2023-10-20 16:01:34 ET
Summary
- Hanesbrands is facing serious financial difficulties and has accumulated a substantial amount of debt.
- The company is considering selling its Champion brand to inject much-needed cash and alleviate financial strain.
- Caution is necessary given the company's situation as it contemplates selling its primary growth-driving asset.
A quick look at Hanesbrands Inc. ( HBI ), a US clothing company specializing in innerwear and activewear, reveals that the company is facing serious challenges in my view. Hanesbrands has been experiencing financial difficulties for more than five years, and it has accrued a substantial amount of debt. Their acquisition of Champion, initially intended to be their primary revenue source, is now being contemplated as a potential asset to sell. This move could inject much-needed cash into the company and alleviate its financial strain, which has seen the stock lose 72.79% of its value over the last five years.
A company with renowned brands at a low valuation might seem like a promising opportunity. However, despite recent pressure from activist shareholders , there are significant uncertainties about the company's future. Moreover, the stock has lost more value than its industry peers in a highly competitive environment. While selling off Champion might help improve the company's financial position, it's likely to be at a reduced price. The overall business is facing substantial challenges, and selling a growth-driving component to support the rest of the company raises a major concern. Therefore, I recommend a sell rating.
Company overview
Hanesbrands, the owner of Hanes, Champion, and Wonderbra, is known for its line of basic T-shirts, underwear and bras. The company generates revenue through three main segments: Innerwear, which accounted for 39% of sales in FY2022; International, which accounted for 30.7% of sales; and Activewear, which accounted for 24.9% of sales. Each segment has separate management teams, but shares supply chains and marketing platforms. The company's core strategy involves acquiring well-established brands to drive growth. However, we can see that over the last five years, growth has been in decline. We can see that YoY, there has been a decline in sales across all segments, and this trend has continued into FY 2023 if we look at the company's FH 2023 results .
The company is currently facing a series of hurdles due to substantial debt, impacting profitability and cash flow. The company is now under the spotlight of an activist shareholder, Barington Capital , who is pushing for decisive actions to create shareholder value.
The Champion brand
In the Q2 2023 earnings report , Hanesbrands identifies Champion as one of its four key growth drivers, alongside strategies to revitalize the Innerwear segment, enhance e-commerce capabilities, and streamline international operations. In 2021, the company's goal was to turn the brand into a $3 billion brand by 2024.
Champion's sales performance up until now has been mixed, with growth in the Asian market and stability in Europe but disappointing results in Australia and the U.S. market. Activist investor Barington Capital has pressured Hanesbrands to address its debt and cash flow issues, ineffective management and lack of shareholder value. From this pressure, a potential brand divestment is strategically being assessed. The outcome of this decision will significantly impact the company's portfolio and financial health. The company's commitment to debt reduction and cash generation is crucial for recovery, but the potential sale of a key growth driver raises questions about future growth prospects.
Financial overview
Hanesbrands has witnessed a five-year decline in both its revenue and profitability, along with mounting debt and cash flow challenges. To facilitate its recovery, the company's focus on reducing debt and generating cash will be crucial. Notably, its revenue has dropped from $6.8 billion in FY2018 to $5.9 billion TTM.
Examining the company's net income, we observe a worrying decline, with a loss of $394.9 million in the trailing twelve months, a significant drop from $539.7 million in FY2018.
In FY2022, the company faced a challenge with negative levered free cash flow. However, in the trailing twelve months, levered free cash flow has shown improvement, reaching $279.53 million. This positive development enabled the company to proactively reduce its debt ahead of schedule. A noteworthy achievement during this period was the significant reduction of inventory, amounting to $255 million or a 12% decrease compared to the previous year.
Examining the balance sheet, we observe that the company managed to reduce its leverage to 5.6 in Q2, 2023. While this marks an improvement, it is important to note that the leverage ratio remains notably high. This high leverage level raises concerns about the company's risk of potentially defaulting on its loans. It's worth mentioning that the company recently obtained a new loan amounting to $900,000, which is set to mature in 2030.
Valuation
The apparel industry has undeniably encountered significant challenges, and Hanesbrands is no stranger to these hurdles. A comparative analysis against industry peers like Gildan Activewear ( GIL ), PVH ( PVH ), and Under Armour ( UA ) reveals that Hanesbrands has weathered a more pronounced impact. In the past year, Hanesbrands' stock has seen a substantial 72.79% decline over five years, with a noteworthy 40.56% drop in the last year alone. This stock decline mirrors the company's financial struggles, substantial debt, and I believe the pressure exerted by dissatisfied shareholders.
When we assess its FWD price-to-earnings ratio of 39.82 in comparison to its industry counterparts, it becomes apparent that the stock is significantly overvalued. What adds to the concern is the absence of evident growth catalysts and the company's efforts to rectify its challenging financial state by contemplating the sale of a brand that was initially earmarked as a primary growth driver. While the company may seem enticing with its low price-to-sales ratio of 0.26, investors should exercise caution due to mounting debt and a limited outlook for growth.
Risks
Hanesbrands finds itself in a challenging position with a consistent decline in its financial performance, substantial debt, and contemplation of selling a key growth brand to alleviate financial stress. This situation raises concerns, particularly within the fiercely competitive and ever-changing clothing industry. When we evaluate the company's debt compared to industry peers, it's evident that Hanesbrands carries a substantial risk, with a total debt to equity ratio of 1,200%. This ratio suggests that the company heavily relies on borrowing to fuel its growth prospects, which can be precarious.
While selling Champion may ease the debt burden, finding a suitable buyer for Champion presents its own set of challenges. Furthermore, the industry's persistent volatility and the ever-changing preferences of consumers add to the inherent risks that Hanesbrands must navigate. We have also seen the negative impact of a ransomware attack in May 2022, which can have financial and reputational damage.
Final thoughts
Given Hanesbrands' challenging circumstances and the uncertain future of its Champion brand, potential investors should exercise caution. The company's stock has suffered due to financial troubles, increased debt load, and pressure from activist shareholders pushing for significant changes. When comparing Hanesbrands to its industry peers, it's clear that the company lags behind, raising doubts about its ability to thrive in the fast-evolving clothing sector.
While selling off Champion may provide some financial relief, the selling price might not be attractive. Furthermore, the company as a whole is grappling with significant issues, and parting with a brand crucial for growth to support the rest of the business is a cause for concern. Consequently, I recommend a sell rating.
For further details see:
Hanesbrands: Dressed For Trouble With Champion In Tow