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Why Hanesbrands Is Falling

May 03, 2018 3:44 PM ETHanesbrands Inc. (HBI)UAA41 Comments
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  • Hanesbrands has borrowed heavily to finance acquisitions, due to the company’s inability to grow organically and/or on a sustainable basis.
  • The company has leveraged its balance sheet significantly; the current debt-to-equity ratio is 938%. Hanesbrands is effectively paying $180 million per year on interest expense.
  • The company operates in a competitive industry with a below-median gross margin; Hanesbrands lacks differentiation or any real competitive advantage.
  • Insiders (executives) are basically selling their shares. HBI stock will probably fall at least to $15, and possibly further.

On February 14, I briefly outlined some risks associated with investing in Hanesbrands. I was short. The stock ran up that day – alongside other retail stocks. However, since then, HBI has fallen over 15% (and by about the same amount from the start of 2018). The S&P 500 has fallen about a percentage point, for reference, hence HBI is clearly under-performing, even in spite of increased volatility in markets in 2018.

It is risky to take long positions on “cheap”, low quality stocks, but it is arguably even riskier to go short on companies that are “expensive but otherwise sound”. Further, shorting is difficult, and in my opinion should only be done to hedge against long positions (unless you buy puts to limit downside risk).

In any case, HBI isn’t even cheap on a valuation basis, and in my critical opinion it is a low-quality stock. Note that while I am no longer short HBI, I do foresee further downside, although I am now less confident about the extent of the downside. Therefore, I am no longer short. (If you went short in early 2018, you should be pretty happy.) Nevertheless, my reasons for believing there is future downside are as follows.

Firstly, nothing has changed since my last brief piece. Most of Hanesbrands’s assets are what I would call “high risk”; that is, goodwill, intangible assets, deferred tax assets, inventories, and other miscellaneous assets and receivables. These are largely the sorts of assets that only have value if the overall business is managed well, performs well, and remains competitive.

I have little reason to believe Hanesbrands is managed well. People point to the return on equity, but the return on equity is only so high because of the high debt load. Any management team with access to capital markets can over-leverage

This article was written by

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Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I was short prior to this article, but I am no longer exposed in any way to HBI stock.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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