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.
