Amit Chokshi_

Heavy Debt Obscuring Hanes' True Earnings Power

HBI's debt is what makes the stock so appealing, it's one of my largest holdings. This is about as close to public LBO participation a public shareholder can have with a phenomenal company. WEB paid 0.5x salesand 11.1x EV/EBITDA for BK Fruit of the Loom and paid 0.7x sales, 6.8x EV/EBITDA, and 24.2x P/E for Russell. FOL was bankrupt and Russell in my view is a weaker brand than HBI. So you're getting a company with arguably the best brand in underwear and very tangible value drivers for a very fair price.

HBI's Champion/9 series is doing well at TGT too and the company is also getting into other store fronts (Family Dollar).

The reason I love this co is that irrespective of economic conditions, I expect this to be a top line inflation grower (3-5%) per year but it has some real value drivers in operationionally and financially. They have a lot of non-cash restructuring costs that are being recognized reducing GAAP income, they are offshoring as much labor as they can, they are addressing pension issues and were able to reduce about $70MM in healthcare related costs.

As for financially, this business cranks out about $500MM in EBITDA per year so leverage for a high brand, stable business is perfect to me. CapEx will be about $90MM per year so you're left with $410MM in cash flow to work with in terms of working capital and paying taxes. THat still leaves a lot of dry powder to delever and reduce interest expense.

The "risk" is market confusion and execution risk. There's going to be about $250MM in restructuring costs (total) over the next 3 years but we don't know how much will show up in each year so god forbid an analyst covering it has a lower number for a particular quarter resulting in EPS higher than what comes in on a GAAP basis and the stock can take a hit. Also, HBI's switch to a calendar year end will make prior year comps difficult and their exitign as you mentioned from certain lower margin businesses will curtail revenue growht, also making prior year comps confusion. If you can wait it out 2-4 years this will prob be an amazing stock. As for execution risk, obviously having 5.0x debt/EBITDA makes execution of the co's strategic plans important, one minor mistake in this capital structure could be much more significant. However, I feel having Noll and Lee have the RSU's and options at $19 or so keeps them pretty focused on making sure things go smoothly. The comp awards were set pretty fairly in my opinion.