McLean knows the HBI accounting puts and takes stone cold. He just called this out for me re WMT/HBI. Definitely worth sharing…
At the same time WMT puts up its best US comp in nearly 5-years (1.8% comp and 2.8% rev growth), HBI put in its K that sales to WMT were down 9%. So we’re talking a double digit spread there. That's a #first, but not a 'last'.
HBI is guiding to a ‘flat to+2%’ organic revenue number for the year. I think there is less than 10% chance it hits that. Simply put, HBI is banking on a rebound in sales from WMT just after it stretched terms so TGT could take in-transit/finished goods inventory. I’m pretty sure that this IS NOT a one-time de-stocking at WMT. The brand has not innovated in nine years, and is taking down R&D and marketing to manufacture cash flow. Note, that does not ring well with WMT at a time when consumers are shifting away from HBI’s core product and it's getting clipped at the low-end by Gildan.
Also keep in mind that HBI just egregiously missed the cash flow targets it blessed on the conference circuit just three weeks before quarter-end. The company HAD TO give some degree of hope on the top line. That 'hope' = WMT restocking. In management’s defense, I don’t think it lied – or even put up overly bullish targets per its internal plan. I just think its internal plan is flat-out wrong.
If I’m the Hanes salesman covering WMT who just got a dramatic order cut, what am I going to tell my boss…
- ”Hey, we lost the business bc our product is stale, the brand is losing relevance AND I’m a really bad salesman?” I’m going to go out on a limb and say No. The sales team will probably say…
- “WMT is heavy on inventory, and they are putting a temporary hold on orders. They still like us a lot. We’ll get it back in 1H.” Then the salesman will likely scramble to fill the order book at a discount.
In other words, the only way sales will materialize (with finished goods inventory at peak) is at a significantly lower merchandise margin, which is NOT baked into a) guidance and b) lender expectations when HBI is sitting at 4.2x and breaching a covenant (4.5x) is a chip shot away.
Though its worked so far from the high $20s, I still think that HBI will turn out to be the best short if my 23-year career (and an even better short than when it was at $29).
--McGough
