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Hanesbrands Inc. (HBI), The Gap Inc. (GPS), Carter’s, Inc. (CRI): Are These Apparel Businesses Good Buys?

According to Barron’s, FBR Capital Markets has rated three specialty retail and apparel businesses, including The Gap Inc. (NYSE:GPS), Carter’s, Inc. (NYSE:CRI) and Hanesbrands Inc. (NYSE:HBI), as Outperform. Indeed, all three businesses have beaten the S&P 500 by wide margins. Hanesbrands is the best performer, with a year-to-date gain of 78.3%. Gap ranked second with a 48.9% gain. Carter’s returns come in at more than 31%, while the S&P 500’s market gain is much lower at around 19.7%.

A high-growth cash cow

The Gap Inc. (NYSE:GPS) has delivered a good historical returns for its shareholders. In the past five years, Gap has managed to grow its operating margin by more than four percentage points while its EPS has experienced 17% compounded annual growth. The business has tons of cash, producing nearly $6 billion in free cash flow. Moreover, it has returned as much as much as $7.5 billion to shareholders via both dividend payments and share repurchases.

The Gap Inc. (NYSE:GPS)In terms of the business model, The Gap Inc. (NYSE:GPS) has been on the way to move from specialty stores to higher-return outlet channels. In the period of 2007 through 2012, the number of the company’s specialty stores declined from 1,056 to 764 while the amount of Gap outlet stores rose from 193 to 226. For the full year 2013, the company targets having 700 Gap specialty stores and around 250 outlet stores.

Looking forward, The Gap Inc. (NYSE:GPS) expects to grow its revenue with healthy merchandise margins and efficient cost management. It also plans on returning excess cash to shareholders.

In 2013, its diluted EPS is expected to come in between $2.52 and $2.60 per share. Moreover, investors might be excited about the company’s plan to return $1.3 billion in cash to shareholders via both share repurchases and dividends. The Gap Inc. (NYSE:GPS) is trading at $46.30 per share, with the total market cap of $21.6 billion. The market values the company at 7.9 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). The current dividend yield stands at 1.3%.

A leader in children’s apparel

Carter’s, Inc. (NYSE:CRI) is the owner of two children’s apparel brands: Carter’s and OshKosh. While Carter’s targets children from ages newborn to seven, OshKosh is for children from ages newborn to 12. In the U.S., Carter’s sells most of its products through 17,000 wholesale locations, 581 company-owned stores and the company’s websites. The company reported that the Carter’s brand has the number-one position in the U.S., with a 13.9% market share while the market share of OshKosh is around 2.6%.

In the second quarter, Carter’s, Inc. (NYSE:CRI) experienced decent growth in its top and bottom lines. While its sales increased by 10% to $517.9 million, its adjusted EPS rose by 24% from $0.37 in last year’s second quarter to $0.46 in the most recent period. A 10% sales increase was driven by Carter’s retail, e-commerce and international businesses. For the full year 2013, the company expects to grow its net sales by 8% to 10%, while adjusted EPS is expected grow in the range of 15% to 17%.

The company estimates that it will spend around $200 million in capital expenditures for initiatives such as a new distribution center, store remodels and a new Atlanta-headquarters facility. Its operating cash flow might come in at around $175 million. Carter’s, Inc. (NYSE:CRI) is trading at $73.50 per share, with the total market cap of around $4.4 billion. The market values Carter’s quite expensive, at 12.1 times its trailing EBITDA, with the dividend yield at 0.9%.

The inner-wear apparel play

Hanesbrands Inc. (NYSE:HBI) has delivered the highest year-to-date gain for shareholders. The company is the designer and manufacturer of several apparel brands, such as Hanes, Bali, Playtex and Wonderbra. In the most recent period, the company generated most of its revenue from the inner-wear segment, with $2.3 billion and accounting for 51.5% of the total 2012 revenue. The inner-wear segment was also the biggest profit contributor, generating nearly $397 million in profits in 2012.

Recently, Hanesbrands Inc. (NYSE:HBI) offered to acquire Maidenform Brands, Inc. (NYSE:MFB) at around $23.50 per share, with the total enterprise value of nearly $575 million. The acquisition of Maidenform will allow Hanesbrand to grow its market share in the women’s and children’s apparel wholesale markets from around 5.4% to 6.4%. Richard Noll, Hanesbrands’ chairman and CEO commented:  “This business is a natural fit into our core business and meets all of our acquisition criteria.”

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