FilippoBacci
In the spring of 2020, I called Hanesbrands Inc. (NYSE:HBI) a relatively solid business, yet one with a softer balance sheet. Shares had come under a lot of pressure at the time, down three quarters from their multi-year highs, amidst softer operational performance in combination with significant leverage assumed on the balance sheet.
Some Perspective
Hanesbrands has been massively influenced by the 2016 purchase of Champion Europe, as it is hard to believe that shares were trading around $27 per share at the time. The company generated $6.0 billion in sales (2016 results), on which EBITDA of $827 million and adjusted profits of $775 million were reported, equal to $1.85 per share. Net debt was reported at $3.2 billion, a huge number close to 4 times EBITDA.
Through 2019, sales had risen to $7.0 billion, EBITDA came in at $1.06 billion, and operating earnings of $890 million worked down to earnings of $1.76 per share. Amidst modestly rising earnings, and thus lower leverage, earnings have taken a beating as the business become more asset intensive.
The lack of earnings growth meant that shares fell to $15 ahead of the pandemic, falling to the low single digits in the immediate aftermath of the outbreak of the pandemic, due to leverage concerns. Given the extent of the crisis, I believed that cash preservation (through dividend cuts) and other measures should and would be a top priority, certainly given the leverage situation. The low earnings multiple looked compelling, yet I failed to have conviction to buy the relative lower earnings multiple given the other trends.
Boom – Bust
Like so many stocks during the pandemic era, Hanesbrands Inc. shares initially fell, to rally in a huge way in 2021. Shares rallied to the low-twenties in the first half of 2021, but ever since have gradually come down. Shares started 2022 in the mid-teens, but have continued to fall, now trading at a low of $6 and change.
Fast forwarding to earlier this year, the company posted its 2021 results. They revealed revenues of $6.8 billion, up from a $6.1 billion number posted in 2020. Despite a recovery in sales, reported sales came in below the 2019 numbers. After posting break-even results in 2020, operating earnings rose back to $798 million in 2021, with adjusted EBITDA coming in at $1.05 billion. Net debt has been cut to $2.8 billion in the meantime, marking a gradual reduction to keep leverage in check at 2.7 times EBITDA.
Despite having just gone through tough times, the company continued to pay out dividends, but moreover announced a rather aggressive $600 million share buybacks program at the start of the year. This was driven by anticipated solid results in 2022, with sales seen between $7.00 and $7.15 billion, despite an anticipated hundred-million-dollar headwind from a strong dollar.
GAAP operating profits are seen between $780 and $850 million, indicating modest accretion seen on this front as well at the midpoint of the guidance. Adjusted earnings are seen between $1.64 and $1.81 per share, comparing to an $1.83 per share number in 2021.
Amidst headwinds from inflation and higher interest rates, the company cut the full-year guidance, now seeing earnings between $1.50-$1.67 per share as it released the first quarter results. The second quarter results were a bombshell report with reported sales down 14% to $1.51 billion. The extent of the shortfall was huge, including an estimated $100 million headwind from a cyberattack, but even adjusted for this and a strong dollar, the results were utterly soft.
The company cut the full-year sales guidance to a midpoint of $6.50 billion in a response to the news, with reported operating earnings seen at a midpoint of $595 million, as adjusted earnings are only seen between $1.11 and $1.23 per share. On the back of these dreadful results, share fell to the $10 mark in August.
In November, third quarter sales were reported to be down 7%, half of which were explained by the stronger dollar. This means that full-year sales are seen at just $6.2 billion, down nearly a billion from the original guidance to the year despite inflationary pressures, with earnings now seen between $0.95 and $1.02 per share, as the fourth quarter is expected to be very soft.
Leverage – The Cause Of All Evils
The issue is that despite another soft year, Hanesbrands shares have fallen to $6 per share, despite an adjusted (and GAAP) earnings number around a dollar per share. This is due to the dreadful operating performance, which means that leverage has increased on two fronts, as net debt rose to $3.7 billion, while trailing EBITDA has fallen to $932 million, for effectively a 4 times leverage ratio.
Most of this money went into inventories, and thus could come back quite soon, as the company continues to spent $200 million on the annual dividend, while having bought back some shares earlier this year, albeit at a reasonable pace.
Right now, the dividend of $0.60 per share translates into a 10% dividend yield, yet the potential to deleverage is very limited here. That is needed, as inventories need to come down, certainty as EBITDA will likely be pressured as well, pushing up leverage ratios higher going forward, on the back of a poor fourth quarter earnings outlook.
One might expect that every day, basic, and low-cost apparel should be quite stable, as the woes at Hanesbrands have been going on for years, with concerns now aggravated by leverage concerns.
Right now this is not the time to get bearish, but the question is if it is time to become upbeat on Hanesbrands here. This relates to the business and its earnings potential, and the potential for dilution down the road as well. The stubbornness and aggressive dividends and buybacks make me cautious about Hanesbrands Inc. here, as I wished management would have been much more conservative with its financials. While Hanesbrands shares might be a reasonable investment here in the long run, if you have a high tolerance for risk, I see very few triggers to get involved here.
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