2023-05-10 14:02:28 ET
Summary
- I explain why Hanesbrands Inc. is under distress and how this exhibits a turnaround opportunity.
- I discuss what Hanesbrands management is doing to turn the ship around and why I'm bullish on these actions.
- I explain why the stock is undervalued through discounted cash flow analysis and comparing multiples.
- I perform market research on the Hanesbrands Inc. social media platforms and their products on Amazon.
What's With Smackdown?
Hanesbrands Inc. ( HBI ) is in distress and I expect a 1.5X-4X when they return to normal business levels.
Artificially low interest rates and supply chain threats motivated retailers to overorder apparel products. While Hanesbrands Inc. does have retail stores, they are primarily a vertically integrated manufacturer, owning 60% of their plants . These orders created an illusion of demand, so their plants started to make mounds of apparel. Whilst this was happening, cotton prices screamed to a ten-year high of almost $160/lb. This also happens to be the second highest in the last 100 years when prices were $200/lb in 2011. They were essentially making products with raw material input prices that happen only once a century.
Cotton Prices Last 10 Years (Trading Economics)
When Covid slowed down, and interest rates were on the rise, demand for apparel products wasn't quite what the retailers expected. Hanesbrands was left with excess inventory made from high cost raw materials. To sell these pieces, they would have to mark off or suffer from inventory overload. The culmination of these issues, destroyed their margins over the last couple years.
During the same time, freight and shipping containers 10Xd. Hanesbrands manufactures a great majority of their products overseas, and they expanded globally such as their Bonds line in Australia. This meant paying costs for shipping only further destroyed their balance sheet .
FBX Global Container Freight Index (Freightos Data)
On top of that, Hanesbrands has a looming debt that management decided to not address until now. They were busy spending money on buybacks, dividends and acquisitions. The financials of the company started to get uglier and uglier.
But it doesn't end there. With the threat of popular athleisure in Lululemon (LULU), NIKE (NKE), and others, Hanesbrands Inc.'s segments in Champion started to lose traction. Private labeling and other unknown brands have challenged the idea of affordable basic clothing such as t-shirts and underwear. And although they are now investing in necessary infrastructure, they also suffered a ransomware attack.
It has been a perfect storm for Hanesbrands lately, and now it trades at historical lows. What a great opportunity to jump on a brand we all know and love.
Why Am I So Bullish?
I'm not expecting a turnaround of the century, but I am expecting a return to normal for Hanesbrands Inc. The price of Hanesbrands is so low right now, a return to normal could 1.5 - 4X the current entry. Some analysts had Hanesbrands at $40 stock post pandemic based on cash flow expectations. But the biggest "why" is how management is learning from their mistakes and turning the ship around. They are managing the debt and dividend now, growing their brand through excellent marketing, and growing other streams such as their collegiate apparel and ensuring their products are saturated in ecommerce on Amazon.
Managing The Debt And Dividend
In February, Hanesbrands launched an offering of $600 million of senior notes due in 2031 at a 9% coupon to prolong their debt obligations due in 2024. Although this comes with a high interest rate, it does help them survive for another 8 years to turn the company around. Along with this, management has eliminated the dividend completely and is allocating all future cash flows to pay down this debt. This angered dividend investors, but now provides an opportunity to value investors.
Growing Their Brands
Hanesbrands segments include: Hanes, Champion, Bonds, Maidenform, Bali, Bras N Things, Playtex, JMS/Just My Size, Gear for Sports, Wonderbra, Berlei, Comfortwash and Alternative.
For the most part, the revenue from these brands has stayed flat for the last 5 or so years. I compiled segment revenue from their last 10-Ks to get an idea of the breakdown, and it seems everything has stayed pretty consistent.
Sales By Segment (10-Ks and Author)
The bread and butter for Hanesbrands is their innerwear segment. In fact, in their last quarterly earnings , innerwear only dropped 4% compared to a total revenue drop of 12%. This means for Hanesbrands to grow, they have to streamline their innerwear segment or promote growth in their Activewear with the major brand Champion, and they are taking a smart approach to do this.
Champion
They are trying to grow Champion by promoting to the younger generation through social media marketing and streamlining their data driven model with their new SAP integration. This means they should be able to make intelligent design and marketing decisions based on data driven models rather than throwing a dart at the board. For fun, I decided to take a gander at their Instagram and was pleasantly surprised with the content quality thus far.
Champion Instagram (Instagram)
They tout over 5 million followers and average around 3-4k interactions per post with some of their popular lines gathering over 20k. We can compare this to Lululemon, which has 4.5 million followers, but the interactions are more dense with 15-20k on average.
Lululemon Instagram (Instagram)
I chose to compare to Lululemon because it is the cream of the crop for brand strength right now. I was a bit surprised with how strong Champion's social media presence is comparatively.
Hanes Originals
Furthermore, Hanes has kicked off their new marketing campaign "Make yourself comfortable ." It is a tasteful campaign that nods to the Victorian 1901 era roots and embodied music from Blondie and comedic relief, along with notes from the popular Netflix (NFLX) hit series Bridgeton . This campaign and video shorts were targeted to the NBA playoffs, NBC and TNT. I recommend those interested in Hanesbrands to watch the two-minute clip and see where your marketing costs are going to. Personally, I thought it was well done and captured a wide range of audiences.
Hanes - Make Yourself Comfortable (Hanes - Marketing Dive)
They are stacking on this campaign by sending influencers Victorian styled boxes filled with Hanes originals to show off to fans. It embodies what we think of when we buy a pair of Hanes - reliable comfort.
Collegiate Apparel
In Hanesbrands' last earnings, Scott Lewis mentioned their collegiate apparel business exhibited another quarter of YoY growth, which is a heck of a good sign. They are the world's largest supplier for collegiate fan apparel and just recently signed an exclusive Apparel Collaboration with UCLA.
Unless people decide to stop repping their favorite schools, I'd be hard pressed to say this isn't considered a mini-moat.
Let's Go Shopping On Amazon
If you're like me, you prefer to do your shopping for basics on Amazon.com, Inc. (AMZN). Now there is quite a bit of private labeling or fake brands, which brings up one of my arguments: private labeling will not destroy strong brands over the long run.
There is a lot of fish in the sea for basic clothing and there are some things I don't care to have a million options for. If I'm shopping for basics, then I want to pick a brand I can trust and ship it to me. I don't care to dilly dally with returns. So I thought it'd be fun to put this to the test to see how strong Hanesbrands is in an ecommerce setting. For a little marketing research, I decided to type a basic term in the search bar and see what shows up.
The first term I searched was "Men's Underwear" and then "Men's Boxers," and the first couple line items were as follows.
Mens Underwear - Amazon (Amazon) Men's Boxers - Amazon (Amazon)
I was impressed by the shear relevancy, volume, and price of Hanes compared to competitions. It is clear Fruit of the Loom and Gildan are competitive in this sense, but Hanes is definitely a strong brand here.
Moving on, I decided to type "hoodie" and "sweatshirt" and again, the first couple lines and massive reviews and stars were dedicated to Hanes and Champion.
Men's Hoodie/Sweatshirt - Amazon (Amazon) Men's Hoodies/Sweatshirts Line 2 (Amazon)
Continuing, I searched the term "bra" and again, the first line had and relevant comments and reviews with Bali and Playtex taking the cake.
This was done for "socks" and "t-shirts" and over and over, Hanesbrands segments were always one of the most relevant. It is very clear to me they are serious about their online retail and have strong brands.
Valuation
I perceive Hanesbrands Inc. stock to be extremely undervalued. Valuation was performed through a Discounted Cash Flow ("DCF") by projecting out revenue and free cash flow margins, and using the perpetual growth method to find the terminal value. Historical Revenue, Cashflow from Operations ("CFO"), Capital Expenditures, Net Debt, and Shares Outstanding, were copied and pasted from Seeking Alpha and are located in the light blue boxes. My assumptions are in the tan boxes and final fair values are in the yellow. The results or shown with access to the file here:
HBI DCF (Author and Seeking Alpha Values)
DCF Discussion
I made the conservative assumption for 2% growth revenue based on historical data, analysts expectations and assuming there is little future growth prospects for the company. I make the Free Cash Flow Margin ("FCF Margin") value of 8%, based on the assumption that Hanesbrands will return to normal margins exhibited from 2015-2019 prior to increased commodity prices, shipping rates, and as they start to clear the inflated inventory over the next few quarters. The fair value, including their massive debt, shows us Hanesbrands around $4.50. However, we know management will be allocating all capital to reduce debt, so I thought a fair value before the debt was applied would be interesting to look at. We get around $16 a share with this. Based on this, if Hanesbrands can return to normal margin levels, there is a possibility they could 3X.
Historical Multiples
Another form of valuation is by looking at multiples. Hanesbrands typically trades at lower multiples compared to industry and some of more premier players such as Lululemon and Nike, so to compare their historical multiples to other companies doesn't make too much sense to me. Afterall, Hanesbrands is considered a boring underwear stock to Wall Street and will typically trade at boring underwear multiples, unless the financials are tremendous. This being said, it makes the most sense to compare multiples to its own historical values.
For example, its current price to sales is floating around 0.25 at the time of writing this article. This is an all-time low, rivaling only at 2020, when everyone thought the world was going to end. Baseline seems to be around 1.00, indicating Hanesbrands could 4x if it returns to normal business' levels.
Historical Price to Sales Ratio (Seeking Alpha)
Some may say Price to sales is not a great metric in this situation due to the debt destroying its market cap. Although, I would argue this is okay since management has cut the dividend and all future cash flows will go towards reducing debt, we can still look at a valuation which encompasses this debt in Enterprise Value to Sales Ratio.
Enterprise Value To Sales (Seeking Alpha)
In this case, EV/Sales is floating under 1.00. I would put baseline at 1.5, indicating a 1.5X if returned to normal business' levels.
Risks And Conclusion
The main risk is failure to return to normal margin levels. If this is the case, then they will have serious issues paying off their debt and will be distressed for some time. I'm optimistic on them returning however due to recent quarterly performance and guidance of $500 to $550 million in operating profit this year. But I'm also optimistic due to the current price which has baked in a lot of this risk along with the experience seeing the sheer amount of Hanesbrands products in stores, online, and wearing myself without notice.
I'm writing this outside in my Hanes Moisture Wicking Tee and my Champion Take a hike Nylon Shorts , and I couldn't be more pleased with where I am allocating significant portions of my portfolio. Management is turning the ship and the valuation is obscenely low. Hanesbrands doesn't have to do anything spectacular. They just have to push forward with their current plan, return to baseline and I will celebrate my returns with a pack of Beefy Tees or a new Champion Reverse Weave Hoodie. Many believe Hanesbrands is a risky play right now, but I'd argue price is the largest indicator of risk.
Because of the current valuation, I think the Hanesbrands Inc. risk reward profile is heavily favored to the reward side. I had an article issuing a "Strong Buy" just below $6. It screamed higher to $8 and then pulled down. Clearly, I jumped the gun, but over the long run, I believe Hanesbrands Inc. is one of the strongest plays of current times.
For further details see:
Hanesbrands: Turnaround Opportunity For This Extremely Undervalued Stock