In February, I believed that investors in Hanesbrands Inc. (NYSE:HBI) were standing in their shorts. The company has seen tough years, with sluggish operating performance being exaggerated by too much leverage. After a tough 2022, the 2023 outlook was outright shocking, and after the dividend was finally eliminated, Hanesbrands had lots to prove from a challenged position.
After the originally soft 2023 guidance has been cut further alongside the second quarter earnings release, and interest rates have ticked up even more, it is hard to get upbeat. The involvement of an activist investor and potential sale could provide a trigger, which is still uncertain here.
A Recap
Hanesbrands has largely grown to its current existence following the 2016 purchase of Champion Europe, which created a $6.0 billion business which posted EBITDA in excess of $800 million, with earnings posted at $1.85 per share. A $27 stock looked reasonably valued as net debt of $3.2 billion was equivalent to about 4 times EBITDA at the time.
With the business posting stagnant results, shares had fallen to the $15 mark pre-pandemic, rose to the low twenties in 2021, as shares had fallen to the $7 mark at the start of this year. Part of this was due to the continuation of too high dividends in my opinion, with the company being a stubborn payer which could not be backed up by actual earnings and/or cash flows.
Forwarding between 2016 and 2021, sales had grown from $6.0 billion to $6.8 billion as EBITDA of just over $800 million has actually risen to just over a billion, while operating earnings were flat at $800 million. Net debt actually came down to $2.8 billion in 2021, resulting leverage ratios of less than 3 times EBITDA.
This modest improvement by 2021 was outdone by two factors. For starters, the company announced an aggressive $600 million buyback program at the start of 2022, and it delivered on much softer performance in 2022. Revenues fell to just $6.2 billion that year (falling almost a billion short compared to the original guidance for the year).
Dividends, lower earnings and poor cash flow conversion pushed up net debt to $3.6 billion by 2022, with EBITDA down to $794 million, for a 4.6 times leverage ratio. Moreover, earnings were under great pressure as the company continued to pay out a $0.60 per share dividend, which was finally eliminated as the reality seemed to set in at the C-suite as well.
This came as the company guided for 2023 sales to fall towards $6.05-$6.20 billion, and that in an inflationary environment. Adjusted earnings were seen between $500-$550 million, with the earnings shortfall (vis-à-vis 2022) being greater than the savings from eliminating the dividend.
Trading Stagnant
Since February, shares of Hanesbrands have traded in a $4-$6 range, and after briefly trading below the lower end of the range, shares now trade at $4.50 per share.
The financial woes hurt the business already with some bond issuances in February, as the company had to offer a 9% coupon on $600 million in senior unsecured notes due in 2031.
In May, Hanesbrands reported a near 12% fall in first quarter sales to $1.39 billion, with reported operating earnings down two thirds to $57 million, as operating margins of 4% and change were entirely (and more) eaten by interest expenses, with GAAP loses posted at $34 million. This worked down to a GAAP loss of $0.10 per share, with adjusted losses reported at six cents per share.
In August, Hanesbrands posted a 5% fall in second quarter sales to $1.44 billion as GAAP operating profits halved to $69 million. While this looked solid on a sequential basis, interest expenses for the quarter came in at $75 million. GAAP losses of $22 million were reported at $0.06 per share, with adjusted losses reported at a penny. Net debt was reported at $3.5 billion, pretty flat as the company was able to reduce inventory levels a bit, offsetting some of the incurred losses. Trailing adjusted EBITDA of $635 million results in an elevated 5.5 times leverage ratio, as obviously there is still pressure on this metric.
The company cut the full year sales guidance to $5.8-$5.9 billion, with adjusted operating earnings now seen at just $425-$475 million. The fact that the 351 million shares trade at $4 and change values equity at just $1.5 billion, a fraction of the net debt load, indicating the severity of the financial distress, certainly in a rising interest rate environment.
Some Green Shoots?
Other than a continued decline in the share price, there is not much to get upbeat on, with the financial numbers showing no reasons to get upbeat.
In September, Hanesbrands announced that it was evaluating strategic options for the Global Champion business, acting as a potential trigger of course, but selling even higher-quality assets in this environment will not automatically yield a great price in this environment.
And Now?
With the original soft 2023 outlook being cut further alongside the second quarter report, there are few reasons to get upbeat about Hanesbrands Inc. in a higher interest rate environment. In fact, the only positive is the involvement of an activist investor at this point in time and potential asset sales, but these are not great times to sell off assets. After all, despite the low optical share price, the company still represents a $5 billion enterprise valuation here.
Given all this, it is too early to go bottom fishing as the woes appear to be priced in. While it is too late to be bearish on the stock (with a compelling risk-reward), I simply fail to see enough triggers to see a compelling investment case from the long side at this point in time.
Read the full article here
