HBI | Single Digit Stock

04/13/17 07:28AM EDT

This HBI release makes such little sense to me. Smells like more gamesmanship from the management team of a company whose stock I think is a melting ice cube.

  • Headline is that it preannounced an in-line quarter, and CFO is leaving.
  • Yes, adjusted EPS is inline – a penny better, actually. But GAAP EPS guide is 10% below what even we were expecting, and below guidance.
  • The point here is that EPS missed, but HBI increased charges.
  • CFO is leaving – but not for another 8 months? Why? Why announce this now? Why include it in what will be perceived as an in-line guide?
  • This is the same guy that was on the conference circuit with three weeks left to go in 4Q blessing a $760mm cash flow number, and then missed it by $150mm.
  • Does anyone care that new CEO Gerald Evans sold about $840k in stock last month? Granted it was sold via 10b5-1, but why would a new CEO sell stock after a 30% decline if he still had confidence in his cash flow?

My point here is that the release is simply strange. But that’s no reason to short the stock – it’s a reason to ding management cred further. HERE’s why I’m short the stock…

HedgeyeRetail HBI Short Call

Stage 1. 2006 – 2010

  • Average brands in average spin from average parent laden with above average debt (4.4x leverage).
  • Traded at 6-7x EBITDA

Stage 2. 2010-2013

  • Repair balance sheet.
  • Pay down $760mm in debt
  • Delever to 1.9x
  • Cap off with a dividend.
  • Stock revalued at 11-13x EBITDA

Stage 3. 2014-2016.

  • Share loss accelerates to Gildan on low end, and Premium brands on the high end (note: the middle stinks).
  • HBI immediately starts doing acquisitions – average brands at/near peak earnings at/near peak multiples – bc management is financially incentivized to do so.
  • Factory utilization goes to peak. Capex as a percent of sales goes to trough. This is the opposite of what any vertically owned manufacturer/brand in any category should do.
  • Margins go from 8% to 15%. Overearning its (disintegrating) wholesale channel by a factor of 3x – the highest in history be a wide margin.
  • Stock is revalued at 13-15x EBITDA – the same as the no-name assets it is buying at peak earnings.
  • CEO quits

Stage 4. 2017-2018

  • CFO quits
  • Underinvested in PP&E to drive top line, so sales continue to erode
  • Levered back up to 4.2x. Busts a covenant at 4.5x
  • No longer has the balance sheet to a) do deals, and b) invest in PP&E to grow organically around a shrinking wholesale pipe
  • Four months ago it upped dividend by 30% on a $760mm CFFO number. Then missed CFFO by $150mm
  • On our CFFO number – which is another $200mm miss, HBI is guaranteeing 60% of its ‘trough capex FCF’ in the form of a dividend after buying back $700mm in stock 30-40% higher.
  • Finished goods inventory sitting at historical highs.
  • Promised an unrealistic 0-2% organic growth rate when it can’t reverse its (9%) run-rate with biggest customer.
  • Amazon not an option – but rather a threat.
  • Sales decline by 3-5%
  • Gross Margins erode by 200bps, and EBIT by 300-350bps as it deleverages fixed infrastructure.
  • CFFO declines another $200mm
  • People stop valuing this thing on ‘adjusted EPS and CFFO’ and start valuing it on FCF given leverage and capital structure.
  • If it trades back at the multiple of a levered vertically-integrated apparel brand (6x EBITDA) we get a $5-6 stock.
  • If it trades at the 3-4x Warren Buffet and VFC have transacted in these businesses in the past (and the price that Sara Lee was willing to bail on) then there’s zero equity value left.
  • Is this a Ch11? No. But that does not mean it needs to trade in the equity market.

I said it at $29, and I’ll say it at $22 – I think this will prove to be the best short of my career – and it’s arguably a better short today on press releases like this than it was at $29.

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