Hanesbrands'(HBI) management team continues to impress me as they stay focused on the long-term goals. They have thus far been able to deliver on the promises that they made after their spinoff from Sara Lee in the fall of 2006 by paying down debt, cutting costs, delivering cash flows and increasing bottom line earnings growth.
Prior to an investor day meeting that the company held in New York yesterday, the company gave an update on where they are in their restructuring and discussed some of their intermediate and long-term goals. As I have mentioned in prior posts, the company does not give short term earnings guidance, but does give intermediate and long term guidance as outlined below. You can see below highlights of the guidance that the company gave in yesterday's press release followed by some of my comments in italics.Company Guidance (per press release):
EPS Growth Goal: Goal to achieve double digit earnings growth annually over the next 3 to 5 years. In the press release, CEO Noll hinted that this will likely be in the 15-25% range per year. Note that current Street estimates are roughly $2 per share which would give the stock a p/e of about 13 and a PEG of less than 1 with strong cash flow generation. My own estimate is actually slightly above the Street estimates with a little less in the first half than in the second half. Part of the increased EPS will be due to a lower tax rate which could give further upside to EPS.
Debt: The company has successfully paid down about $285 million in debt to bring their debt to EBITDAR level down to 4.6 from 5.2 at the time of the spinoff. In the press release, the company stated that the goal of debt to EBITDAR is 4.0x with a range of 3.5 to 5x. The company will likely speed up repurchases of shares or make potential strategic acquisitions as the debt to EBITDAR level declines. The company's first long term debt does not expire for 4 years and they anticipate that as debt markets become more normal, they will refinance their debt to a lower rate. I am happy to see the company specify the amount of debt which they feel is comfortable to hold on the balance sheet.. I agree that some degree of leverage is useful and likely prudent for a company such as Hanesbrands which has strong cash flows.
Top Line Growth and Profit Margins: The company guided to 1-3% revenue growth, excluding acquisitions, which is identical to prior estimates. The company also guided to incremental 50 to 100 basis point improvements in profit margins per year.
Interest and Tax Expense: Per the press release, 75% of Hanesbrands' long term debt benefits from a lower interest rate environment. Based on LIBOR at 3.25%, Hanesbrands has a interest rate of 6.9%. LIBOR rates are likely to stay low over the next several months, but in my opinion, they may have somewhat of an increase late in the year as the economy improves and (potentially) inflationary worries begin to escalate. If credit markets were to improve, Hanes should be able to lower the overall cost of debt.Hanes also expects a significantly lower tax rate for 2008-2010 at 22-25% against 31.5% in 2007 which would be a tremendous help to the bottom line of the company.
Near Term Factors: The company remains very positive on 2008 although they are very cautious on the first half of the year as they state that the consumer environment remains challenging. I have modeled in 1-2% revenue growth in the first quarter for the company which should increase in each subsequent quarter as the consumer environment improves.
Overall: Overall, Hanes has continued to deliver on everything they had promised to this point. The company is facing a bit of a consumer headwind as are others in the consumer discretionary sector, however, they were able to deliver revenue growth in the 4th quarter and continue in my opinion to utilize their cash flows in a prudent manner by paying down debt and when they consider it to be opportune also buying back shares of stock.
The key risks to the company are a prolonged and severe economic downturn which could slow some of the growth rate assumptions along with the possibility that they wont be able to cut costs as quickly as they have stated (whether due to commodity price increases if they aren't able to pass along these increases or a failure to properly identify sources of cost reduction). In the past quarter, the company launched new marketing campaigns and also announced a 10-year alliance with Disney which gives potential upside going forward.