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Takeaway: We don't like the base business one bit. But HBI is sandbagging on acquisition accretion. That's tough to bet against, for now.

Conclusion: We think that HBI has some fiercely opposing investment characteristics right now. It’s got abysmal top line growth and tougher margin compares shaping up on one end, but low expectations for the addition of the (sandbagged) MFB acquisition on the other. In the end, while we don’t think HBI is comfortably investable here, we think that the stock falls into the ‘unshortable’ category for the next year (at least at this price).  


On one hand, the company is ‘growth challenged’. Let’s face it…HBI is buying Maidenform because it has to.  Since it anniversaried the Gear For Sports acquisition in 2Q11, HBI’s top line growth has averaged zero percent. Yeah, there’s perhaps a 1% hit from exiting the screenprinting business, but 1% growth in aggregate is hardly anything to get too excited about. Our biggest beef is that International and Direct-to-Consumer are both smaller today than they were two years ago. FX has been a factor, we’ll give ‘em that (though it hasn’t stopped others over this time period). But DTC, which should be the low hanging fruit for any company that owns its own brand – especially one that manufacturers vertically – simply can’t seem to grow. Ironically, the MFB acquisition will not improve the proportion of Int’l or DTC, it simply fills out a different part of HBI’s bra business in US mass channels and department stores.

On the positive side, the reality on Maidenform is that a) HBI got it for a steal, b) management lowballed on accretion as they simply add it to HBI’s model, c) there’s easy margin upside as HBI unravels failed MFB programs put in place over the past two years, and d) there further upside as HBI fills out its excess capacity with MFB business (i.e. transitions MFB to an insourced model from an outsourced model).  They guided to $0.15-$0.20 per share from MFB. Seriously? If we simply add on MFB’s net income after borrowing costs from last year – which was abysmal, by the way (worst in 8-years) we get to $0.25-$0.30 in accretion. When all is said and done, we think the accretion numbers will be at least 2x guidance in year 1, and could be closer to a buck versus management’s $0.60 guidance three years out.

The bottom line is that it does not matter one iota that sales are punk. We might start to see some positive benefit from HBI’s organic marketing initiatives in 2H – but that gives them maybe a point or two in growth.  The big upside begins in another two quarters when HBI gets 15% sales growth alone just from adding MFB. Along the way, cash flow looks good, and the company looks on track to pay down the debt associated with the deal just over a year after it closes. Organically, we’re not fans of this story by any stretch (challenged top line and cotton-led gross margin benefit coming to a close). But the reality is that the market won’t look at the ‘organic growth and margin characteristics’, it will look at reported numbers, and lowballed expectations.  As a merged entity, this one will be tough to bet against.