hanesbrands was lacking. Maidenform’s revenue has been fairly stable over the last few years, hovering around that $600 million range.

Hanesbrands Inc. (NYSE:HBI)Hanesbrands Inc. (NYSE:HBI) owns bra brands Playtex, Wonderbra, Barely There, Just My Size, and Bali as well as Hanes men’s, women, and children’s underwear, and L’Eggs hosiery. Hanesbrands also owns outerwear brands Champion and Duofold. The company’s website says it is number one in market share for fleece, socks, men’s and kids’ underwear, T-shirts, and sheer hosiery and number two for bras and panties.

The Maidenform Brands, Inc. (NYSE:MFB) lines currently contracted out for third-party manufacture can be made in-house at Hanesbrands. This synergy is expected to lift earnings per share by 15%.

Hanesbrands Inc. (NYSE:HBI) is trading at 52-week highs as the market loves this merger, bringing further economies of scale to Hanesbrands and more opportunities to challenge rivals Fruit of the Loom, owned by Berkshire Hathaway Inc. (NYSE:BRK.B), privately held Jockey, and Victoria’s Secret, owned by Limited Brands, Inc. (NYSE:LTD). Hanesbrands plans to challenge Victoria’s Secret  globally, too, with plans to take Maidenform Brands, Inc. (NYSE:MFB) to Asia.

Intimate apparel is an $11 billion annual business in the U.S. alone, $16 billion worldwide. Most adult women in the U.S. own nine bras and regularly wear six. Another interesting factoid is that since the first patent for the modern brassiere was awarded in 1914, now 95% of Western women wears bras. Girls are starting to wear bras ever earlier.

Limited Brands, Inc. (NYSE:LTD), with its PINK line, which debuted in 2004, is the beneficiary of that trend. PINK, a line aimed at college age girls, has found a customer in her younger tween to teen sister. The PINK line is doing so well that the company has been opening standalone PINK stores and expects its $1.5 billion PINK business to double by 2015. The company is already heavily promoting its back-to-school PINK line on social media and by e-mail. This younger demographic is  where Hanesbrands Inc. (NYSE:HBI) has struggled, but the Maidenform Brands, Inc. (NYSE:MFB) merger should attract younger customers.

Another advantage Limited Brands, Inc. (NYSE:LTD) has over Hanesbrands Inc. (NYSE:HBI) is thanks to Oprah Winfrey, who has campaigned for several years on the benefits of professional bra fitting. While Hanesbrands bras are sold in department stores at which fitting consultants are available, most of its intimates are sold at big box stores where they aren’t. Maidenform Brands, Inc. (NYSE:MFB), as a slightly higher end line, will improve that with most of its intimates sold at department stores.

Limited Brands, Inc. (NYSE:LTD)’ Victoria’s Secret stores are more of a destination experience where girls and women can buy fragrance, cosmetics, and the popular Pink line which also features hoodies, graphic T’s, yoga pants, and accessories. Women can also receive fitting advice at the bricks and mortar stores.

Limited Brands is trading at a lower P/E of 20.14 than Hanesbrands Inc. (NYSE:HBI), but its PEG is higher at 1.68. It also offers a yield of 2.30% and it should be noted that over the last five years, that dividend has grown by 64.92%. Limited Brands, Inc. (NYSE:LTD) hit a 52-week high recently, closing at $53.68 on July 26, but the stock has underperformed the S&P, only up 13.01% over the last year.

Besides Victoria’s Secret and PINK, Limited Brands, Inc. (NYSE:LTD) owns La Senza, Bath & Body Works, and high end retail store Henri Bendel for over 3,300 stores worldwide as well as the much-admired catalogs and e-commerce sites. The company has strong insider conviction with CEO and founder Leslie Wexner holding over 17 million shares.

Hanesbrands Inc. (NYSE:HBI)’ stock has risen 97% in the last year and the P/E is stretched out at 24.78. However, the PEG is only 1.13 and price/sales is 1.29. It does offer a 1.50% yield. Analysts expect a 15% five year EPS growth rate but that is mostly in line with its industry’s 14.09% rate.

Hanesbrands Inc. (NYSE:HBI) also competes against Ascena Retail Group Inc (NASDAQ:ASNA) with its Lane Bryant and Catherine’s stores and websites that offer apparel and lingerie for full-figured women.

Gross margins are choppy at all three companies, with Ascena Retail Group Inc (NASDAQ:ASNA) having the highest gross profit margin at 57.59% and Hanesbrands the lowest at 34.62%.

LTD Gross Profit Margin Quarterly data by YCharts

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