We will host a call on Tuesday, September 13th at 11am ET to outline our thesis and review our latest Black Book on HBI. Dial-in details below.
HBI is our TOP SHORT in Retail
Here is the thesis at a high level:
- Hanes has top share in slow growth category.
- Feeling competitive pressure at high-end (Tommy John, Under Armour, Lululemon) and low-end (Gildan) = negative organic growth. The latter is particularly under-appreciated.
- Capacity utilization at owned factories is at peak (90%+). People do not realize this as it is not readily disclosed.
- Margins at peak 15.5% -- higher than Nike (not a direct competitor, but the comparison is telling). Trough margin is 8-9%. It will see that level again.
- As growth slows, doing deals at peak earnings and multiples to goose perceived/reported growth.
- Latest deal is a non-scalable underwear company in Australia. They don’t have our call that Australian economy faces a massive headwind as consumers run out of financial assets to draw upon to fuel consumption.
- HBI takes more special charges than any company we’ve seen in retail. Strips out all investments to take up margins and get management paid.
- Management selling/stepping down.
Bull case is that the balance sheet has been cleaned up, which is 100% true. Now paying a dividend.
It’s also ‘cheap’ and “has lots of cash flow”. (For the record, people making this bet are almost always wrong in retail). At peak margins, yes, it has cash flow. But people don’t discount what happens when sales slow, margins get cut, and cash flow gets cut in half.
Dividend yield is 1.7%, but FCF yield is only 3%. That’s hardly cheap.
Trading at 14x earnings – but in the past, it’s traded at 8x earnings. Not saying it gets there again tomorrow, but within the next 12-months HBI should be trading at a lower multiple on much lower numbers.
10x $1.70 is totally realistic. That’s 35% downside from here. At that level it would still be at just a 5.5% FCF yield (ie not cheap), and a 3.1% dividend yield.
We’re 20% below the Street next year, 40% below the year after, and almost 50% below out to 2019.
Call Details:
Toll Free:
Toll:
UK: 0
Confirmation Number: 13645264
Materials Link: CLICK HERE
Video Link: CLICK HERE
