Forget Lululemon, Hanesbrands Is the Activewear Stock to Buy Right Now


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Activewear retailer lululemon athletica (NASDAQ: LULU) impressed investors on Wednesday with a strong fourth-quarter report . Same-store sales jumped 6%, while direct-to-consumer sales soared 37%. Those results drove the company’s total revenue up 26% year over year, ahead of analyst estimates.

This good news pushed shares of Lululemon to an all-time high on Thursday. But while the company’s results were certainly impressive, the stock carries a lofty valuation that leaves little room for error. Shares of Lululemon now trade for around 43 times adjusted earnings.

Lululemon can still generate market-beating returns if rapid earnings growth continues. But that requires the brand to remain in vogue with consumers, something that the company has struggled with at times in the past .

Women exercising.

Image source: Lululemon.

There’s another fast-growing activewear brand that’s putting up impressive numbers, and it’s part of a company that trades at a depressed valuation. I’m talking about Champion, owned by Hanesbrands (NYSE: HBI) . If you’re looking to bet on the activewear trend but unwilling to pay a hefty premium for Lululemon, Hanesbrands is the answer.

A fast-growing brand

Hanesbrands is best known for Hanes, a leading brand of men’s underwear, socks, and other basic apparel. But activewear is becoming an increasingly important part of the business. Activewear accounted for 37% of total revenue in 2018. Hanesbrands sells some activewear under the Hanes brand, but its core activewear brand is Champion.

Champion is a 100-year-old brand that’s seeing a surge in popularity. While Hanesbrands’ innerwear business has been stagnating, growth in activewear, and Champion in particular, has helped pick up the slack.

Champion generated $1 billion of sales back in 2017. Its growth since then has been impressive. Champion revenue soared 36% in 2018, and Hanesbrands expects it to grow another 29% in 2019. The company has set a goal of reaching $2 billion of Champion revenue by 2022, and it’s ahead of schedule so far.

The Champion logo inside of a store.

Image source: Champion.

These numbers exclude C9 by Champion, a line of Champion-branded clothing sold exclusively by Target . Target has opted to drop that line after its contract ends in 2020, likely to focus on its own private-label brands. In the trailing-12-month period prior to Target’s decision, C9 generated an additional $380 million of revenue for Hanesbrands.

Losing the C9 contract stung, but the Champion brand isn’t missing a beat. Hanesbrands set its $2 billion revenue goal prior to the C9 news, and the brand should have no trouble hitting that target even without that additional revenue.

A very cheap stock

Hanesbrands overall isn’t growing all that fast, but the company did have an exceptional fourth quarter . Organic sales grew by 6% adjusted for currency, the best result in years. The domestic innerwear business trod water while Champion and the international segment grew.

Hanesbrands isn’t a growth company like Lululemon, so it shouldn’t be priced like one. But the market has gotten way too pessimistic, especially given the long-term growth potential of Champion. Hanesbrands stock trades for just 10 times the company’s earnings guidance for 2019. And that’s after a 40% surge so far this year. The stock was a screaming bargain in December.

You could pay more than 40 times earnings for market darling Lululemon, or you could pay just 10 times earnings for beaten-down Hanesbrands. The choice seems clear to me.

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Timothy Green owns shares of Hanesbrands. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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