“If I’m right, this may prove to be the best short call of my 23-year career,” Hedgeye Retail Sector Head Brian McGough wrote recently about Hanesbrands (HBI).
One year since making his original short call on the company, in May 2016, shares of Hanesbrands are down -23% compared to a +16% gain for the S&P 500.
Below are the key takeaways from McGough's most recent piece on Hedgeye.com, "My ‘Big Short’ Call on Hanesbrands Could Become the Best of My Career." (For the latest analysis on Hanesbrands email sales@hedgeye.com to read our institutional research.)
- "Leverage backed up to 4.2 times – with 50% of operating cash committed to dividends – mitigating the company’s ability to do deals or invest in the business to grow."
- “Hanesbrands’ accounting practices are about as aggressive as any other (solvent) company in retail.”
- “By our math, this company has acquired an average of one company a year, over the last five years, for a total of $1.5 billion.”
- “These have come at increasingly expensive prices. The most gem was Pacific Brands, which cost 10x EBITDA. In short, Hanesbrands is trading at 10 times EBITDA, but its most recent deal multiple is 20% higher.”
- “The company has spent $731 million over the last 18 months, just when margins were at their all-time peak.”
- “Former Hanesbrands CEO Richard Noll sold $116 million worth of stock, before stepping down in October, taking his stake from 0.8% to just 0.2% of the company… I think management sees the underlying issues here.”
- “Distribution of Hanesbrands products is highly consolidated, with Wal-Mart, Target, Kohl’s, Penney, and Amazon accounting for ~70%... Both Target and Wal-Mart have indicated they plan to lower prices and pressure vendors like Hanesbrands.”
- “The company has been the beneficiary of a 7-year low in cotton prices. Cotton prices fell 55% from the peak in 2011 and Hanesbrands saw about 700bps of gross margin expansion.”
- “Cotton is up about 36% from the bottom about a year ago. It takes about 9-12 months for these costs to flow through to the P&L. By our estimates, a 10% move in cotton equates to about 45-65 basis points of gross margin risk for Hanesbrands, or about a 4% hit to earnings per share.”
All told, McGough reiterates his call to "Short the tightey whities!"
For more, check out the video below of McGough laying out his short thesis on Hanesbrands from last May.