HBI’s stock not being down significantly is one thing, but GIL being UP? People aren’t contextualizing the real dynamics here. Both of these names look very risky (with minimal reward) to us.
Recall that HBI is blaming a $0.30 hit to earnings on weakness in something that is only 8% of sales and profits. That same number is about 70-80% of sales for GIL. We’re talking about $370mm for HBI, of which HBI noted that ¼ is what it refers to as ‘highly competitive’. That’s where it competes most heavily with GIL. This is $95mm that runs at a loss. Our sense is that for it to get to a point where HBI would let it go, it would need to be at about a -10% margin (this is usually a loss leader linked to other business).
GIL definitely has a more efficient cost structure, as well as the benefit of a zero percent tax rate. Let’s say that in a best case scenario, they stole this business from HBI and were somehow able to do so at a +10% margin. At best, we’re talking $0.04, or 3% on this year’s numbers, and less than 2% of the consensus 2013 estimate. But at a $25 stock and 12x P/E on next year’s estimates, the Street is already looking for 2013 earnings to nearly double for GIL.
This also assumes that HBI did not step up price discounting on the other 75% of its imagewear business. That’s far too safe an assumption.
It also assumes that HBI won’t get hit meaningfully due to the dominos set in place by Ron Johnson’s move to auction off space inside JC Penney stores.
Remember that HBI still has price integrity built into its 2H assumptions – which suggest margins right up there with the best names in the apparel industry (that don’t sell in basic categories like underwear).
The point here is that GIL’s stock is already above where it was when it collapsed last quarter, and yet the risk profile associated with one of its top competitor went up materially. HBI is more than 2x GIL’s size, and though I know people will argue with me that they don’t have perfect overlap with their businesses, I could care less. If HBI experiences pressure in its US branded wholesale business, it will find any area of weakness in its supply chain and competitive set to help fund any price or margin concessions.
Whether the first or second derivative of HBI impacts GIL, it won’t matter. Cash is cash. In the meantime, if you want to bank on GIL putting up never before-seen earnings levels in 2013 (and pay 12x for it), be my guest.
An important note on TRADE here.
Keith added HBI to the short side of the ledger of the Hedgeye Virtual Portfolio this afternoon.
"TRADE support is 26.65 – should get smoked if/when it crosses that.”
His thoughts on GIL:
“Looks somewhat like HBI but needs a catalyst or will rip the shorts up to its TAIL at 28.19.”
Let’s be careful on timing here. There’s no reason why the upcoming quarter can’t be the catalyst. 2H of CY12 looks bad. Did they give themselves cushion with their latest guide down? Everyone thought the same for HBI 13 weeks ago. Also, the market shrugged of GIL’s last guide down. If things change for HBI (which they should) then they will have likely changed for GIL as well.