Takeaway: This is about as good a quarter as we could have expected from HBI, and earnings were still down 9%. Setting up for a big 2H miss.

This is about as good a quarter as we could have expected from HBI, and earnings were still down 9% with the stock down 5%. There is a setup for a 15-20% miss in the back half. Maybe a near term positive catalyst on the May 15 investor day (the team is saving us a seat in the front row – lol), but management is holding a balloon under water as it relates to cash flow trajectory for the year and I can’t imagine how management talks its way around that. I would not be shocked to see HBI back off it’s phantom $1bn in CFFO guide.

  • Slight rev and EPS beat in Int’l and Activewear – w EPS still down 9% YY.
  • Full year guide held with 2Q guided weakish, 2 cents below street at the midpoint. Innerwear down 3%, confirming continued share loss in the core for HBI.
  • Activewear up 6% total with 5% from Alternative acquisition and 1% organically fueled by Champion up HSD% domestically. 
  • Again we see Champion slowing against tougher compares in 2H.
  • International beat by 8%, up 19.4% YY, with the help of 940bps from FX (higher than we and the company expected).  This segment was the main driver of the revenue beat, seeing 7pts of organic growth driven by Champion in Europe and Asia, and 3pts from the Bras N Things acquisition. Golf clap there.
  • Gross margin was down as we expected vs. guidance of being positive YY, remember the company should have seen ~25bps+ from mix benefit from higher retail acquisitions.  Company noting input (cotton) costs being the main drag, flowing through the P&L now, and note cotton has been making new highs recently so this headwind will remain throughout the year.
  • Cash flow looks bad in 1Q, with CFFO down $100mm, capex up, and a large acquisition.  CFFO has a high bar to hit annual guidance, especially considering the company's inventory looks better on the margin, up just 2% while closing on Bras N Things.  Inventory clearing is a lever the company has pulled to boost cash in recent quarters, it appears that would be a challenge to repeat this year.

Am I concerned with this stock being at a 4-year low? No. We’ll see more multi year lows as it grinds to a single digit stock. This is a setup for a 15-20% 2H miss.

Here’s our deck outlining why this stock is likely to get cut in half – again.
HBI Black Book: CLICK HERE

HBI | En Route to Single Digits - 5 1 18 HBI earn table

McLean’s Tear-Down of the Print


Revenue:

Company showed organic growth of 1%, but was aided by a seasonal product timing shift.
2Q organic rev is guided to be negative feeling the hurt from the shift.

Champion was a large driver of organic growth, up 17% globally, that’s 2-3 points of organic top line.
Innerwear was in line with our expectation down 3%, slowed on a 1 and 2 year basis.

Acquisitions were slightly below what we expected, with Alternative adding 4.8% to Activewear and Bras N Things adding 2.8% to International. 

In 2Q we're modeling 4% and 6.5% impact for Alternative and Bras N things respectively in their segments.

FX helped 3.2% on the top line, about 50bps higher than we expected.  The benefit drops in 2Q, but should still be about 200bps of help.


Margin:

Gross margin down 13 bps with the benefit from mix shift and FX more than offset by higher product costs, which caused 95bps of margin compression.  The cotton headwind should remain all year and potentially get worse into next year.  The company is trying to take price to offset the rising input costs, but we think that will be challenging with retailers unlikely to pass along costs or take a margin hit.

SG&A grew 7.2%, deleveraging 17bps.  The company noted higher media advertising spend, something we think is likely to continue to try to mitigate US share loss.


Cash Flow:

CFFO was weak, down $105mm YY from building working capital.  Yet inventory was not much of a driver up just 2% on 6.6% sales growth while closing on a ~$150mm rev acquisition.

Capex was up $7mm YY and the company put $335mm in cash towards Bras N Things.

Company had to pay the $28mm earn out on Champion Europe this quarter as well.

HBI | En Route to Single Digits - 5 1 18 HBI sigma

HBI | En Route to Single Digits - 5 1 18 HBI algo