Takeaway: This is very bad for HBI almost any way we slice it.

A quick note on the CEO stepping down at HBI, which is on our Best Idea List as a Short.

  1. This is VERY bad for HBI. The bulls who are stepping up and saying that this is a non-event bc HBI has a ‘deep bench’ are in a severe state of denial.
  2. Rich Noll has ruled HBI with an iron fist since the spin out of Sara Lee a decade ago. In that regard you could argue that his successor will be welcomed by the organization. But like the guy or not, Noll’s approach has been extremely effective as it relates to the stock.
  3. Noll is 58, and his successor is 57. It’s not like organization is being handed down to a new generation of leadership.
  4. Remember that our call here is that the company is based on the following…

a) HBI is the leader in a no-growth category

b) Starting to feel pressure from competition at the high-end (Tommy John, Lululemon, Underarmour, etc…) while getting incrementally squeezed at the low end as Gildan gets heavier into underwear.

c) Margins are beyond peak as factory utilization (something most retail analysts don’t understand) is at peak of 90%+, and cotton costs are near trough.

d) The primary channels where HBI sells its product clearly have too much inventory (WalMart, Target, Macy’s, Kohl’s, JC Penney, etc…)

e) Due to the grim outlook in its ‘core’ business, HBI has been acquiring other businesses at what we’d consider an alarming rate at equally alarming prices. Its latest acquisition – an underwear company in Australia -- is at 12x EBITDA according to the acquired company – despite Noll’s assertion that they were buying it closer to 10x EBITDA.  Noll announced that he is stepping down before that deal even closes.

f) HBI takes egregious special charges that strip out of earnings costs that would otherwise prevent management from getting paid, according to what is dictated in the proxy statement. These ‘adjusted earnings’ have been a key factor in Noll’s compensation, allowing him to sell $26mm in stock over the past 7 months.

g) It’s tax rate of 8.8% is unsustainably low, and is likely to head closer to a normal rate for your average US tax-paying multinational.

The bottom line is that we think HBI is egregiously overpriced with an EBITDA multiple and PE of 12x and 13.9x, respectively. This is a financial model that we view as riddled with risk, and smoothed over for the investment community by ‘special charges’ that we’ve never seen any company take – ever.  The only thing ‘special’ about them is that they do a great job in obfuscating the real earnings, and hence the valuation. We think this story is going to end violently for shareholders. We’d avoid it by any means necessary.