Hanesbrands Is Getting Threadbare

·5 min read

Hanesbrands Inc.'s (NYSE:HBI) products are immensely popular. The stock, not so much.

While it would be fine to hold it if you own it, those who may be interested in the stock may want wait a few months and consider the caveats.

For instance, consider the impact of Federal Reserve rate increases, the direction of the inflation rate, conditions impacting the supply chain and data on consumer spending. Additionally, Hanesbrands was unable to fill $40 million worth of Champion orders due to lack of inventory this year.

Popular products

Hanes is a well-known brand with good-quality products. The company designs, manufactures, sources and sells basic and sports apparel for men, women and children. It sells some home goods, too. But it is its innerwear, activewear and international clothes that built the brand.

The company licenses its Champion name for footwear and sports accessories. Hanesbrands has license agreements that let others sell its products under names like Maidenform, JMS/Just My Size, Bali, Polo Ralph Lauren, Playtex, DKNY, Gear for Sports, Zorba, Bras N Things and others.

Hanes is not a company to pay short shrift. Approximately 96% of people surveyed are familiar with Hanes, while 76% like the products and 20% are neutral or buy other brands. YouGovAmerica lists Hanes among the top 25 name brand companies in the world among all adults; that's no small feat. In clothing and footwear, Hanes is the most popular brand.

The company operates 216 retail and direct outlet stores in the United States and Puerto Rico. It has 626 retail and outlet stores in Europe, Australia, Asia, Latin America, Canada, the Middle East, Africa, Mexico and Brazil. Its U.S. hosiery business is for sale. The European-based Innerwear business was sold.

Weak-kneed stock

The weakness in Hanesbrands, in my opinion, results from two primary factors. First, consumer retail stocks are under pressure and a good quarter of financial news cannot forefend its dive. Second, there is a lack of confidence in management; they are not producing the long-term consistent profits and revenue growth analysts and investment bankers expect.

In the four weeks between April 20 and May 20, Hanesbrands' shares fell almost 22%, from $14.86 to $11.63. Shares are down approximately 40% for the year and 44% over the last five years. The S&P Retail Select Industry Index's shares tumbled 12.86% over the same period. Almost all retail exchange-traded funds are reporting negative yields to date between 18% and 43%.

Hanesbrands Is Getting Threadbare
Hanesbrands Is Getting Threadbare

The numbers

Hope sprung when the company released positive first-quarter 2022 results that exceeded analysts forecasts for revenue and earnings per share.

Net sales from continuing operations increased 5% over the prior year to $1.58 billion; thats up 7% on a constant currency basis. GAAP earnings per share from continuing operations were 32 cents and adjusted earnings from continuing operations were 34 cents.

Global Champion brand sales increased 6% over the prior year, highlighting the strength of the brand in troubled times. U.S. Innerwear sales increased 1.5% over the prior year and 37% on a two-year stack basis. Management attributes some of this to price increases.

Hanesbrands repurchased $25 million, or approximately 1.6 million shares of stock in the quarter. Another positive number for retail value investors is a 5.16% forward dividend yield. However, the dividends safety, growth and consistency are tentative, in my opinion.

Wall Street analysts were leaning to the bullish side, but they are now less certain. Among 15 analysts, seven are recommending a buy and eight recommend holding shares. The GF Score of 81 out of 100 shows value and profitability are the company's strong suits, while its weaknesses are growth, momentum and financial strength. GuruFocus has detected two severe warning signs with Hanesbrands.

Credit Suisse Group earlier in the year raised its expectation for Hanesbrands to outperform. It set an average price target of $23 to $26. Stifel just lowered its average price target to $11 and maintains its hold rating.

I believe the average price target might reach $14 to $15 over the next 12 months; that is a 33% change from the current price. Hitting the target depends if consumer spending keeps up, if supply chain impediments ameliorate and if management strings together profitable quarters. The next earnings per share forecast consensus is 34 cents. That is down from 47 cents for the same quarter last year. The next report date is Aug. 3.

The CEO and a director have bought over 40,000 shares so far this year in the $15 range. There are no reports of any major insider selling in 2022.

Loose worrisome threads

Owning Hanesbrands leaves investors picking at a lot of loose and worrisome threads. Short interest is up from 9.3% a month ago to 11.33%. The price-earnings ratio dropped from 8.2 to 6.98 in the same period. The beta is 1.14. All this means the stock may fall faster than the market on any bad news. The dividend is not assured, and any cut might be the impetus that sends the stock down more.

The net debt is up again after being reduced in 2021. Debt is $3.46 billion currently, while equity has risen from $702.5 million to $779.4 million. Additionally, the debt-equity ratio is up to 447% as of April 1. The ratio increased over the last five years. Operating cash flow does not cover the debt. Ebit also adequately covers the company's interest payments, but higher rates are a certainty. Despite the debt, the company is repurchasing stock.

The Champion brand is building its online presence, but 5 million followers are only a drop in the bucket in the social media age. Direct sales are a key contributor to retail success. VF Corp.'s (NYSE:VFC) Dickies brand has Madonna representing it, while Carhartt has rappers. In comparison, Champion has actor Tony Carvallo in its commercials. Who?

Hanesbrands is not a stock I can recommend as more than a hold at this time for retail value investors. The best thing the stock has going for it is the dividend yield and brand popularity, so I dont feel the stock can weather this windblown market currently.

This article first appeared on GuruFocus.