Why We’re Short Hanesbrands

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 |  About: Hanesbrands Inc. (HBI)
by: Whitney Tilson

After a singular career as a financial journalist focused on discovering ticking time bombs in public-company financial statements, Herb Greenberg has teamed with Debbie Meritz to start independent research firm Greenberg Meritz Research & Analytics. In the firm’s very first report (made available here with permission), Greenberg and Meritz raise several questions about the performance and prospects at apparel company Hanesbrands – so many, in fact, that after doing our own work, we shorted the stock.

The entire 14-page report is available here

Here’s the executive summary:

Investors cheered Hanesbrands’ (NYSE:HBI) rising first quarter operating profits and impressive beat of earnings per share in the face of falling sales. The company’s explanation for the strong bottom line: “Globalization and consolidation initiatives.”

Sounds impressive, especially for a company being portrayed by some pundits as having pulled off a remarkable  turnaround. Indeed, if you view the company the way Hanesbrands skillfully presents the numbers in its first quarter earnings release and post-earnings conference call, it looks and sounds like a turnaround -  until, that is, you get to the 10-Q, which was filed 16 days later.

To us, the reality: Less than two years after being spun off from Sara Lee (SLE), the company remains in the middle of trying to turn itself around and appears to be relying heavily on nonrecurring, nonoperational and artificial income boosts as the core of its current growth story.

For obvious reasons, we’re not fans of companies that use nonrecurring, nonoperational levers and artificial income boosts to give the impression that the underlying business is on a solid growth trajectory. We’re even less enthusiastic when the company leaves the good stuff for investors to find on their own in regulatory filings.

At Hanesbrands, nothing was more compelling last quarter than an $11.9 million reduction in the allowance for doubtful accounts. This wasn’t mentioned in the earnings release or conference call. 

We believe the balance sheet and operating cash flow were equally unimpressive in the quarter: Both deteriorated faster than normal and, in our opinion, are inferior to peers in a mature, competitive and rapidly consolidating industry at a company that is maneuvering itself through a major restructuring.

We realize that one quarter does not make a trend, but we believe the risk for investors is that as the economy continues to struggle, costs rise and competition intensifies, Hanesbrands had better hope it can find more nonoperational levers to pull to help make things look better than they really might be.

Disclosure: Author manages funds that are short Hanesbrands.