2023-08-18 01:24:13 ET
Summary
- Hanesbrands is making progress in fixing its business by reducing inventory and paying down debt.
- The Hanes brand is performing well, but the Champion brand is struggling and needs stabilization.
- Activist investor Barrington Capital is calling for change at Hanesbrands, including upgrading the board and potentially implementing a new CEO.
In March , I asserted that Hanesbrands ( HBI ) had problems but that they are fixable, while in June I followed up on the name noting that while there were some green shoots of improvement, that its issues won’t be fixed overnight. The stock is up modestly since my original write-up and up over 16% since my most-recent write-up. Let’s catch-up on the name.
Company Profile
As a refresher, HBI is an apparel company known for its Hanes branded undergarments as well as its Champion branded activewear. The company owns several brands but these two are its largest and most important. Hanes focuses on essential items such as t-shirts and underwear, while Champion is most recognized for its mesh shorts and practice uniforms.
The vast majority of HBI’s products are sold through the wholesale retail channel, with under 20% of its sales coming from the DTC channel. The company manufactures over 70% of the apparel it sells at its own facilities or dedicated contractors.
Q2 Progress
As a reminder, HBI got in trouble last year when it didn’t identify that wholesalers were stocking up on inventory due to previous supply chain issues related to Covid. This issue certainly wasn’t unique to HBI, and even this past quarter solar inverter company SolarEdge ( SEDG ) saw this issue hit it . While this issue was pretty prevalent in the apparel space last year, HBI’s vertically integrated model where is runs its own manufacturing plants, led to more pain than most in the space.
Inventory has been one of the big issues I’ve been tracking, and on the front, the company was able to reduce inventory by -12%, or $255 million, year over year and -7% sequentially to $1.84 billion. The company is targeting to have inventory down to $1.5 billion by fiscal year end.
The Hanes brand has clearly been the stronger of HBI’s two brands, with Innerwear sales up nearly 3% in Q2 to $705.8 million. However, activewear sells fell -19% to $267.5 million, with Champion sales down -25% in the U.S. and -15% overall in constant currencies. Overall sales decreased -5%, or -4% in constant currencies.
At this point, the Champion brand is clearly an issue and struggling to bounce back. On the call, CEO Stephen Bratspies said:
“In the U.S., Champion is not where we expected it to be at this point in time. This is clear in our results and our outlook. And as a result, we're actively taking steps that we believe will drive the long-term success of the brand. We brought in new leadership, which is driving new talent in design, merchandising and sales. We've coordinated and launched our new brand purpose of Champion a better tomorrow. We've completed our first full global product line from the new team, which is based on our disciplined global segmentation approach and will be available for the 2024 fall/winter selling season. In total, nearly 1/3 of our 2024 product and fabric platforms will be global versus 0 today. This will reduce SKU complexity and drive additional cost savings beginning next year. ... In addition to the natural margin recovery we expect next year from lower input costs and the benefits of using global product platforms, we've also taken recent additional actions to improve Champion's performance in the U.S. We quickly opened 7 pop-up Champion stores to move through excess inventory in a way that preserves margins and brand equity. We've established partnerships with industry-leading licensees for kids apparel and outerwear with the potential for additional categories. We're also beginning to leverage our successful performance in the collegiate channel by using our quick turn graphics capabilities to drive incremental revenue opportunities in our wholesale business. We're doing a lot to position Champion for success. We're making progress, and we're continuing to adapt to the environment. We remain highly confident in the potential of the brand. However, we expect Champion sales in the U.S. to continue to be pressured throughout the rest of the year.”
Margins continued to be pressured for the company but are showing some signs of recovery. Adjusted gross margins of 33.6% fell by -425 basis points year over year but were up 90bps sequentially. The company is projecting that it will exit the fiscal year with gross margins in the high 30% range.
HBI's debt level is another issue the company is dealing with and it ended the quarter with leverage of 5.6x. Reducing inventory helped the company generate $88 million in operating cash flow in Q2, and it paid down $100 million in debt in the quarter. HBI is still projecting OCF of around $500 million for the year and free cash flow of $450 million. The company plans to pay down $200 million in debt this year.
Looking forward, the company is forecasting sales of between $5.8-$5.9 billion, adjusted operating profit of between $425-$475 million, adjusting EPS of between 16-30 cents. For Q3, it is looking for revenue to decline by slightly less than -8% with an adjusted operating profit of between $130-150 million.
Overall, HBI continues to make progress fixing its business by reducing inventory and paying down debt. Its Hanes brand is doing fairly well, while it is actively looking to stabilize its Champion brand. This will continue to take time to play out, but the company is slowly trending in the right direction.
Activist Investor
Earlier this month , Barrington Capital sent a letter to the HBI calling for change at the company, writing:
“We believe that Hanesbrands currently sits at a critical juncture and must immediately focus on cash generation and debt reduction in order to create long-term value for shareholders. We believe that management’s largely ineffective response to recent market challenges is responsible for the Company’s rapidly deteriorating results. Further, Hanesbrands’ excessive debt burden appears to amplify the impact of poor operating performance on Hanesbrands’ ability to create value for shareholders.”
Barrington is looking to upgrade the company’s board, and perhaps even implement a new CEO. The company, not surprisingly, wasn’t very receptive, but did say it was “open-minded.”
Barrington has not disclosed how large its position is with HBI.
While I don’t think Barrington is pushing anything that HBI management doesn’t already know, I do like their presence in the stock. Matthews International ( MATW ) has rebounded strongly this year after Barrington called them out last December, and I think HBI has the same potential.
Valuation
HBI currently trades around 11.5x the 2023 consensus EBITDA of $541.7 million and about 8.2x the FY2024 consensus of $719.9 million.
It trades at a forward PE of 26.2x the 2023 consensus of 21 cents and 7.8x the 2024 consensus of 69 cents.
Revenue growth is expected to be -6% this year, and then grow by nearly 2% in 2024. Margin improvement is thus the biggest driver of EPS growth from 2023 to 2024.
If HBI can reduce its debt by ~$800 million by the end of 2024, then it may only be trading at 7.1x 2024 EBITDA, which for a brand is pretty attractive. The company has often seen between a 10-12x trailing multiple in the past.
Conclusion
There is nothing at this point that says that HBI’s issues aren’t fixable, and activist investor Barrington appears to agree. However, the company needs to continue to clear up its inventory issues and reduce debt, as those should be its top priorities.
The Hanes brand is in solid shape, so I don’t see any issue there. Champion, on the other hand, is struggling, and while a new team and initiatives are in place, only time will tell how successful they are. Champion had a resurgence in popularity several years ago, but at this point HBI just needs to stabilize the brand. A rebound in Champion sales isn’t currently in 2024 numbers, and would just be a bonus at this point.
I continue to rate HBI stock a “Buy” for aggressive investors.
For further details see:
Hanesbrands: Progress Continues, Reiterate Buy