Takeaway: Over the last month we’ve seen further headwinds form as it relates to HBI’s fundamentals over the next 6-12 months.

As we outlined in our HBI Short Black Book last month (Link: CLICK HERE), the fundamental headwinds are blowing very hard for HBI in the coming quarters.  Innerwear is seeing big risk from private label brands and door closures, the TGT C9 partnership ends in January, and Champion is facing massive growth compares while currently slowing and being overdistributed in the US. Yet as bearish as the set-up was then, we’ve seen several incremental headwinds for HBI over just the last month.


George (Gildan) In-Store Presentation

We have discussed in detail the shelf space and unit velocity risk for HBI as Walmart changed over Gildan product to George private label and expanded the space by 50-200%, and upgraded the brand placement in stores we have tracked.  Now the presentation of George is changing again which will be incrementally bearish for HBI share inside Walmart doors.  Traditionally, the men’s underwear section at Walmart was separated by brand, meaning you would see a whole half aisle or more of Hanes product bunched together with multiple SKUs/styles (briefs, boxers, boxer briefs, V neck undershirt, crewneck undershirt, pocket tee, etc).  Then you’d see a similar presentation of Fruit of the Loom, and now George as well.  What is now changing is that the presentations will be bunched and presented by style. So you will see V neck undershirts for George, Hanes, and Fruit, then crewneck for each brand, then briefs for each, and so on.  What this will do is allow the consumer to very clearly see the price variance by brand for the item they are shopping.  George has both the lowest sticker and lowest unit costs in the category.  With a quality product offering including premium features, the lowest price on the shelf, and now an easier comparison shopping presentation, we think the unit velocity for George is going to accelerate, meaning HBI’s share loss inside Walmart will accelerate. The change is being gradually rolled out to Walmart stores, much like the George launch was gradual over a 2-3 month time period.  That means it will likely be at least the end of 2020 before we have full ‘lapped’ this headwind for HBI.

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Source: Gildan Presentation


Champion Cracking?

We heard FL talk about its apparel weakness on Friday.  On the call, FL management gave some commentary that to us implied Champion (at least within men’s) is seeing a clear rate of change slowdown/weakness within the store. 

“On the men's side, we've got a little bit of a shift going on in some of the franchises that have been good for us, slowed down a little bit. And as we transition into a cleaner, less all-over logo sort of look, we've got to just transition through the inventory.

We previously highlighted that inside the Foot Locker stores we observed, roughly half of the apparel was Champion, as much as Nike and Adidas combined (see our note HBI | Champion Distribution Case Study).  This fall there was less Champion product, while also having a dedicated Champion clearance rack.  We think the spring sell-in to Foot Locker was the peak growth rate for Champion at this large retailer, and that the commentary above is very bearish for Champion’s ability to comp the comp in 1H 2020.

Also, looking at interest trends on Google, the Champion brand appears to be slowing.

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C9 Liquidation

HBI has launched an inventory liquidation auction site through B-Stock https://hanes.bstock.com/.  The interesting datapoint to note here is that Hanes had a pallet of C9 product listed on the site.  Two key observations/questions from this: 

First, it’s odd to see the product on here at all since, as we understand it, Target has an exclusive license on C9 until January. So how can another retailer be selling any C9 product before Jan. 31?

Second, if there is any future for C9 product after the Target deal ends, why would HBI be liquidating a pallet of innerwear basics (not seasonal items) that it could just hold onto for the next C9 retail partner.  We think there is no home for C9 after Target, and HBI’s commentary on the subject seems to imply it is not even looking for a new home for the brand.


Cotton

Cotton has been marching higher over the last few months, and is now over 10% above the lows seen in August.  At current prices cotton remains an overall P&L tailwind for upcoming 2-3 quarters, but it looks like the cotton bottom might be in and the rate of change for the margin tailwind is less bullish.