Hanesbrands Comes Under the Fire of Activist Investor Barington

Evan Clark
·4 min read

Barington Capital Group has a few ideas for Hanesbrands Inc.

The activist investor — which has previously nudged L Brands, Avon Products, The Jones Group, Warnaco and more — said it has a stake in Hanesbrands and fired off a letter to chairman Ronald Nelson, suggesting a raft of changes aimed at turning around the company’s stock price.

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“We believe that Hanesbrands currently sits at a critical juncture and must immediately focus on cash generation and debt reduction in order to create long-term value for shareholders,” said James Mitarotonda, chairman of Barington, in the letter. “We believe that management’s largely ineffective response to recent market challenges is responsible for the company’s rapidly deteriorating results. Further, Hanesbrands’ excessive debt burden appears to amplify the impact of poor operating performance on Hanesbrands’ ability to create value for shareholders.”

Mitarotonda noted the company’s stock price has fallen 51.6 percent in the last year and has underperformed its own chosen peer group, the Russell 2000, over many years.

He argued the company’s gross margins “have deteriorated as a result of management’s missteps, exacerbated by a challenging macro environment. In particular, we believe that overproduction and an insufficient response to rising input costs, were significant contributors to the company’s gross margin deterioration.”

The activist pointed to gross margins that have declined to 32.7 percent in the first quarter — a 10-year low that is also down from the 38.6 percent seen in the five years before the COVID-19 pandemic.

“It appears that these decisions are the result of the company’s focus on simply increasing market share and sales growth,” he said.

Mitarotonda laid the blame on management, especially Stephen Bratspies, who became chief executive officer in August 2020.

“We believe that most of the company’s current problems result directly from management’s inadequate response to external challenges and a failure to address internal problems,” the letter said. “We would argue that Mr. Bratspies’ experience with electronics, toys and baked goods at Walmart, Sam’s Club, and FritoLay has not prepared him to lead a global vertically integrated apparel business. The company’s significant turnover of senior managers in the last two years appears to be a direct indictment of Mr. Bratspies’ leadership.”

Barington thinks some fresh faces on the board and, perhaps, a new CEO would help. It also has a three-pronged operational plan that it said could “triple, even quadruple, the company’s share price in the near term.”

The activist wants Hanesbrands to trim expenses by at least $300 million annually, cut inventories by the end of the year to 170 days outstanding and speed up its gross margin recovery by “further facility optimization and operating process improvements.”

“We believe that a more competitive cost structure will position Hanesbrands to create a best-in-class, vertically integrated apparel company and invest in sustainable growth that has the potential to deliver long-term shareholder value equal to many multiples of the current share price,” Mitarotonda said.

Hanesbrands responded by saying its board and management team are “committed to moving the company forward with a clear priority to deliver sustainable value creation for shareholders. We regularly engage with shareholders to understand their perspectives and to share ours. Consistent with this practice, members of Hanesbrands’ management team have held discussions with Barington over the past year, and the chairman of our board engaged with Barington in recent weeks, prior to Barington publicly issuing its letter.”

The company said it believes its “Full Potential” plan “will unlock significant opportunities, which we look forward to discussing later this week as part of our second-quarter 2023 earnings report. We are also, however, open-minded with regard to additional paths to improve performance and create value.”

Hanesbrands also noted that the people on its board and in its management team are “deeply experienced in areas relevant to our strategy and portfolio, including among other things, apparel, global manufacturing and supply chain management, retail, e-commerce, branding and marketing.” It also noted that three new independent directors have been added over the last four years.

Investors liked the idea of a little agitation at Hanesbrands and traded shares of the company up 5.1 percent to $5.49 on Tuesday.

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