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I like the HBI story, but I think expectations are too high headed into 3Q. Let’s not forget that the average EPS surprise for HBI is +40% over the past 6 quarters. This qtr won’t be different.

My model is shaking out about 20% below the Street for the back half. I think that the top line is fine. Volume trends have been decent enough in mass channels, and I think that price increases from Wal*Mart are coming through at a magnitude needed to offset higher cotton costs through mid-2009. It’s the non-commodity costs that are a true moving target for this company. A simple tweak in labor or ad spending accounts for wild swings in EPS. That’s why my Jr Analyst Zach Brown cranked out the file below, which is a complete sales and margin walk of all the puts and takes over each of the past six quarters. It highlights some interesting points for the upcoming quarter.

1) On the top line, 3Qand 4Q07 were the two biggest top line quarters of the year.

2) In 3Q HBI was nearing the end of a 1-year period where Champion ramped up in Sporting Goods channels.

3) 3Q07 started a 4-quarter period where International sales accelerated from no growth to double digit. Now FX is going the wrong way and growth comps get tough.

4) HBI is comping against 375bp in combined labor and manufacturing cost savings margin enhancement. Remember that the company let go 150 employees at corporate in late summer ’07. Now it needs to find a new bag of tricks.

5) 250bp of this went to fund the write-off of obsolete inventory. But net/net, that still leaves HBI 125bp in the hole this quarter.

Check out Zach’s table below for more details (click on each one for an enlarged picture with better detail).
If the company does, in fact, miss and/or guide down, I’m likely a buyer. I like the longer term margin progression. This is one of the few companies left in this industry that can offshore its production and free up what I think is 8 points of margin to be used as an offensive weapon to grow the business, pay down debt, and improve returns.