HBI: Your Long Thesis Just Blew Up

Don’t get lost in the weeds here, folks. Every analyst is likely to come out defending this HBI deal. Mathematically, it makes sense. The conference call – at face value – made sense too. But make no mistake – to stay invested here your thesis HAS TO change; and meaningfully at that.               


This story has changed. Period. Think about it… It used to be a story where the last standing US manufacturer of apparel was offshoring its apparel to recapture margin to become more competitive, kick-start growth, boost margin and repay a heavy debt burden.  Now, the company is out doing acquisitions when it cannot even keep up with the current boost in growth it is experiencing in its core business (remember in 2Q they had to outsource demand at zero margin). In addition, they’re getting into the licensed apparel business for college bookstores? Yeah…perhaps it makes sense given HBI’s core competency. But whatever happened to de-levering?  Debt on top of big, expensive, inflexible, wholly-owned factories that depend on maximizing capacity utilization is a very very dangerous combination, my friends.


Most people are going to come out defending this deal, while few will nix it. Management is following up with a roadshow to fuel the fire. But one thing is certain. The primary reason why 90%+ of the bulls I have EVER spoken with on this name (and I worked on the deal when it was spun out of Sarah Lee) has absolutely positively changed. To think that there’s not some serious ‘thesis-morph’ at play here would be flat-out disingenuous.  This thing is actually starting to smell a bit more like VFC. But keep in mind that it took VFC the better part of a decade to diversify away from its capital intensive denim and intimate apparel businesses (the latter of which it sold at a fire-sale price).  VFC had its fair share of blowups in the interim.


The point here? DO NOT lose sight of the core business for HBI. Lack of de-levering + high commodity costs + increasingly desperate competition + shake up in the management ranks at largest customer + unsustainable growth in second most important distribution channel (dollar stores) = risk, risk, risk.  




Gear For Sports, a leading seller of licensed logo apparel in collegiate bookstores



(FY10 ended in June)

  • Sales ~$225mm
  • EBIT $25mm+
  • OM 11%+
  • (implied D&A of ~$5mm)
  • Expected to close in Q4 and be immediately accretive
  • ~$0.20 in 1st 12 months
  • ~$0.30 in 2nd 12 months
    • No write-offs or restructurings needed, not dilutive to 4Q or 2010 earnings guidance of $2.25-$2.35


  • Total cost of $225mm
  • $55mm in cash
  • $~$170mm in debt
  • = ~7.5x EBITDA
  • Still project 2010 debt-to-EBITDA ratio of ~3.5x on a pro forma basis

Management Changes:

  • Very little change
  • Gear For Sports senior management will remain in place to run the business, and the administrative, operational, production and sales structure will remain intact, with management offices remaining in Lenexa, Kan.Gear For Sports President Larry Graveel intends to retire but will remain in his role for approximately six months, while Chief Financial Officer Craig Peterson and Executive Vice President of Sales Jim Malseed will remain in place and continue to lead the business.


Call Notes:



  • Revenues -
  • Growing MSD over last 4-5 years
    • Graphics -
    • Great
      • Justified acq solely be the opportunties on the cost side
      • Relative to what GFS can buy their products for, HBI has a significant opportunity to provide cheaper product
      • Will start to integrate more product and access global supply chain in 2011


  • Good/better/best structure of brands
  • Gear for Sports - opening price point
  • Champion - good price
  • Under Armour - premium offering
  • have already agreed to transfer license to HBI (5-year license) restricted to college bookstores, resorts and golf


  • t-shirts in the $15-$30 range
  • Sweatshirts in the $30-$60 range


  • Paying down debt would be $0.10 accretive next year; acquisition will provide ~$0.20, so ~$0.10 net accretive in Yr1
  • Primarily predicated on cost synergies
  • Assumes MSD growth in GFS business
  • They are paying 10%+ on their debt now

Cyclicality in recession:

  • Similar to HBI, positive momentum coming out of 2008


  • Has ~25% market share of the college channel
  • Growing consistently MSD
  • Opportunity to grow golf and resort business, in addition to further share
  • Mgmt sees opportunity to grow in HSD range

Brand distribution (as % of total):

GFS 20%

HBI 50%

UA 30%

  • GFS sources UA product directly so that won't change

Working cap - Gear for Sports:

  • ~$60mm last year
  • Inventory accounted for ~$50mm
  • High turns as a sourced business 

Distribution Opportunities:

  • Opportunity not to take to mass, mostly sporting goods, college books stores and mid-tier dept. stores due to price point
  • Outerwear - graphics will increase from 5-6% of business today to 20-25% post acq.

Manufacturing Facilities:

  • Graphic printing in Kansas City (Gear for Sports) - quick turn
  • Operation in Mexico - semi quick turn ~1 week
  • Outsourced printing in Central America

Capacity Implications:

  • Gear for Sport units not that great, will have capacity to handle despite tightness in most recent Q2
  • Capacity constraints due more to much tighter turnaround needs


  • $11mm in synergies in first 12-months related to better sourcing of blanks alone
  • Re 11% margins, they've been consistently in the 10%-12% range

Dynamics of Industry:

  • GCO rolling up industry on retail side
  • Not a lot of opportunity to capture synergies


  • Operating margins, have been in 10%-12% range, post synergies could get to mid teens margins
  • Could add 100bps to Outerwear margins, ~10bps to consolidated HBI margins




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