HBI: There’s More Downside To Go

 

Even with today’s blow up, people are currently paying for uninterrupted growth today at HBI. Not only is the growth suspect, but the cadence is as well. We should see the top line growth rate erode meaningfully throughout the next 6 quarters. The risk/reward here is NOT favorable.

 

 

Not a surprise with HBI’s reaction to its print today. Yes, it was an in-line quarter, but we’re starting to see cracks for which its valuation left little margin of error. We’ve been concerned about HBI for about two quarters now, and have had it near the top of our short list more recently (along with JC Penney, Carter’s, Gildan, and more recently, Under Armour).

 

Our conclusion on HBI is that it could be a very good story, if the management team realizes what it is and manages its playbook accordingly. They’ve been executing very well with their factory consolidation – to an extent that no one (except Gildan) has done so in the past. The problem, however, is that HBI is trying to be a growth company, instead of a ‘steady-but-slower-growth top-line with meaningful cash flow and de-levering balance sheet’ story. More specifically…

 

Long  term top line growth is should be 2—4%. The category grows 1%. Then they take 1-3% share as they use proceeds of factory cost reductions to pass to retailers and consumers. But they’ve been printing top line of around 9% for the past 6 quarters. Much of that (5-6%) has been shelf space gains at Dollar Stores, WMT and TGT. But then, as they started to anniversary growth, what did they do?  They started doing deals. One was big, the other small. But they both happened within a quarter of one another.  Remember, the pitch upon the spin-off was lsd top line, hsd ebit, and mid-teens eps due to delevering the massive $2.6bn debt load that Sara Lee dropped on it. But instead of de-levering and paying underfunded pension liability, they’re doing deals?  In addition, CFO Lee Wyatt just resigned. Our sense is that Wyatt and Knoll simply did not agree on strategy.  Wyatt wanted to improve the balance sheet. Knoll wants to pursue an aggressive growth strategy – even if they have to buy growth.

 

People say it is cheap on earnings, which is absurd. There’s no reason why an asset-intensive vertically-integrated apparel company with $2bn in debt should be valued on anything other than EBITDA. It’s trading at about 8.2x EBITDA today.  When vertically integrated apparel assets have traded hands in the past, they’ve gone for 3-5x EBITDA (ask the folks at VFC who had to give away their ops several yrs back at 4.6x EBITDA). If HBI trades below 4x EBITDA, there’s no equity value left.

 

People are currently paying for uninterrupted growth today at HBI. Not only is the growth suspect, but the cadence is as well. We should see the top line growth rate erode meaningfully throughout the next 6 quarters – unless HBI does more deals. That’s possible, but we suspect that the market will start to see through this.

 

The risk/reward here is NOT favorable.

 

Here are some of the more notable statements from management on the call.

  1. The volatility in this model is picking up.
    • Moved from steady outlook to more volatility
    • They’re looking for a price hike in Q4 to offset increase costs in the first half of 2012.
    • Looking for negative price elasticity in back half
    • Cutting back on unit inventory levels to manage inflation, and units are falling off less than prices going up
    • But...HBI leads on price which allows temporary gaps in pricing against competitors
  2. They’re banking on MORE shelf space gains
    • Space gains happen again after back to school and into holiday
    • lot of programs across a lot of retailers in all categories
    • Looking for new offerings throughout a whole host of accounts (“lots of wins in lots of places”)
  3. On channel inventory levels, Knoll noted that some channels are up, and some are down. But the ones that are having the most success are those that are being the most liberal with inventory build. (This synchs with our view that retailers overall need to accelerate inventory growth to command any kind of growth multiple).
  4. Inflation outlook
    • Cotton went as low as a dollar – that was too low
    • Need to be above a dollar and a quarter to maintain acreage against other crops
    • Retailers don’t want low cotton as it will lead to negative comps in the back half of 2012

 

HBI: There’s More Downside To Go - HBI S 7 11

 

 

 

 



Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more