Is Pacific Brands Limited a bargain buy?

Pacific Brands Limited (ASX:PBG) has been adjusting its business model to lift performance. The new changes have improved its growth prospects, making the stock look cheap at current prices.

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Pacific Brands Limited (ASX: PBG) has been in the news over the last few years for all the wrong reasons. Shifting manufacturing overseas, laying off workers, disappointing sales, selling under-performing businesses and changes in senior management were some of the reasons for the adverse publicity.

However, recent operating results for the full year ending June 30 2015 have revealed a company making progress towards improvement. After making major strategic changes, Pacific Brands now has a portfolio of solid brands, with excellent growth potential.

Pacifc Brands Split

As evident from the above chart, 69% of the total sales are generated by only two key brands. Men’s and women’s underwear brand “Bonds” and a bed linen and towel brand “Sheridan”. Other smaller brands account for the remaining 31% sale.

By far the biggest strength of the company lies in these two major brands, Bonds and Sheridan. Both are well recognised and continue to grow strongly.

Underwear brand Bonds posted solid growth in sales for the full year ending June 30 2015. Total sales increased by 13% mainly driven by dedicated Bonds only retail stores with strong comparable store sales rising by over 20%. Sales were flat in the Bonds wholesale division. The strong growth in sales at Bonds retail outlets is solid proof of the strength and attraction of the Bonds brand. Plans are in progress to increase the number of Bonds retail outlets, which currently stand at 79.

The Bed Linen and Towel brand, Sheridan, is the other jewel in Pacific Brands’ crown. Total sales for the Sheridan brand increased by 15%, and again dedicated Sheridan retail outlets were the major contributor to sales growth. Sales at retail outlets were up by 19.4%, whereas the wholesale channel reported a minor decline in sales. Sheridan currently has 143 outlets, and more new outlets are being planned for the future.

Pacific Brands now has a strong balance sheet, and is debt free for the first time in its history. The strategic reviews have helped the company get rid of underperforming assets and brands. It is now focusing its efforts on the key brands Bonds and Sheridan and a few smaller brands.

It is a valuable company now, with no debt, growing brands and a clean balance sheet, which makes it a potential takeover target.

Foolish takeaway

So a Foolish investor may consider adding Pacific Brands to their portfolio, not only because the stock price may rise from a possible takeover offer, but mainly because the stock has solid upside potential in my opinion.

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Motley Fool contributor Qaiser Malik has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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