We reiterated our short stance on Hanes with our Black Book in October (Link: CLICK HERE). The stock has underperformed since, but we think there is still significant downside in estimates and the stock as the sell side appears to be just now recognizing the risk. Meanwhile short interest is hitting 18 month highs of 18% and deservedly so indicating investors are ahead of the sell side. For our last note HBI | Headwinds Continue Building from November 25th CLICK HERE.
Downgrades, CFO Departing
There is now officially more ‘sell’ ratings on HBI than there has ever been with the company getting a couple negative downgrades in the last month. Not surprisingly the timing of these is after the CFO Barry Hytinen announced he was leaving the company for a new job. On the last print, with results showing weak fundamentals overall, the most bullish callout was the detail and conviction that the CFO outlined on the quarterly guidance. Barry will be gone by the 4th quarter print, and it seems confidence in Barry isn’t there when Barry isn’t there. This CFO transition happening during such a critical time period for fundamental performance is likely playing a role in the negative sell-side sentiment inflections.
C9 Phase Out
Around Christmas Target still had plenty of C9 product on the floor, though it appears it has started the phase out process with some product on sale late in the holiday selling period. So far Umbro seems to be the space gainer (mainly women’s) with the small C9 floor changes seen.
Hanes also still has various C9 product listed for sale on its liquidation bstock site implying it doesn’t want to hold that inventory for the next seller. 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.
Innerwear/Intimates Risk?
On its bstock site, Hanes actually has “Multiple Truckloads of Disassembled Bra Materials: Fabrics & Straps, 51,710 lbs” for sale, currently located in Honduras. That would seem to imply either some kind of manufacturing issue, or significant excess inventory. Either way it can’t be a good read on the sales outlook for intimates/Innerwear. Also, the Walmart George men's underwear product presentation change that we flagged in our last note does not appear to have been done yet in a majority of WMT stores, meaning it will be an incremental Innerwear headwind in 2020.
Expect Acquisitions
We flagged in our October deck that we would not be surprised to see acquisitions again when Champion revenue slows. After all, management incentives are aligned with doing acquisitions at any price. On the last call CEO Gerald Evans confirmed our suspicion all but explicitly saying expect M&A in 2020. With Barry Hytinen leaving we think acquisitions become even more likely, as Barry seemed to be the driving force behind the “deleveraging” story that was communicated in early 2019 that temporarily scared away bears. Acquisitions may temporarily obscure the weak underlying fundamentals for HBI should they occur, but ultimately given HBI's style of M&A execution, we think the majority of deals we have seen and will see are equity value destructive and increase the opportunity short-side.
Champion Interest
Much of the HBI debate has been focused on Champion, which is understandable given that a collapse in Champion will likely mean a collapse in HBI stock. We think you can get a much lower stock even with a Champion status quo. The growth has already slowed, Champion has not proven to be able to offset profit losses of the core (ie revenue up, earnings not), and retail is over-supplied with Champion product such that even with the brand still having favor with the consumer revenue growth should be pressured in 1H20.
Interest for champion appears to have gotten better since the lows in October/November, but 4Q still looks like lowest YY improvement in years.
