2023-05-03 22:24:47 ET
Summary
- Hanesbrands appears cheap from an NPV perspective.
- A refinancing of its nearest-term debt was recently completed.
- Currently impacted by inflation, high inventory and low consumer demand.
Investment thesis
Hanesbrands (HBI), an otherwise stable every apparel company, is currently under pressure from high inventories, weak consumer demand and inflation. Although these are good reasons for the stock price to trade lower, these are temporary and do not indicate fundamental problems with the company’s business model or financial practices. A probability-weighted NPV calculation below arrives at a share price of $11, indicating a great long-term value investment from current $5 levels.
Introduction to company
Hanesbrands Inc. is an American casual clothing company with top brands such as Champion, Bonds, Maidenform, Bali, Playtex, and not the least Hanes under its belt. It owns most of its supply chain as more than 70% of the apparel sold has been manufactured in their facilities or close contractors which helps it navigate the cost structure of its business better. It sells its branded clothing through its more than 250 branded retail stores across the US and through wholesale customers’ stores and websites as well as their own. Hanesbrands’ products are worn by people of all gender and age with each brand focusing more so on, for example, streetwear as is the case with Champion. It has recently embarked on its Full Potential plan which is its new strategy for becoming more stable financially and more growing its brands more consumer centric.
Revenue Breakdown
2022 annual report Hanesbrands
Based on 2022 numbers, 69% of net sales were derived in the United States while the rest had taken place elsewhere. Its products are primarily distributed through wholesale customers, such as Walmart and Target, which accounted for about 19% of net sales in 2022. These mass merchant products are priced to be accessible to end customers of all incomes whereas its sales to department stores target a higher-income end customer. The latter accounted for approximately 8% of net sales while sales direct-to-consumer accounted for about 17% of net sales. Sales to other customers, including the United States military and various colleges, were about 25%.
Recent Company ReFi and Plan
The Full Potential plan is the company’s growth plan. It includes growing the Champion brand especially in Europe and Asia through partnerships and retail channels, using cash flow to pay down debt. It aims to become more profitable across market cycles which are the result of changes in general consumer confidence. It also increases investment in e-commerce and the project compounded annual growth rate in top line revenue is expected to be 6%.Much in line with the plan, the company has successfully refinanced its 2024-due notes as of March 9 th , enabling the company to meet its short-term obligations and complete the planned investments in e-commerce and presence in Europe and Asia.
Q1 2023 Results
Its Q1 2023 net sales in USD terms were $ 1.39 billion, about 12% lower than the Q1 2022 figure of $1.58 billion. Primarily a result of a macro-driven consumer demand slowdown, it resulted in a net loss of $34.4 million, or, a loss of 0.1 per share. These numbers also reflect the company’s efforts in driving down inventory through discounts, resulting in more margin pressure. Other than that, inflation in the form of ocean freight and cotton prices also continue to exert downward pressure on margins. Therefore, the company’s recent focus on growing its brands are not visible in the financial statements, as sales are down across business segments.
With data from Stratosphere.io
Financial Strength
From an income statement perspective, the company does not seem as healthy as it has been in the past whereas from a balance sheet perspective, it also seems rocky with Q1 2023 Net debt/EBITDA ratio increasing to an unhealthy level of 5.4 from 2.8 in Q1 2022. Also, its quick ratio stands at 0.6, indicating a clear dependence on being able to offload its inventory in order to meet its obligations for the next year with cash from its continuing operations.
Valuation
In order to value HBI stock, it is appropriate to create two future cash flow scenarios with the first one reflecting a continuation of the company’s prior results as measured by the average annual free cash flow and the second one reflecting a continuation of its current results which are negatively impacted, especially by current consumer trends. By probability-weighing these valuation outcomes, one can arrive at a great estimate.
For the first scenario, the intrinsic value of one share is about $13 with assumptions of a 2% growth rate in free cash flow, a discount rate of 8% and a terminal multiple of 10 which would be very much in line with the company’s prior results.
The base from which to project future cash flows off for the second scenario is the 3-year average of annual cash flows per share which amounts to about $0.37. This is assumed to repeat in 2023 and 2024, before recovering and stagnating in the years 2025 to 2033. The intrinsic value then arrives at $11.13, not that far from scenario 1’s $13. This means that the valuation price is not as dependent on the actual cash flows as on changes in the general investment environment as measured by discount rates and exit multiples.
Probability-weighing these scenarios with a 50/50 probability distribution results in a share price of about $11, indicating a potential of doubling the initial investment from May 2 nd ’s $5 price levels. This is of course not a guaranteed outcome as risks are associated with every financial investment.
Conclusion
In conclusion, Hanesbrands has the potential to be a great value investment from current $5 levels and has a track record of delivering stable returns in the past through selling everyday clothing at affordable prices. The company’s stock price is currently under pressure as their business segment is noticeably affected by inflation worries, the current consumer slowdown, and high inventories.
For further details see:
Hanesbrands: Temporary Headwinds, Long-Term Value Investment