When HBI teased last quarter that it was working on a new C9 partnership, we thought perhaps it had small opportunity to place the brand in a new store and give up a little margin relative to its Target program. A new announcement would be overall a net positive, but not overly material to the P&L. Today it announced who that new partnership is with, and in our opinion it's the worst possible retailer for C9 to partner with, Amazon.
The value of the Target relationship was the ‘free’ marketing of a lesser known brand being placed in front of the consumer at a large, trafficked national retailer. It sells simply because it’s on the shelf. Being placed on Amazon vs some other B&M retailer will mean less sales and more importantly much less margin for C9 than what had otherwise seemed to be the opportunity. Few if any people will go to Amazon explicitly to buy C9, rather on Amazon it will be presented in search results alongside actual Champion, Fruit of the Loom, Amazon Essentials, Russell Athletic, Under Armour, and another 50 brands most of which you probably have never heard of. The only way C9 can win share there is with low price, i.e. big margin degradation.
We probably shouldn’t get too worked up in either direction on this announcement. Ultimately we knew the C9 brand is going to be much smaller than it was at TGT and the profit contribution would be tiny in comparison regardless of the new partner.
We think the bigger area of focus now for HBI should be Champion and HBI’s direct retail exposure around Covid-19. When HBI bought Champion Europe it was a retail heavy business mainly in Italy. It’s also been growing in Asia (China/Korea etc.). The domestic over-distribution of Champion was a big risk in 1H20, but if Europe/Asia kept growing and Champion stayed positive, we thought the stock would prob stay above $10. But now the risk of Champion going negative in 1H is rapidly increasing. When that happens you are left with nothing but declining revenue businesses at HBI with high decremental margins. The bottom then, on a levered HBI stock, is much lower... we think ~$5. HBI’s businesses in Australia (Bras N Things, Pacific Brands) are also highly exposed to direct retail selling meaning higher sales and profit risk should the virus cause traffic/shopping reductions there. Australia now has over 100 cases of the virus.
Side note: As of Friday some C9 product was still in Target stores with tops, bottoms, underwear, and shoes all available, most of which now on clearance. The new private label brand All In Motion has taken the core selling space C9 used to occupy.
