Hanes Unfairly Treated by Mistaken Association with Gildan

Includes: GIL, HBI
by: Amit Chokshi, CFA

On December 11, 2008, Gildan Activewear (NYSE:GIL) released earnings that disappointed investors. In sympathy, Hanesbrands Inc. (HBI or the "Company") experienced a significant sell-off. GIL dropped roughly 35% that day from its December 10 close of $14.17 to $9.19 while HBI dropped 24% from its December 10 close of $14.17 to $11.01.
On December 12, HBI fell a further 7% compared to a 4% decline with GIL. While HBI has generally recovered from GIL's earnings disappointment, the Street has failed to distinguish the different end markets HBI and GIL serve. In addition, HBI had been highlighted as an attractive short-sell recommendation by an independent research firm earlier in the year, that has resulted in steady selling pressure for the last half of 2008. The reality is that HBI's end markets are quite different from GIL and the short-sell thesis can be refuted by those that do their own work.
GIL is a vertically integrated producer of T-shirts, fleece, and socks. On the surface that sounds pretty similar to HBI and the core products are similar. The difference, however, is that GIL sells its products mainly to wholesale distributors as "blanks" which are then embellished by screenprinters. According to GIL's 40-F, GIL's products are purchased in/for sports, entertainment, corporate events, and travel and tourism purposes. This type of business is less than 10% of HBI's total business as the Company's products are branded and sold to mass retail channels like Wal-Mart Stores (NYSE:WMT) and Target Corp (NYSE:TGT).

GIL's products are far more sensitive to economic fluctuations compared to HBI. HBI's products are staple apparel that are regularly replenished. In contrast, GIL's products are tied to the ups and downs of the economy. For example, a number of corporate events for Bear Stearns or Lehman Brothers may have required large orders of GIL t-shirts imprinted with company logos. With many workers in New York City's financial sector unemployed, there will be far less demand for imprinted t-shirts for events like the JP Morgan Chase (NYSE:JPM) Corporate Challenge. That demand is not coming back and helps illustrate the point that much of GIL's end products are levered to strong corporate demand. With less corporate spending on all sorts of perks where attendees receive the obligatory free "event" t-shirt, it's not a surprise to expect GIL to experience continued pressure on its business.

HBI operates in a much different arena, with its end users purchasing its products at WMT, TGT, Kohl's (NYSE:KSS), and other retail stores nationwide. With less than 10% of its sales tied to the screenprinting segment, hopefully investors can begin to realize that the fortunes of HBI and GIL are not as intertwined as the two stock prices would suggest.

Nonetheless, HBI has experienced steady selling pressure off a determined base of short sellers through a good portion of 2008. This started in June 2008, when Herb Greenberg's new research firm, Greenberg Meritz Research & Analytics ("GMRA"), issued a report that basically highlighted HBI as a short-sell candidate. The stock fell by about 10% on the day of the report. Whitney Tilson followed on July 11, 2008 by making GMRA's research on HBI publicly available. By then the stock was at $23-24, down about 30% from GMRA's initial report.

My fund did not own HBI at the time of GMRA's report but did own it previously. When HBI was in the mid $30s, the stock appeared fully valued but I still followed the Company and felt I knew the potential risks and rewards with HBI. Once I read GMRA's report, however, I was surprised at the quality of research. For a 14 page report, there did not appear to be much substance. I had actually caught a post by Geoff Gannon following Tilson's post, pointing readers to his original thoughts on HBI, along with the bear case posted by Tilson and GMRA. I mentioned to him that I felt much of GMRA's analysis was lacking and intended to put out a rebuttal. Due to the market turbulence, I never got around to posting anything on HBI but with the markets settling down for some year-end window dressing, I wanted to take the time to revisit the HBI short case and GMRA's report.

The reason I was generally irked by the report was that aside from some solid concerns, certain issues raised by GMRA were framed in a manner that avoided the use of data to strengthen GMRA's point, ignored publicly stated claims by management, or were written in a way where if readers avoided doing their own homework, they would arrive at a false conclusion. For example, GMRA questions the quality of HBI's Q1 08 earnings because its effective tax rate was 24% compared to a prior year tax rate of 30+%. On the surface this might sound like an area of potential concern, but Company management discussed achieving a 22-25% long-term tax rate since the Company was spun off from Sara Lee Corp (SLE) in 2006. GMRA does not mention this fact so the uninformed reader would view the effective tax rate difference more skeptically.

GMRA also raised the point that worker/labor costs in China, a key region where HBI is expanding, were rising. Some anecdotal evidence is mentioned but no data is provided. Therefore, if one does not do follow up research, one could easily conclude that the spread in terms of labor benefits from shifting labor from the U.S. to Asia is declining such that this value lever for HBI would be potentially impaired. The problem is that on an absolute dollar basis, U.S. apparel workers make roughly $15-$16 per hour while hourly labor costs in Asia are under $1. So even if Asian costs quadruple, HBI's labor strategy can create significant shareholder value. This labor data is not provided by GMRA and is framed in such a way that a lazy reader could conclude that rising labor costs in China invalidate HBI's labor strategy.

To be fair, I've corresponded with Herb Greenberg in the past and I believe that much of his work has helped uncover a variety of frauds. I also recognize that broader equity markets have experienced major pressure throughout 2008 in part contributing to HBI's selloff. In addition, I am not sure what GMRA's current view on HBI is, as the initial report was issued in June 2008, but visiting its list of covered stories/companies seems to suggest GMRA is still following HBI. At any rate, I had always maintained files on HBI and wanted to put out my own take on the Company. Interested readers can click here for my full take on HBI which covers both the potential upside and downside of the Company.


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