“We don’t like the Brands, don’t like Management, and don’t like the Company, but that alone is no reason to short a Stock,” Hedgeye Retail analyst Brian McGough wrote in his original stock report sent to Investing Ideas subscribers.
“What is, however, is the fact that we think earnings and margins are at peak.”
McGough added, “As hard as we try, we cannot figure it out, aside from over-earning due to a 7-year trough in cotton prices and the temporary benefit of being a serial acquirer and restructurer of companies in an effort to grow away from its core.”
Four reasons we still don’t like the company:
- Margins: Why should a company whose primary brand sells through mass channels and department stores have higher margins than the best brands in the business?
- Acquisition Behavior Bothers Us: This company has acquired an average of a company a year for 5-years for a total of $1.5bn.
- Buying at the Top? HBI is buying back so much stock while margins are at all-time peaks (and management is selling) comes across as flat-out reckless.
- Management Selling: (see chart below)
Bottom Line
Once the dust clears from the acquisitions, special charges, and cotton prices normalize from the 7-year low, we think we’ll be looking at lower multiples on lower earnings and cash flow.
