Why the Pacific Brands Limited share price is up 25% this year

Shareholders of Pacific Brands Limited (ASX: PBG) are having a wonderful 2016. While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may be down 2% year-to-date, Pacific Brands has put on a whopping 25% gain.

Pacific Brands is the owner of well-known brands such as Bonds, Berlei, Jockey, Tontine, and Sheridan. In its half-year report the company posted a sales increase of 8.6% to $425.3 million compared to the same period last year.

On the bottom line things were even more impressive. The underwear and bedding retailer reported that underlying net profit climbed an incredible 44% to $24.3 million year-over-year. This sent the share price rocketing by almost 10% on the day, and it hasn’t looked back since.

The cause of the great result was the strong performance of all its major brands. The company’s biggest is the Bonds brand, which accounts for 47% of total sales. It produced a massive 16% growth in sales over the same period last year.

Its next biggest is the Sheridan brand, contributing 24% of total sales. The luxury bedding brand also performed strongly, posting 8% growth over the same period last year. I expect Sheridan to continue to perform strongly in the second-half due to the booming housing market.

Approximately 80% of its cost of goods sold is settled in US dollars. Much like companies such as Harvey Norman Holdings Limited (ASX: HVN), Reject Shop Ltd (ASX: TRS), and Myer Holdings Ltd (ASX: MYR). This causes strong headwinds when the Australian dollar weakens.

Pacific Brands has tried to offset this with price increases, hedging, and working closely with suppliers on cost reduction opportunities. Things seem to be going well with this as it managed to increase its gross margin from 48.5% to 49.9% in the first half of fiscal 2016.

As the company continues to open more stores and concession sites, I believe the strong level of growth it has been producing can continue for some time. According to CommSec, analysts are expecting Pacific Brands to grow its full year earnings by an average of just less than 20% per annum for the next two years.

While many of the gains may have been missed now, I believe the shares are still reasonably priced with the potential for further upside. Its shares are trading at an estimated forward price-to-earnings ratio of 18, compared to the consumer discretionary industry average of 21 times estimated forward earnings. For this reason I believe Pacific Brands would be a good addition to your watch list at the very least.

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Motley Fool contributor James Mickleboro 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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