Let me lead in with what McLean IM’d me in the middle of this HBI conf call…
“…the deception I hear in management’s prepared remarks is downright sickening.’
And to be clear, as animated as I am, McLean is the opposite. That’s a big statement for him.
How I see it, HBI management’s credibility is as shot as Kevin Plank’s and Ralph Lauren’s – maybe more than those dudes. I’ve hardly hid my opinion that Rich Noll was a ‘bad guy that did unethical things to get both himself and investors paid.’ (In fairness, people got paid = good). And while I love giving my opinion, facts are better. Here goes...
- Cash flow (CFFO) guidance started the year at $750mm-$850mm.
- Over three quarters, expectations crept down to $750mm-$800mm.
- Then Rich Noll announced he was leaving as CEO. Simultaneously sold stock -- left in Oct after doing four acquisitions in three months.
- Leading up to Noll’s exit, he threw a $1bn in Cash Flow target out there to the Street. The consensus ended up over $900mm.
- On the 3Q16 call 90 days ago, management said the following re 2016 Cash Flow… "So, very confident, though, that we're going to get to the numbers that we've been talking about."
- Then in mid-Nov HBI was at the Morgan consumer conference hitting the one-on-one circuit. MS analyst is the big bull. Good guy and good analyst, but not on this one.
- Then (I think) HBI was at the KeyBank conference the week of Dec 6th and talked up the same level of optimism.
- To be clear, at that point the year was 94.7% over and cash flow guidance was STILL suggesting $750mm-$800mm.
- Then last week it boosted the dividend by 36% -- by our math that locked in 60% of next year’s cash flow in the form of a dividend (and a less risky 20% on the now-false Street numbers/guidance).
While I’m being factual, here’s another one for you. I have not made my career by basing my ideas on what management teams tell me. I listen – there’s always something to learn. It’d be arrogant for any of us to not appreciate that most people in the C-suite are very smart people (but smart ≠ good judgement or good intentions). But I like my opinions better than their IR pitches. Get this… while we conducted our initial research after HBI was looking like a big out-of-consensus short, we called HBI IR to vet through some issues and see where we could be wrong. The VP of IR got back to us six weeks later and said something like [I don't think that Hedgeye can differentiate and add value vs. other analysts covering our stock]. Yep, I guess we didn’t add any value to them. I can sleep well knowing that.
I digress. Back to the grind...
So let me get this straight…Everything was fine three weeks before the quarter closed. And now the company puts up a 22% cash flow miss? This tells me that either…
1) The company’s forecast accuracy is horrible, or
2) HBI’s financial management/reporting systems are inaccurate, or outdated, or...
3) Management lied.
The truth is that as much as I can use every bit of analytical mojo I have to piece together the financial facts and the behavior I think that led to poor decision making, I can never rightfully say that anyone lied. So I won’t start now. But what I know is that I’m not the only one in the investment community that can put these pieces together. Even the uber-bulls – at least those with intellectual integrity – will be asking (and probably answering) these questions.
As long as this dynamic is in place – along with my view that HBI will be lucky to generate $400mm in CFFO this year (with a greater decline in FCF) is the case – then I think we’re looking at a meaningful revaluation on a much lower steady-state cash flow number (ie another 30-40% cash flow cut).
I still think this is a single digit stock be year-end 2017.
Here’s a link to our HBI Black Book, our note heading into the print, and any/all HBI commentary from my RetailDirect morning product – in case you do not subscribe to that.
LINK: HBI BLACK BOOK
