We reiterated our short stance on Hanes with our Black Book in October (Link: CLICK HERE). The stock has underperformed since down 14%, but we think there is still significant downside in estimates and the stock and this 4Q event is likely to be a catalyst. C9 is being pulled out of TGT stores, and Champion is slowing, while Innerwear loses share inside Walmart doors. Traditional B&M distribution is still at risk as we think retail will see more door closures in 2020 than the record numbers seen in 2019. Short interest is nearing 2 year highs and deservedly so. We see fair value on the underlying trends at about $10-$11. If Champion cracks (i.e. goes negative) there is downside to the mid single digits.
All the thesis detail can be found in the black book with some updates in the note links down below. But quickly here is where we stand.
4Q19E
We’re at $0.47 vs the street at $0.51.
We expect Innerwear to miss by 200-300bps. We think the WMT George private label brand is taking shelf space, and risking unit velocity for HBI on top of that. In addition some of the C9 product being phased out falls under Innerwear. The Innerwear lost sales have high decremental margins.
Champion should slow, but we still expect positive growth (~low dd) for the brand.
There is a reasonable chance that cash flow looks better than the underlying EBIT trend as inventory for C9 has likely be reduced to near zero while sales were still coming in during the Q.
2020E
We see current street estimates as ~20% too high.
The magnitude of C9’s profit contribution in 2019 is not appreciated and losing that ~$450mm in sales will have to be replaced by at least 2x the Champion product sales. We don’t think that happens.
In fact we think there is a real risk that Champion goes negative by mid-2020 given the over distribution and high domestic inventory levels in the channel. However, we are not modeling a negative Champion brand in those 20% below consensus numbers.
With Champion slowing we think there is a real chance management returns to its acquisition growth strategy and buys something this year to boost rev and EBIT growth while taking leverage back up.
Other Considerations
CFO/Guide – Guidance for 2020 is a question mark. HBI historically has guided probably what it actually thinks it can do, just with assumptions that are too bullish for the industry realities. This quarter though, we have an interim CFO, that has been on the job less than a month, and actually took the role as the seat was empty for a week after the departure of Barry Hytinen. Guidance could be anywhere from flat to down 20%, perhaps depending on who actually sets the numbers. HBI may leave it to the CEO or IR Head to decide what the year’s targets are or at least set limits on how high/low the new CFO can go. The CFO should want to set expectations low, but it may not actually be his decision.
Reporting Date – HBI is reporting on Friday morning. The company has not reported on a Friday in its public history. Is that bullish or bearish? Don’t know for sure, but our experience is companies tend to save bad news for Fridays. Or maybe it's just what happens when reporting a fiscal year end when the CFO seat was vacant for 9 days at quarter’s end.
Cotton – Cotton head headed back down alongside other commodities in recent weeks, down ~10% YY now, though it still sits at 15% above the lows from last summer. At current prices it should be a tailwind for another 2-3 quarter, then inflects to a headwind.
Cash Flow Levers – From what we saw in the numbers it appears that there were step ups in previous years on some cash flow levers like receivables factoring (rising funding fees). Perhaps Barry Hytinen fully pulled that lever before he left. With C9 going away (i.e. less quality TGT receivables) and sales likely to decline YY, perhaps there is cash flow headwind of not being able to pull the factoring lever as it appears to have been pulled in recent years. So perhaps cashflow will underperform an already pressured earnings number in 2020.
Here are our notes since the last earnings print.
HBI | As We Expected….With More Bad News To Come
