The bear case for Hanesbrands (HBI US)

Hanesbrands makes underwear and the alike (shocks, fleeces, sweats, thermals) under the brands: Champion, Hanes, Maidenform, Playtex, L’eggs and Just My Size.
Most of the brands it controls came after acquisitions and to fund them it has raised USD 3.3b in debt (quite high at x3 current EBITDA).

The bull case is that underwear / innerwear have little fashion risk and Hanesbrands has a big market share in the US (management says 4 in 5 Americans purchased something from them)

But if we look back in 2008-9 revenue dropped -13% and Operating profit shrinked by -24%, weaker consumer sentiment can dent revenue.
M&A: In 2013 management spent USD 580m to buy Maidenform Brands, more recently spent USD 1.1b to make two further acquisitions: Champion and Pacific Brands.

Analysts expect synergies after the recent acquisitions, cost savings as  production is brought in-house. At first glance it seems synergies are evident as Net Income margin improved from 9.7% in ’12 to 15% in ’15, higher than other apparel makers.
But, ‘exceptional’ costs related to acquisitions come at USD 570.5m and if we include them in bottom line then margins drop to something more pedestrian close to 10-11%.
A similar discrepancy is notes in EPS, ‘adjusted’ (management’s reported) EPS come at USD 1.71 whereas GAAP EPS (the audited ones) come at USD 1.14.

Where is the truth?


A lot of old inventory: Between ’12 and ’16 inventory went up at 15% annually on average, much faster than the average growth in sales, at 7%. As a result inventorey days shot up to 199 days v 147 in ’12.

Interestedly operating cashflow has been declining for some time now, in opposite direction to income’s growth.

It all about the incentive: Management pays itself based 40% on growth adjusted EPS, 20% based on growth in revenue and 40% on cashflow growth.

Effective tax rate: although 80% of revenue is generated in the US, their income tax rate is just 9.5% !! (so probably either Tax authorities aren’t seeing some of the profits, or some of the profits investor’s see aren’t there)

Flat Organic growth: most of the reported growth (c 8%) comes from M&A as organic growth in ’14 came at 0.7% and in ’15 at L4L sales came down -1.9%. I think online can dent Hanesbrand’s revenue further, as most of their sales come from Wal-Mart stores and Target (49% of revenue) Kohl’s corp (15%). Champion brand could do the weight lifting but is only 14% of group revenue.

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