Some clear intra-EPS season callouts on the revenue trajectory for our top short idea, HBI. McLean walked over to my desk on Friday and said something like ‘how the [heck] is this company actually going to grow…’. Here are his thoughts.
Back To School Was Not Bad, Just Bad For HBI
- Heading into the 3Q print, management was telling investors that it would grow 2.5% organically (though the numbers implied 1.5%) and that 3Q would benefit partially from a timing shift in Activewear. Neither one happened.
- The blame was put on "continued declines in the overall apparel category and poor traffic trends resulted in broad-based weakness at retail during the back-to-school season"
- However, reviewing the commentary from HBI's core retail distribution, not one called out weakness in back to school, and several noted positive trends.
Share Loss
Let's think about the comp trends for HBI's major retail distribution in 3Q...
- Wal-Mart had its best comp of this economic cycle, accelerated 100bps.
- TGT comped up 0.9%, slowed 40bps
- KSS comped positive (+0.1%), accelerated 70bps
- JCP comped up 1.7%, accelerated 300bps
- Amazon North America grew 28%, accelerated 150bps
- And yet HBI US Innerwear slowed 270bps to negative 5.2% growth…
If you hear management talking about HBI being a CPG type company with stable growth, LSD organic growth and a loyal customer (minimal share risk), remember these data points.
HBI is facing structural market share risks, sales are not stable, and management does not have command over the top line of the business.
Late 3Q was strong for the retailers as weather turned cold, so perhaps there is a tailwind for HBI in 4Q, but we still expect US organic to be flat to down.
No "Restock"
- Wal-Mart managed inventories tightly in 3Q, and that is expected once again in 4Q. Keep in mind that HBI management banking on a ‘4Q restock’ lapping the big reduction at WMT last year in 4Q. Yet inventory at WMT was only up 0.7% on 4.2% growth in sales this quarter. The re-stock is not going to happen.
- Side note: Gildan's Mens Underwear spokesman is now "The Sexiest Man Alive", just sayin'. Whether this helps or not, the unit economics alone mean that GIL will continue to take share in WMT doors.
10-Q Revenue Callouts
Foreign Exchange Helping
The company appears to be down playing the FX impact.
In its November FAQ filed simultaneous with 3Q results, the company noted "Third quarter organic revenue growth of more than 1% (roughly 1% in constant currency)". However the company also notes that International sales grew 14% in constant currency. Reported International sales grew 16.4%, meaning the total growth boost from FX was about ~0.7% in 3Q. If organic growth (growth excl the $15mm in acquisition benefit HBI disclosed) was 1.3%, and FX was 0.7%. Then constant currency organic growth would be about 0.6%. That is roughly 1%, but the FX impact is not clearly detailed. Our math suggests that at current rates the 4Q FX benefit will be at least 2x that seen in 3Q, meaning around a 1.5-2% growth tailwind.
Lastly, if FX appear so minor, why would the company site it as a driver of growth in the 10-Q...
"Net sales increased 2% during the third quarter of 2017 primarily due to the following:
- Acquisition of It’s Greek to Me and GTM Retail, Inc. (“GTM”) in 2016, which added incremental net sales of approximately $15 million in the third quarter of 2017;
- Increased net sales driven by our global Champion and global online growth initiatives;
- Increased net sales in our Hanes Australasia business;
- Increased net sales within our sock product category; and
- Favorable impact of foreign exchange rates in our International businesses."
Acquisition Impact, Did HBI Really Grow?
- The 10-Q did not give us clarity on the impact of Hanes Australia in the first two weeks of the quarter (closed 7/15/16), but it did give us information that would imply it was likely material.
- The company filed a pro-forma revenue result assuming that the 2016 acquisitions of Hanes Australasia and Champion Europe had occurred on January 4, 2015. This gives us the revenue impact of Hanes Australia in the first two weeks of the quarter last year, since this is the only difference between last year's reported 3Q number. That dollar value is $19.5mm.
- If Hanes Australia is growing MSD, the revenue impact this year would be about $20.5mm. Add that to the reported GTM acquisition impact of $15mm. Add to that $12mm in FX benefit you get a total of $47.5mm. Total revenue was up only $38mm. This puts our estimated organic growth at -0.5%. Not “roughly +1%”, as HBI stated as the c$ organic rate.
- Perhaps most telling is what is not found in the 10-Q… which is the term "organic growth"
