Have you ever heard a management team on a call sounding so comfortable with being below-sub-mediocre? Welcome to the world of HBI. More expensive today at lower price than yesterday. Is the cagiest print I’ve ever seen from HBI? I think so. If you’re short this – which I hope you are – today’s mess is being right for the right reasons. It’s more expensive AFTER today’s 9% sell-off than it was yesterday. Perhaps a better short at $20 than it was at $29.
Key Callouts
- Only positive here is hitting the quarter’s EPS. That’s where it ends.
- Why in the world is management talking about a ‘challenging retail environment’ when we just saw the best comps out of its wholesale channel in 5-years? It’s called share loss. And it’s accelerating.
- Missed EBIT. $916mm for the year vs lowered $925-935mm . 4Q was supposed to be $241-251 and did $231.
- Operating profit guided to $950-$985mm vs street at $983mm, and acquisitions are expected to add $30mm in EBIT.
- Did a deal – a big one. Acquisition ($400mm) ‘2018 accretive’ yet EBIT and CFFO guided below street expectation?
- Synching management’s comment on multiple implies EBITDA margins of 28% on the deal. That can’t be.
- CFFO guided to $675-$750 vs street at $861. Again with help from a new acquisition. Right in line with our model.
- Company had a negative tax rate w $450mm repatriation charge. “Tax is behind us”. What’s not behind them is the fact that GIL’s 0% tax rate (Canadian) not going up…and competitive pressure intensifies.
I’ll reiterate what I said yesterday… (HBI | BigFoot in a Thong: LINK). HBI’s problem isn’t the lack of a clear and defined plan – it’s that this management team actually believes it. I think 2018 is finally the year when 10-years’ worth of misaligned incentives (stemming from Sara Lee spin-out circumstances) results in REAL cash flow generating power of $500mm or less becomes a reality, and the stock is violently revalued accordingly. Today we got evidence that the day of reckoning is approaching. When the balloon is being held under water so long, these stories end violently. Kind of like an atomic wedgie.
If our cash flow numbers are right this year and next, I think we’re looking at a meaningful—if not visceral – re-rating on lower numbers. 5-6x EBITDA on this business = a $5 stock. Check out the numbers in the table below. Either our fundamental research call is flat-out wrong (or far too aggressive) or else these multiples are among the most disparate in all of retail vs actual financial reality. There’s terminal value here, but it’s all likely in debt. This was not a kitchen sink event, There’s more ugliness to come in 2018.
-- McGough
Here’s McLean & Biolsi ripping apart the model and the numbers…
US Business
US topline was one of the few positives in the quarter.
Innerwear grew 0.8% (fully organic), first time it grew in 5 quarters. Though lapping last year's -8% means the 2 year rate still slowed 200bps. We suspect the traffic increases and spending strength at retail around holiday were a clear help.
Activewear beat our expectation by about 200bps. The delta was likely less cannibalization than we thought from Champion, since the brand performed well up mid teens, as expected. (Newly acquired) Alternative Apparel was slightly better than expected at $18mm vs our estimate of $17mm. And perhaps there was some underlying acceleration in non-Champion product following US retail strength.
International ex Champion Slowing?
If Champion did so well in Internationally… why wasn’t International up more?
FX was a 5 point help (as we expected). So C$ was up 3%. Champion internationally should have contributed 2 or 3 points this quarter. The conclusion, other international businesses are not really growing.
This Acquisition can’t be real – or at least the numbers cant.
Since it appears international is slowing, perhaps this new Aussie acquisition is just in time?
Let's pick it apart.
First of all, management stated that Bras N Things "targets very closely the millennial consumer". Do you think management knows that the US "Millennial" generation is not the same as the corresponding generation in other countries. Every country's generational cycles have different traits, they are not the same.
The math on the acquisition doesn’t quite add up. Either HBI is buying one of the most profitable apparel retailers in the world, or the stated multiple is low.
The implied EBITDA margin based on the disclosed acquisition numbers is 28%. And the company is guiding it to 35% after synergies. Did HBI just acquire Hermes?
If we give the revenue base a comparable company margin rate, say 21% (Victoria's Secret at the peak), the multiple is 13.2x – far too high for marginal apparel assets.
So HBI buying a bra business similar to Victoria’s Secret, at peak margins, before the low priced bralette trend makes its way down under?
And let's not forget our Financial/Housing team’s short call that Australia is headed for a large housing bubble crash driven recession, which will translate into pain for all consumer companies. Two of which will be owned by HBI (~13% of revenue).
Business Disruptions
Hanesbrands recorded a $34M charge for business disruptions and other actions associated with the storms in Q3/4. We ask does HBI not have business disruption insurance? Airlines are not even taking charges for this. Sorry HBI, but retail is a full contact sport (and an outdoor one as well).
Looking at other companies, CVS incurred $55M of expenses from the hurricanes in Q3 that reflect its insurance deductibles. CVS did not record a charge for the hurricanes. FL included $7M of hurricane related expenses in SG&A, stating: “Although we did not adjust our non-GAAP results for these costs, which total about $.03 per share, SG&A would have levered by 10bps if these hopefully one-time costs had not been incurred.”
We do not know how much of the $34M of costs are truly one-time in nature, but if anything ends up being ongoing, the comparison next year will be undoubtedly difficult.
GAAP vs Non-GAAP
After several quarters where GAAP an Non-GAAP margin spread was shrinking from 300 to 100bps, all of a sudden it explodes to 700bps, with just a small acquisition (Alternative Apparel) in the last 12 months.
The company is guiding 80mm in charges in 2018, 2019 to see charges almost gone, but we hear this every year, and they keep roaring back.
Champion Europe - Another Payment
Per the last 10-Q HBI had already paid $41.2mm additional on Champion Europe due to the business performance. Then today it announced an incremental $27.9mm. Therefore the price for Champion was about 35% higher than announced on the original deal.
Dividend
Given everything else going on in this print, its perhaps not surprising, but this is the first time since starting a dividend that HBI did not raise it for new year.
Leverage
Reminder that HBI amended its credit agreement to include:
-increased capacity by $300mm to $2.25bn
-lower rates on its revolver and term loans, (interest impact will depend on leverage rate)
-increased leverage ratio limit to 4.5x/5.0x Net Debt to EBITDA vs prior 4.0x/4.5x (ratio increases to higher limit for quarters ending in the 12month period following the closing of a $200mm+ acquisition)
-The acquisition of Bras N Things means the limit goes to 5.0x for 4 quarters. Our model has leverage pushing 4.0x by year end, so it does not appear that the limit will be in play this calendar year. This is the only negative for investors on the short-side – cutting dividend unlikely this year.
Marketing
Company noted marketing spend was up $20mm. That’s growth of 12%, seems like proactive investment.
However, the company saw ad spend come down as $700mm were added from 2014 to 2016. So the ad spend rate is still 50bps below the level seen 3 years ago.
We think more investment is needed, especially with this new retail acquisition.
Capex
Capex came in $7mm below guidance meaning the capex rate is hitting a 3 year low at 1.3% of sales. We need 2-3% if HBI wants to actually grow.
Taxes/Competitive Pricing
So much for tax change being below bearish expectations. The 15-16% rate is right around the midpoint of the range we thought it could end up.
Also, the company noted that tax reform headwinds are over. That may be true on the tax line, but the company is forgetting its main competitor (Gildan) will not see its tax rate go higher as it is domiciled in Canada. That means tax headwinds persist on the sales/margin line as HBI tries to offset cotton cost pressure, and Gildan doesn’t budge.
Booster Running Out of Fuel
Since the announcement of Project Booster and the $1bn in CFFO target, we are seeing "booster" mentions decline.
Here's the cadence on mentions by call:
1Q - 30
2Q - 14
3Q - 9
4Q - 5
Looking Forward...
Revenue
We expect Innerwear sales to remain negative. Modeling -3% in 2018. Retail doors are still closing, share is still being lost to Gildan, and high-end is still moving to new, better, and more-innovative brands.
Activewear expected to be up about 4%. It has the same distribution issues, but Champion continues to grow and the Alternative apparel acquisition is good for 3-4 points of growth. Beware the back half when lapping the acceleration and over distribution of Hanes.
In international, Bras N Things will add about 7pts of growth. Champion growth likely slows, but adds another point or 2. The question is what will happen to Pacific and DBA. We think they are flat at best.
Margins
Gross Margin should see 30-50bps of tailwind from mix shift with new deals.
Cotton cost should be a headwind of 50-75bps. And the utilization benefit from closing Nanjing last year wanes as the year goes on.
Guidance implies the acquisition contribution will flow through at 17% on the EBIT line, so we guess that's a margin tailwind on EBIT as well.
SG&A pressure remains, marketing spend needs to go higher to protect market share. And at some point these ongoing acquisition charges appear to be ongoing expenses.
Cash Flow
HBI will be lapping working capital benefit seen this year.
Capex is guided to a similar level as 2017, $90-$100mm.
