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Hanesbrands: I'm Buying The Dip

Aug. 03, 2018 2:03 PM ETHanesbrands Inc. (HBI)AMZN, TGT45 Comments


  • Global direct, international, and Champion growth continued, driving overall revenue growth (including constant currency organic growth) during Q2.
  • Management reaffirmed full year guidance and long-term Champion growth guidance.
  • The market overreacted to Target failing to renew its C9 by Champion contract in 2020, making shares highly attractive.
  • At a time when massive distortions in the economy are likely leading to malinvestment, investing in a discounted, defensive consumer goods business with strong liquidity and a healthy dividend is prudent.

I am buying Hanesbrands (NYSE:HBI) following the market sell-off of shares because the reaction to Target's (TGT) non-renewal of its C9 by Champion contract in 2020 is overblown and the business is just now entering its rebound stage where management's growth strategy should begin bearing fruit.


The company's moat (defined by its global supply chain, economies of scale, and brand power) remained strong during the quarter. According to studies cited by management on the earnings call, brands in this category of consumer goods are just as important to customers today as they were 5 years ago and HBI management continues to invest heavily in maintaining and strengthening their brands.

Furthermore, while not immediately evident in this quarter's results, management pointed repeatedly during the Q&A to the role that their increasing economies of scale/synergy harvesting and ability to mitigate/pass on inflationary costs to their customers through their supply chain and pricing power with retailers will play in driving margin expansion beginning in Q3. While inflationary pressures across all production and transportation categories squeezed margins in the first half, the company is leveraging their pricing power with retailers to raise prices, which should combine with increased efficiencies from Project Booster to expand margins.

The company also continued to progress on its deleveraging efforts, reducing net debt by ~$52 million during the quarter despite the declining margins. They should be able to make much more rapid progress in the second half as cash flows pick up through increasing growth and margins.


Global direct, international, and Champion growth continued, driving overall 4% revenue growth (including constant currency organic growth for the fourth consecutive quarter) during Q2, which fell on the upper end of management's guidance range.

The Champion brand continued living up to its name, growing in all geographic regions and 18% overall. Even more

This article was written by

Samuel Smith profile picture

Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.

Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.

Analyst’s Disclosure: I am/we are long HBI. 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.

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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Comments (45)

ckarabin profile picture
Their balance sheet is a train wreck! They have 180 days of inventory! And receivables are 90 days too! In short, they are having trouble selling! Classic signs of trouble! Does anyone cheer when GM has 180 days of inventory?! Therefore net cash flow from operating activities for the 6 months: NEGATIVE!

There's no equity in firm either! It's only 10% of assets. Debt up $400MM more in the past year!

Innerwear sales/profit are falling and that's their biggest segment. Where is this "moat" I am hearing about? Worse yet, US Activewear profit is falling! This is the segment that they incurred all the debt to acquire and the profit from it is FALLING? Whew!

Man stay away. Value trap if I ever saw one!
Orphan Brigade profile picture
Why did Target drop them ? Champion has always been a quality product with a good reputation....
Erik Neelsen profile picture
See if $17 holds...
PanicBuyer profile picture
Clearly the tariffs will have an effect here. We just don't know how much. More bad news to follow. Wait on HBI.
I took a look at HBI after the big price drop. The 4.5 billion in debt at nearly 6 x equity was enough to scare me away. Interesting company with nice brands but I am not a buyer of this stock.
Orphan Brigade profile picture
So has their t-shirts. They just seem to be a lower quality...
I'm very concerned about the quality of HBI's products lately. I've worn their tube socks all my life, but recently they have gone from being nice thick cotton to a slippery polyester blend that doesn't wick away moisture and just feels cheap. Most of the reviews on Amazon concur. I'd be fine if they'd just increase their prices, but cutting costs by producing shoddy products is going to ruin HBI's brand in the long run.
Top 10 holding for me. That said, it didn't feel very "defensive" the other day when it dropped through the floor.
Still holding.
top rated Morningstar stock . bought for IRA.
Thanks for the much needed info, took stupid advice from CNBC talking head on earnings, bought alot and got hammered !! Will hang on to shares awhile, should come back !!!
This is why investors loose in the market. They have a quick trigger doing a stocks uptrend, and get limited gains. In retrospect, they then have a slow trigger doing a downtrend hoping that the stock will recover. Just cut the bitch loose, there are other hot babes in the market.
Orphan Brigade profile picture
I like the strategy.
Thanks for update. Long HBI at 18.00 and have owned this on and off.
All they are loosing is exclusivity of selling C9 through Target;
The effect should be a wash since HBI can sell C9 through everyone.. including Target.

What am I missing?
HBI won't be a good buy until they resolve their issues on the home front. Without International sales/Acquisitions this stock would be in the gutter.
Thanks for your reply.
Morningstar has a FV of $29 on it . That seems a bit high based on its historical P/E ratio, but even a FV of $25 makes it look pretty good from a valuation perspective right now. Morningstar's analyst states: "C9 generated $380 million in trailing 12-month revenue, or 5.7% of total TTM revenue, with operating margins roughly in line with core U.S. Champion margins (roughly 14%-15%). While we're likely to trim our $29 fair value estimate by a dollar or two to account for the lost revenue, we believe today's pullback is an overreaction by the market and leaves Hanesbrands at an attractive risk/return proposition."
It looks like the ex-Div date is Aug 13th. I'll have to give it further consideration before then.
Thanks for the idea. I like the current valuation and div, but the BB credit rating certainly isn't impressive. Do you have any comments about why its so low? Thanks.
Samuel Smith profile picture
They took on a lot of leverage with acquisitions which is certainly something to keep an eye on. I take comfort in the fact that their current ratio is still over 2 and they are gradually paying down their debt. Additionally, it is a very stable, defensive business with a solid moat so little fear of a recession sending them to bankruptcy.
They locked most of their debt in at fix rates. I think that was a smart move.
ckarabin profile picture
Growth? What growth? Weren't sales up 4% and then they lost a $400MM contract that was something like 20% of Champion's total sales? And innerwear continues to erode, being a commodity locked in a slow race to the bottom? And the debt they incurred to buy things like Champion is still there and still overleveraging the balance sheet while the asset they bought starts to look impaired. Boy, I would stay away from this turkey!
Samuel Smith profile picture
The contract was actually more like $350 million I believe and it won't expire until 2020. It wasn't a high growth component of Champion and will be easily replaced by then with other growth opportunities and potentially another retailer will pick up C9. Sure there are risks. My job is to provide research and analysis. Your job is to decide. To each his own.
And then the shorts put in their 2 cents.....
Copy that.....the balance sheet is worse than their “tighty white is”........want to see them work down this debt before I buy.
Scarlo profile picture
Look at the chart and the dates on the significant high-volume dips correlates almost completely with quarterly conference calls. Work some options around that.
Charlie's Munger profile picture
Bought a starter in 17s.
Garrison Householder profile picture
I jumped ship in early July with a small gain, mostly from the dividend, after the run-up in May and June (started the position in March 2017). I still like the story, but the lack of clear progress on management's stated goals has me in wait-and-see mode. If this post-earnings collapse continues to the point of a 4% yield I'd probably be tempted to re-enter with a small position though.
Samuel Smith profile picture
Similar to TSCO, I've been trading in and out of HBI for the past two years. Both stocks seem to produce overreactions in the market on both good and disappointing news. I'm happy to profit from people's emotional instability.
pearldelat profile picture
I thought it is the computers doing most of the trading nowadays.
The loss of C9 business from Target may have more to do with the CEO of Target, Brian Cornell, being extremely erratic as a manager. Cornell hires people who leave the company within a year or so and has done this repeatedly. He launches a new program or project and then it fizzles and Target moves on to something else. Both Target and WalMart are the biggest single customers of Hanes and it likely will remain that way.
It is not clear to me that the discontinuation of the C9 program is a bad thing. Obviously Target is a huge distribution channel. That being said, Champion brand sales are increasing rapidly on a global basis. If Target was getting too good a deal in relative terms, then Champion might end up cannibalizing margins from other distribution channels in future years if they continue the current agreement. I acknowledge this is only a supposition.

The Champion brand is looking fairly hot right now. Overall, I find the Hanes / Champion active wear products are a far better cost / quality proposition than competing UA products. I don't know how the average high school athlete can afford some of these UA products. I agree that at the current share price HBI looks attractive. If they just muddle along and accomplish fairly conservative projections, these shares could easily trade into the mid to high 20s if one assigns just an average 15 multiple. Their online sales growth is significant and brands have real bottom line meaning in this sector. People tend to stick to undergarments they already like and repeat purchase brands over long periods of time. At this time , the upside argument for HBI is much stronger than the downside argument in my opinion.
Samuel Smith profile picture
I completely agree - well said!
RJMC profile picture
Could be dead money for few months but dividend at this level is good. PEG ratio is not bad either. Agree more upside than downside.
Samuel Smith profile picture
Sell puts and/or covered calls if you feel that it might stagnate for a while.
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