HBI releases 1Q earnings results on Thursday morning. It appears its results are coming slightly earlier than originally expected, given the late March update suggested a May earnings print. This earnings season it's probably better to be out earlier than later, as other earnings events will give analysts data points and ammo to prod management for details -- details most teams likely don’t want to get into. Looking at expectations, HBI’s near term street estimates look too high to us.
Business Trends
- HBI has given little info on business trends so far. On April 7th it noted that its stores were closed, adding that it is making masks, and taking steps to preserve cash, but not much else. Guidance was pulled on the late March update, but the company has still not given an update on its dividend plans.
- Stores closures mean that the retail side of the business is obviously tracking near zero. Retail is small in the US (outlets are in ‘other’ revenue, new Champion stores in Activewear), but retail is bigger in Europe (particularly Italy), and in Australia where Bras N Things is a retailer, and Pacific has some of its own stores (~about a third retail at acquisition).
- If we think about wholesale sales, in Activewear almost the entire distribution networks has been closed since late March. That’s department stores, clothing stores, mall retailers, etc. For Innerwear, some key partners have remained open like WMT, TGT, dollar stores. Unfortunately the trends here have not been good either. On its late March update TGT said apparel and accessories were comping down over 20%. On last week's update, that number weakened to down over 40%. We think Hanes sales in the mass channel are tracking similarly. WMT and TGT make up about half of Innerwear sales, meanwhile much of the remainder of Innerwear is sold in stores that have been closed.
- So sales should definitely be weak, the flow through to earnings is going to be big. For reference Adidas (the first global brand to give 1Q results) saw revenue down 19%, gross margin down 420bps, and EBIT down 93%. We’re not saying HBI would see similar decrementals, but Adidas should actually have a more variable COGS structure.
1Q Outlook
- For HBI we think this Q can see revenue down low 20s, street currently at down mid-teens. For reference, we had down HSD before Covid-19 even happened given lost C9 and DKNY programs and continued underlying share/distribution losses. Within our model down low 20s on revenue puts EBIT down about 80%, which would mean EPS below zero with the interest and other expense. Consensus currently has earnings down about 50%.
- There is of course the question of what will HBI do in terms of ‘one time’ charges. The company has always been aggressive with its non-GAAP earnings presentation -- this Q and year will likely be no different.
2020E
Below is what we think the year could look like. Again we think US retail remains closed or mostly ‘untrafficked’ until at least August. Key international markets perhaps recover a bit sooner, at the bottom of the note is a breakout of International.
Leverage is a risk. The HBI credit facility covenants include 3x EBITDA to Interest and 4.5X Net Debt to TTM EBITDA. On current street estimates the Net Debt to NTM EBITDA is at 4.3x and we suspect street EBITDA will be going even lower, with net debt levels marching higher this calendar year.
Long Term
Covid-19 is going to rapidly accelerate the HBI distribution door closures. JCP is going to be right sizing, same with M, KSS will likely have to accelerate closures as well. Then there’s probably at least a dozen stores in the mall the carry Champion which should also be rapid net door closers. At the same time we think the Mass channel continues to find higher value in Private Label brands vs being price compared on Amazon with national brands. The consumer in the coming years (recession) will also likely be looking for low(est) price options, meaning more private label velocity. As revs remain weak, management will likely try to continue the M&A margin milking model that has been so destructive to equity value as it overpays and under-invests in declining assets.
One thing to keep in mind CEO Gerald Evans was announced to be retiring at the end of this year. CFO Barry Hytinen left in December, so perhaps there is a chance for a whole strategic direction change under new management. However, that will be a costly change and doesn’t divert the company from the earnings profile we see over the next few years.
Where does the stock go?
It’s a tough market to pinpoint what ‘appropriate’ valuations are, but we’ll stick to the framework we always use and that we think matters. That is where are NTM earnings heading, what does the rate of change in revenue and margins look like in getting to that earnings, where is that earnings profile vs what we think is the long term earnings power of the business model, and what does the macro quad framework say about market sentiment on this kind of company for a given market period? For HBI, we think NTM EPS is likely heading to around $0.00, the rate of change of revenue and margins is going to be an unfathomable degree of slowing and weakness, which is a multiple compressor, the long term earnings of the out year “misses” are pulled forward where we think the company will struggle to see $1 again, and we sit in ‘deep’ macro quad 4 where consumer discretionary/apparel names historically perform their worst. As lower NTM EPS becomes more visible we think new trough EV to “run rate” EBITDA multiples around mid single digits are reached meaning stock downside is to $5 or less.
