Why We’re Short Hanesbrands

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’ (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.

Comments

[america_f_yeah]

Pair trade: short HBI, long MFB

2008 Jul 11 03:22 PM

[Value Dope]

tilson did his own work lol? did u do your own work on MBI,ABK, TGT, MCD, WEN, BGP, BKS too Whitney?

2008 Jul 13 05:28 PM

[fxtrader07]

Huh, very subtile promotion for your friend herb greenberg who has already served you and other hedgefund managers so well in the past, uh?
not as a financial journalist, however. greenberg has never been a journalist in the sense of the word. he has rather been the pure opposite of a responsible journalist. he has usually just taken up the stories provided by his hedgefund friends. often they went short just prior to the negative stories he then released - based to 95% on the 'information' provided by these very short sellers. read deepcapture.com

or specifically about herb the 'unjournalist' greenberg and other former cramer (tsc)-employees and how they create news, rumours and misleading stories with the purpose of influencing stock prices in the interest of hedgefund managers:

www.deepcapture.com/wp...

i am sure cramer's and tilson's (and ackman's and rocker's) friends at cnbc, barrons and the wsj and... will gladly take up the issue and spread related negative articles about Hanesbrands over the coming days. so shareholders should watch out. the hedgies and naked shorters are at it.
Btw, are you ever looking into a mirror , Mr Tilson?

2008 Jul 17 08:05 AM

[fxtrader07]

p.s. apart from my remarks regarding greenberg and the hedgefund cabale the short case regarding Hanesbrands may still be justified. i haven't analyzed the company as tilson (or ackman) certainly has. however that ridiculous greenberg-promotion had to be replied to.

2008 Jul 17 11:52 AM

[Daniel W]

Has Greenberg's analysis on companies been right--or wrong? Is his analysis on HanesBrands good--or bad?

Tilson correctly highlights Greenberg's past and recent work because it has consistently been right on the mark, and that's a very good thing (whether you don't want to lose money in a bad stock or want to make money going short the same).

I read Greenberg's analysis and thought it was good. I've also read the street's analysis and consider it too optimistic.

*They downplay the low quality of earnings that Greenberg & Meritz pointed out as well as the inroads that their competitors are making.

*They don't think earnings will suffer--either due to lower customer spending or increased cotton prices--as they see the company being able to offset this through the paydown of debt.

*They don't place enough weight on risk factors--particularly here of bringing new production capacity online without problems and the company's huge debt position. The effect of problems in the first should be obvious, especially as they ripple throughout the system. The effects of the latter should too, and here they would be magnified should the Fed start raising rates at some point over the next year to deal with inflation.

*Finally, I don't see why anyone would want to pay 14-17x earnings for an overly-indebted company which suffers from a higher RMB, higher cotton prices, higher rates on US debt, and lower consumer spending--particularly with the risks on the production side.

Based partly on the Greenberg & Meritz report I too went short this company. Haven't shorted a lot, especially relative to my portfolio, as I'm waiting to see what management will do with this next earnings release.

2008 Jul 17 01:53 PM

[Daniel W]

By the way, the above was written because this is the sort of stuff that matters, right or wrong.

Put another way: whether your conspiracy theory about Greenberg is correct or not doesn't matter. The truth or not of what he writes is.

Whether shorts have an interest in seeing shares they've sold go lower is not primarily important. Why they've gone short, and the correctness or not of that reason, is.

Talk about secret dealings between hedge funds and journalists is not just stupid--it's a waste of time.

2008 Jul 17 02:01 PM

[fxtrader07]

@Daniel W: you are dead wrong. if you analyzed the many hundreds of herb greenberg's negative articles on corporations over the years you will find out that about 70-80% of the stuff he claimed there never came true. of course, there were true stories among them, and not each and every sttory was dictated by his hedgefund friends and masters. some turned out to be true, no doubt and these stories are what many people remember and what people like tilson alway present as proof. but the vast mmajority turned out to be misleading, half truths, rumour spreading - but usually bearing the desired fruit of loweringstock prices.
tiull today herb greenberg will insist that naked short selling doesn't even exist - gee, look, the SEC two days ago felt the need to ban it at least for a selected handful of wallstreet darling stocks. that the oh, so investigative 'journalist' (what a joke) greenberg refused to take up the biggest crime going on in the stocl markets should be more than telling. but then again, who would want to write an investigative story about himself?

2008 Jul 18 06:31 AM

[Dan Weiss]

I would argue that the analysis made by Greenberg is so short-term oriented that is nearly worthless for long-term investors except to say that these are the things that investors need to look at going forward to see if some of the trends in inventory and other areas continue in future quarterly and annual reports.

2008 Jul 22 05:10 PM

[ouray]

My research shoes HBI to be one of the best investments long term then I've seen in a long time. If you miss this; your missing a real good one.

2008 Dec 14 01:56 AM