hanesbrands inc - hedgeyedocs.hedgeye.com/he_hbi_may2016.pdf · 8) accelerated deal activity: wrong...

HANESBRANDS INC SHORT THE TIGHTY WHITIES May, 23 2016

BRIAN MCGOUGH ALEC RICHARDS

JEREMY MCLEAN

HEDGEYE 2

DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied.

TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more details please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com

DISCLAIMER

PLEASE SUBMIT QUESTIONS* TO

[email protected]

*ANSWERED AT THE END OF THE CALL

HEDGEYE 4

CALLING IT LIKE WE SEE IT

DATA SOURCE: HEDGEYE RISK MANAGEMENT

1) Core business weakening at accelerated pace 2) Margins at Peak and Headed 400bp Lower

• Utilization beyond peak (most retail analysts don’t appreciate this leverage) • Input costs near trough

3) Tax rate unsustainably low 4) Organic EPS unlikely to grow again through the end of this decade 5) We’re 18% below consensus next year, and ≈ 40% thereafter 6) HBI is the king of special charges, with GAAP EPS 30% below ‘adjusted’ EPS 7) HBI is pretty good at Insider Selling too. 8) Accelerated deal activity: wrong time, wrong brands, and wrong price 9) Balance sheet and valuation support is not what it used to be 10) Upside on a non-GAAP (i.e. fake) $2.20 at 14 -15x is $33. Downside on our $1.50 is to about $12 on 7.0x EBITDA. That’s $5 up, $15 down.

HEDGEYE 5

INTERNAL AND EXTERNAL CYCLE RISK


Acquisitions/ Increased Leverage

Increased Non-GAAP

Adjustments

Adjusted EPS Growth –

Organic EPS Decline

Management Meets

Performance Criteria Gets Paid

Core Growth Slows

Economic Cycle: We Are Here… -Peak Margins -Peak Utilization -Trough Tax Rate -Trough Cotton Price -End of Economic Cycle -Slowing Core Growth

Value Destruction Cycle

Risky incentive structure

Aggressive Accounting

Management needs to increase sales

Worse assets at higher prices

Competition & Cycle Impact

HEDGEYE 6

Sara Lee Step-Child

Balance Sheet Fixer Acquirer Underwear Company

$0

$5

$10

$15

$20

$25

$30

$35

$40

Au

g-0

6O

ct-0

6D

ec-0

6F

eb

-07

Ap

r-0

7Ju

n-0

7A

ug

-07

Oct

-07

De

c-0

7F

eb

-08

Ap

r-0

8Ju

n-0

8A

ug

-08

Oct

-08

De

c-0

8F

eb

-09

Ap

r-0

9Ju

n-0

9A

ug

-09

Oct

-09

De

c-0

9F

eb

-10

Ap

r-10

Jun

-10

Au

g-1

0O

ct-1

0D

ec-1

0F

eb

-11

Ap

r-11

Jun

-11

Au

g-1

1O

ct-1

1D

ec-1

1F

eb

-12

Ap

r-12

Jun

-12

Au

g-1

2O

ct-1

2D

ec-1

2F

eb

-13

Ap

r-13

Jun

-13

Au

g-1

3O

ct-1

3D

ec-1

3F

eb

-14

Ap

r-14

Jun

-14

Au

g-1

4O

ct-1

4D

ec-1

4F

eb

-15

Ap

r-15

Jun

-15

Au

g-1

5O

ct-1

5D

ec-1

5F

eb

-16

Ap

r-16

STAGES OF HANESBRANDS

HBI has gone through several stages with showing a different MO, and getting very different valuation multiples. HBI STAGES OVER TIME

DATA SOURCE: COMPANY REPORTS, FACTSET, COMPANY PRESENTATIONS, COMPANY COMMERCIALS

Spin-Off 1st Dividend -Paid $670mm in LT Debt-

12x PE & 7x EBITDA 10x PE & 8.5x EBITDA 16x PE & 12x EBITDA

HEDGEYE 7

FINANCIAL SUMMARY

DATA SOURCE: HEDGEYE RISK MANAGEMENT, COMPANY REPORTS, FACTSET

HBI (Hanesbrands Inc.) $27.52

Financial and Valuation Summary

FY16 ends Dec 2016 2QE 2016E 2017E 2018E 2019E EPS % P/E Price EV/EBITDA

Hedgeye EPS ($) 0.53 1.87 1.76 1.55 1.50 2016E 12.4% 12.0 x 22 10.6 x

Consensus ($) 0.53 1.91 2.18 2.48 2.69 2017E -5.7% 11.0 x 19 9.1 x

Variance % -1.2% -2.2% -19.1% -37.5% -44.1% 2018E -11.9% 10.0 x 16 8.4 x

2019E -3.3% 8.0 x 12 7.1 x

Sales ($MM) 6,081 6,668 6,809 6,886

EBIT Margin 15.7% 13.9% 12.2% 11.5%

EBITDA ($MM) 1,052 1,183 1,077 1,031

FCF Per Share ($) -1.48 0.93 1.29 1.34

Book Value Per Share ($) 4.07 5.48 6.69 7.86

Net Debt to Total Capital 66.1% 57.0% 48.6% 40.1%

P/E 14.8 x 15.6 x 17.8 x 18.4 x

EV/EBITDA 12.5 x 11.8 x 12.6 x 12.8 x

Price/Book 6.8 x 5.0 x 4.1 x 3.5 x

Cash Yield -5.4% 3.4% 4.7% 4.9%

Targeted Valuation Range

Investment Thesis Snapshot:

1. Core business weakening at acceleratedpace.

2. Utilization at peak, input costs at trough. Margins at all time highs.

3. Management incentivized to make mediocre acquisitions, and obfuscate real growth trend by taking 'special' charges.

4. Acquisitions are happening at dangerously high and very deceptive multiples.

HEDGEYE 8

HEDGEYE VS. CONSENSUS

EARNINGS VARIANCE

44% below the street in out years.


$1.87 $1.79

$1.58 $1.53

$1.91

$2.18

$2.48

$2.69

-50%

-40%

-30%

-20%

-10%

0%

10%

$1.00

$1.50

$2.00

$2.50

$3.00

2016E 2017E 2018E 2019E

Hedgeye EPS ($)Consensus ($)Variance %

HEDGEYE 9

HBI: RNOA ANALYSIS

PROFITABILITY ROADMAP This analysis is absolutely critical for an acquisition-focused, asset-heavy company at peak margins. Up and to the right = good, and down + to the left = bad. HBI = Very Bad

DATA SOURCE: COMPANY REPORTS & HEDGEYE RISK MANAGEMENT

2008A

2015A 2016E

2017E

2018E

2019E

7%

8%

9%

10%

11%

12%

13%

14%

15%

1.2x 1.3x 1.4x 1.5x 1.6x 1.7x 1.8x 1.9x

X-Axis = Asset Turnover

Y-A

xis

= T

ax A

dju

ste

d O

pe

rati

ng

Ma

rgin

s

Peak Multiples

Trough Multiples

TOP LINE IS SLOWING

HEDGEYE 11

U.S. UNDERWEAR SALES VS APPAREL SALES

NOT A BAD INDUSTRY

DATA SOURCE: EUROMONITOR

-6%

-4%

-2%

0%

2%

4%

6%

8%Apparel Sales YY%

Underwear Sales YY%

The U.S. has a $16.9bn underwear market, only 6% of total US apparel sales. Underwear sales growth has outpaced apparel for the last 5 yrs.

HEDGEYE 12

GLOBAL UNDERWEAR ASP GROWTH GLOBAL UNDERWEAR ASP YY%

DATA SOURCE: EUROMONITOR, HEDGEYE ESTIMATES

-6%

-4%

-2%

0%

2%

4%

6%

8%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Women's Underwear ASP YY% Men's Underwear ASP YY% Underwear ASP YY%

HEDGEYE 13

OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT

BUT MARKET SHARE IS STAGNANT MEN’S UNDERWEAR MARKET SHARE WOMEN’S UNDERWEAR MARKET SHARE


HOSIERY MARKET SHARE ALL UNDERWEAR MARKET SHARE

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Maidenform Hanes Champion

0%

10%

20%

30%

40%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Hanes Champion

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Hanes Champion L'eggs

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Hanes Maidenform Champion

HEDGEYE 14


“ONLINE” GROWTH = AMAZON GROWTH

HBI DIRECT TO CONSUMER REVENUE HBI DTC is in decline, when management says online grew 15% in 1Q, they are referring to sales of their product via any website.

AMAZON IS NOW 8TH LARGEST CUSTOMER Amazon is growing at about 70%, while the other online channels are stagnant.

DATA SOURCE: COMPANY REPORTS, HEDGEYE RISK MANAGEMENT

-10%

-5%

0%

5%

10%

15%

$340

$350

$360

$370

$380

$390

$400

$410

$420 TTM DTC Revenue YY Growth

+70%

HEDGEYE 15

HBI CHANNELS - % OF TOTAL SALES

CUSTOMER BREAKOUT

Traditional wholesale channels shrinking as sales go online.

DATA SOURCE: COMPANY REPORTS, HEDGEYE ESTIMATES

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Other Other Mid-Tier Dept Stores (M, JCP) AMZN DTC KSS TGT WMT

HEDGEYE 16

HBI GROWTH EXCLUDING ACQUISITION $

ORGANIC GROWTH CLEARLY SLOWING We’re seeing lower peaks and lower valleys in the core business. And this has not been in a recessionary period.


-2.8%

1.6%

-1.8%

3.0%

-1.2%

0.2% 0.6%

1.2%

-3.3%

-0.4%

0.6%

-10.0%

-0.9%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Organic Growth 2 Year Avg Linear (Organic Growth)

HEDGEYE 17

CORE CUSTOMERS ARE IN BAD SHAPE

Inventories are too high, sales are too low, and profitability is down. Why, then, should HBI be at peak margins?

DATA SOURCE: HEDGEYE & COMPANY REPORTS

MARGINS HEADED LOWER

HEDGEYE 19

UNPRECEDENTED MARGINS

HBI has a demonstrably higher than the following companies – UA, RL, PVH, GES, CRI, ANF, KATE, and yes – even NKE.

EBIT MARGIN LTM

DATA SOURCE: FACTSET, HEDGEYE RISK MANAGEMENT

16% 15% 14%

13%

11% 11% 11% 10%

8% 7%

5% 5%

3% 2%

1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

GIL HBI NKE CRI KATE RL PVH UA KSS TGT GES WMT AMZN ANF JCP

HEDGEYE 20

HIGH CASHFLOW RISK AT PEAK UTILIZATION

We need to think of the asset base as a cross between a Consumer Non-durable and an Industrial hypercyclical like CAT.

DEMAND AND CASH FLOW OF MANUFACTURING MODELS


Ca

sh F

low

Demand

Owned Manufacturing

High Utilization

Low Utilization

Ca

sh F

low

Demand

Outsourced Manufacturing

HEDGEYE 21

REVENUE AND HBI FACTORY COUNT

FACTORY COUNT DOWN, REV UP

The company clearly got much more efficient after its IPO.

DATA SOURCE: COMPANY REPORTS

70

62

52

41 43 43

41 39

46 47

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

30

35

40

45

50

55

60

65

70

75

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Revenue HBI Operated Manufacturing Facilities

HEDGEYE 22

FACTORY PRODUCTIVITY

FACTORY PRODUCTIVITY

Productivity, as measured by rev per factory, is up 125% in a decade, but has clearly started to flatten out.


-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$20

$40

$60

$80

$100

$120

$140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue Per Facility YY Growth

HEDGEYE 23

To eliminate any change from acquisitions, lets use the business in 2012…

COTTON DECLINE = 720 BPS OF MARGIN

The drop in cotton price had potentially 720bps impact on margins. Price change takes 12-18 months to flow through to P&L, which means max benefit is likely just behind us.

GROSS MARGIN IMPACT OF 56% COTTON DECLINE

DATA SOURCE: FACTSET, COMPANY REPORTS, HEDGEYE RISK MANAGEMENT

$0.50

$0.75

$1.00

$1.25

$1.50COTTON #2 TTM AVG PRICE

-56%

If we assume goods not produced by HBI have the same cotton use and cost dynamics, we get upwards of 720bps of gross margin benefit.

2012 Business With -56% Cotton

HBI Revenue $4,522 $4,522

HBI Produced Goods % of COGS 75% 75%

% of COGS from Cotton in HBI Produced Goods 14% 7%

COGS $3,106 $2,862

$ Value of Cotton in HBI Produced Goods $435 $191

Cotton Price COGS Savings $243

Gross Margin Impact in BPS 538bps

HEDGEYE 24

+10% COTTON MOVE = -40 TO -65BPS

10% increase in cotton price means a ~40bps hit to HBI margins within its own production. This will take 9-12 months to hit the P&L, plus possible delay/ offset from hedging.


Cotton in HBI Owned Production 2015 +10% Cotton

HBI Revenue $5,732 $5,732

COGS $3,532 $3,557

$ Value of Cotton in HBI Produced Goods $247 $272

Cotton Price COGS Increase $25

Gross Margin Impact in BPS -43bps

Assuming goods not produced by HBI have the same cotton use and cost dynamics which get passed on to HBI, we get upwards of ~65bps of gross margin hit for a 10% increase in cotton price.

BEHAVIORAL CONSIDERATIONS

HEDGEYE 26

COMPENSATION FUELS THE FIRE

60% of incentive compensation is directly benefitted by the rate of acquisition and the magnitude of charges. The price and quality of acquisitions has minimal significance in the short/intermediate term.

MANAGEMENT INCENTIVES PERFORMANCE CRITERIA

DATA SOURCE: COMPANY PROXY STATEMENTS

Acquisitions and Charges boost this piece of performance criteria.

HEDGEYE 27

Sara Lee Step-Child

Balance Sheet Fixer Acquirer Underwear Company

$0

$5

$10

$15

$20

$25

$30

$35

$40

Au

g-0

6O

ct-0

6D

ec-0

6F

eb

-07

Ap

r-0

7Ju

n-0

7A

ug

-07

Oct

-07

De

c-0

7F

eb

-08

Ap

r-0

8Ju

n-0

8A

ug

-08

Oct

-08

De

c-0

8F

eb

-09

Ap

r-0

9Ju

n-0

9A

ug

-09

Oct

-09

De

c-0

9F

eb

-10

Ap

r-10

Jun

-10

Au

g-1

0O

ct-1

0D

ec-1

0F

eb

-11

Ap

r-11

Jun

-11

Au

g-1

1O

ct-1

1D

ec-1

1F

eb

-12

Ap

r-12

Jun

-12

Au

g-1

2O

ct-1

2D

ec-1

2F

eb

-13

Ap

r-13

Jun

-13

Au

g-1

3O

ct-1

3D

ec-1

3F

eb

-14

Ap

r-14

Jun

-14

Au

g-1

4O

ct-1

4D

ec-1

4F

eb

-15

Ap

r-15

Jun

-15

Au

g-1

5O

ct-1

5D

ec-1

5F

eb

-16

Ap

r-16

STAGES OF HANESBRANDS (AGAIN)

Let’s look at this again in the context of HBI’s capex spend. LET’S LOOK AT THIS AGAIN …

DATA SOURCE: COMPANY REPORTS, FACTSET, COMPANY PRESENTATIONS, COMPANY COMMERCIALS

Spin-Off 1st Dividend -Paid $670mm in LT Debt-

12x PE & 7x EBITDA 10x PE & 8.5x EBITDA 16x PE & 12x EBITDA

HEDGEYE 28

CAPEX AS % OF SALES

ORGANIC INVESTMENT SLOWING When acquisition activity kicked into high gear, capex started to decline materially. Is this the new JNY?

DATA SOURCE: FACTSET

0%

1%

2%

3%

4%

5%

6%

1Q0

82

Q0

83

Q0

84

Q0

81Q

09

2Q

09

3Q

09

4Q

09

1Q10

2Q

103

Q10

4Q

101Q

112

Q11

3Q

114

Q11

1Q12

2Q

123

Q12

4Q

121Q

132

Q13

3Q

134

Q13

1Q14

2Q

143

Q14

4Q

141Q

152

Q15

3Q

154

Q15

1Q16

HEDGEYE 29

HBI LEVERAGE SINCE IPO

BALANCE SHEET TEMPORARILY IMPROVED

This used to be a great delevering story…


97%

89% 92%

84%

78%

73%

60%

54% 54%

64%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A

LT Debt to Capital

HEDGEYE 30

INCREASING LEVERAGE AT CYCLE END

Company borrowed in Q1 to buy back stock, announced 2 acquisitions for ~$1.05bn, then did 2 debt offerings. We could argue on GAAP #s HBI is in violation of its debt covenants. Dangerous for equity value heading into recession.

DEBT CHANGES AND LEVERAGE

DATA SOURCE: COMPANY REPORTS, FACTSET, HEDGEYE RISK MANAGEMENT

$2.4 $2.2 $2.2

$2.0 $2.1 $2.0

$1.5 $1.6 $1.7

$2.3

$3.3

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5Net Debt (Billions) Net Debt / EBITDA 1Q16 New Current

Short Term Debt 378 378Revolver 1003 -800 203Term Loans 1244 1244Notes/BondsIssue 6.375% 2020 1000 -1000Issue 4.875% 2026 0 900 900Issue 4.625% 2024 0 900 900Issue Euro 3.5% 2024 561 561Other -21 -21

Total Debt 3603 4164

The leverage ratio covenant requires… total debt to EBITDA for the preceding four fiscal quarters will not be more than 4.0 to 1.0 for each fiscal quarter provided that, following a permitted acquisition in which the consideration is at least $200mm, such maximum leverage ratio covenant shall be increased to 4.5 to 1.0 for each fiscal quarter ending in the succeeding 12-month period following such permitted acquisition.

HEDGEYE 31

Announced Company Revenue Price EV/EBITDA Acquisition Benefit Est. IRR

28 Apr '16 Pacific Brands $600 $800 12.5x Entry into Australia underwear market Mid-teens

07 Apr '16 Champion Europe $210 $228 10.0x Control Champion brand globally Low-Mid Teen

24 Feb '15 Knights Apparel, Inc. $180 $200 8.0x Exposure to mass retail channel, leverage collegiate licensed apparel High-teens

25 Jun '14 DBApparel SAS $875 $544 7.5x More female exposure in intimate/hosiery categories, entry into Europe

24 Jul '13 Maidenform Brands, Inc. $500 $575 9.5x Complement Intimate Apparel business in US

04 May '11 TNF Group Pty Ltd. $9 Entry into outerwear segment in Australia

10 Aug '10 Gear for Sports $225 $225 7.5x Licensed apparel. Entry into graphic aparel. Strengthen outerwear segment.

31 Dec '07 Inversiones Bonaventure SA Benefits to global supply chain stretegy (Hosiery Sewing)

06 Sep '07 Industrias Duraflex SA Fabric production capacity in El Salvador (Textile Manufacturing)

26 Oct '06 Goldindo Intl Thailand Co. Global manufacturing capabilities.

ACQUISITIONS – RISING MULTIPLES

ACQUISITION HISTORY AND DETAILS

DATA SOURCE: FACTSET, COMPANY REPORTS, HEDGEYE

9.5x

7.5x 8.0x

10.0x

12.5x

6x

10x

14x

Maidenform Brands, Inc. DBApparel SAS Knights Apparel, Inc. Champion Europe Pacific Brands

EV/EBITDA Multiple

HEDGEYE 32

“Clearly, everybody can calculate the trailing 12-month multiples. What we wanted to provide was line of sight into what we believe the earnings power is for calendar 2016 for the total Company and use that multiple, since that is generally how stocks are valued…

If you actually go and look at consensus earnings down there for Pac Brands and actually extrapolate that to calendar 2016, you will see a multiple that is right about 11 because they have been growing pretty substantially...

We actually think they can do a little bit better than that. They have been handling foreign exchange and prices and stuff like that, and so we get to a multiple that is just slightly over 10.”

DECEPTIVE DEAL DETAILS

HBI reported a 10x Multiple for the deal. Pacific Reported a 12x multiple. We estimate the Real Multiple is more like 12.5x


Pacific Brands Press Release

Hanesbrands Press Release

HEDGEYE 33

PACIFIC BRANDS STOCK PRICE

OVERPAYING FOR PACIFIC BRANDS

HBI is offering about 3x what Pacific was worth less than a year ago. Why weren’t they in the market making offers before the asset doubled in price?


$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

Jan

-14

Fe

b-1

4

Ma

r-14

Ap

r-14

Ma

y-14

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4

Oct

-14

No

v-14

De

c-14

Jan

-15

Fe

b-1

5

Ma

r-15

Ap

r-15

Ma

y-15

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct

-15

No

v-15

De

c-15

Jan

-16

Fe

b-1

6

Ma

r-16

Ap

r-16

Ma

y-16

Why Not Buy Here? VS Here?

HEDGEYE 34


AGGRESSIVE CHARGES IN 2015

TTM ADJUSTMENTS BY BUSINESS Maidenform adjustment just ended after 9 quarters. Do 1 time charges last over 2 years?

TTM FOUNDATIONAL & OTHER ADJUSTMENTS Foundational and Other adjustments accelerated significantly since the Knights Apparel Acquisition. “Foundational costs are expenses associated with building infrastructure to support and integrate current and future acquisitions.”


14% 17%

18%

26%

21% 21%

29%

25%

21% 21%

0%

10%

20%

30%

40%

50%

$0

$50

$100

$150

$200

$250

$300 Maidenform DB ApparelKnights Apparel Champion Japan% of TTM EBIT

0.0%

3.0% 3.4%

3.8%

4.9% 4.3%

7.7% 8.3%

9.5%

7.7%

0%

2%

4%

6%

8%

10%

12%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90 Foundational Costs Other Costs

% of TTM EBIT

HEDGEYE 35

1330 bps

0 bps

1000 bps

2000 bps

3000 bps

4000 bps

5000 bps

6000 bps

7000 bps

1300BPS Δ BETWEEN GAAP AND NON

230 companies with positive earning for years 2011-2015. This looks at the spread in reported earnings CAGR vs. GAAP earnings CAGR. HBI in the top quintile

AT THE HIGH END OF THE S&P


“The Securities and Exchange Commission is stepping up its scrutiny of companies’ homegrown earnings measures, signaling it plans to target firms that inflate their sales results and employ customized metrics that stray too far from accounting rules.” WSJ 4/28/16

HEDGEYE 36

RICHARD NOLL HBI OWNERSHIP %

CEO SELLING STOCK

Noll owned $59mm worth of stock in June’15 w/ stock near all-time highs. He has sold over 50% of his share since – he now owns ~$25mm worth today.

DATA SOURCE: FACTSET, BIZJOURNALS.COM

$0

$5

$10

$15

$20

$25

$30

$35

$40

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Richard Noll OS%

HBI Price

HEDGEYE 37

HBI MANAGEMENT OS% EX. RICHARD NOLL

NOBODY ELSE BUYING

Other HBI management not unloading stock to the same degree as Noll, but not buying either.


$0

$5

$10

$15

$20

$25

$30

$35

$40

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Current Management OS % Ex. Noll

HBI Price

CATALYST

HEDGEYE 39

HERE’S YOUR CATALYST

HEDGEYE 40

Nu

mb

er

of

Fili

ng

s(B

ar

Gra

ph

)

$0$2$4$6$8$10$12$14$16$18

0123456

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

Jul-

14

Oct

-14

Jan

-15

Ap

r-15

Jul-

15

Oct

-15

Jan

-16

Ap

r-16

Sales (#) Buys (#) Insider Sell $$ Value Insider Buy $$ Value

Se

nti

me

nt S

core

$0

$5

$10

$15

$20

$25

$30

$35

$40

0

10

20

30

40

50

60

70

80

90

100

A-10 J-10 A-10 O-10 D-10 F-11 A-11 J-11 A-11 O-11 D-11 F-12 A-12 J-12 A-12 O-12 D-12 F-13 A-13 J-13 A-13 O-13 D-13 F-14 A-14 J-14 A-14 O-14 D-14 F-15 A-15 J-15 A-15 O-15 D-15 F-16 A-16

HBI: Sentiment vs. PriceSentiment Price Graph Insider Sell Insider Buy

Price

Do

llar

Va

lue

(Sca

tter P

lot)(Millions)

BEARISH SENTIMENT SCORE

Hedgeye Sentiment Triangulates Sell Side Ratings, BuySide Short Interest, and Insider Transactions.

DATA SOURCE: FACTSET, HEDGEYE RISK MANAGEMENT

APPENDIX

HEDGEYE 42


UNSUSTAINABLY LOW TAX RATE

HBI TAX RATE OVER PAST 3 YEARS Tax rate at 8.8% ~500bps below MGMT LT guide. “And we think there's no reason why acquisitions shouldn't enable us to … sustain a tax rate in the low to mid teens really for the foreseeable future.” Jan ‘14

OTHER EPS TAX HEADWINDS Pacific Brands Acquisition & the roll-off of jurisdictional benefits should increase tax liability.


6%

12%

18% TTM Tax Rate

-$0.01

-$0.03

-$0.05

-$0.06

-$0.07

-$0.06

-$0.05

-$0.04

-$0.03

-$0.02

-$0.01

$0.00

2016E 2017E 2018E 2019E

HEDGEYE 43

SHARE REPO PARABOLIC AT PEAK

After years without buying stock, HBI has repurchased 363% of CFFO on a TTM basis. Borrowing against its revolver in 1Q. This at the same time CEO Noll is selling stock.

HBI SHARE BUYBACK AND % OF CFFO

DATA SOURCE: COMPANY REPORTS, FACTSET

0

100

200

300

400

500

600

700

800

$0

$5

$10

$15

$20

$25

$30

$35 HBI PriceShare Repurchase Price TTM ($mm)

120% 155%

363%

0%

50%

100%

150%

200%

250%

300%

350%

400% TTM Share repurchases % of TTM CFFO

HEDGEYE 44

FY 2016

BLENDED FX TOPLINE IMPACT

FX BECOMING REVENUE TAILWIND MGMT Guide: With respect to currency, our guidance assumes approximately $40 million of incremental revenue headwinds in 2016, which equates to roughly 60 to 70 basis points of growth.


-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

4/21/2013 4/21/2014 4/21/2015 4/21/2016 4/21/2017

Blended FX Revenue Impact

HEDGEYE 45

HBI THEN & NOW 2006

DATA SOURCE: COMPANY REPORTS, HEDGEYE ESTIMATES

92% 8%

25%

75%

27% 58%

32% 8%

13% 6%

12% 29%

0%50%100%

80% 20%

35%

65%

27% 46%

39% 7%

1% 10%

5% 15%

23%

0% 50% 100%

2015

WMT TGT

KSS

DTC

JCP/M

OTHER

INNERWEAR

OUTERWEAR

MEN’S

WOMEN’S

INT’L

U.S.

% SALES

AMZN

HEDGEYE 46

MARKET SHARE BREAKDOWN HBI has about a 28% share in its core business – and that share has not moved for the past three years.


28.2%

9.2% 8.8%

15.1%

0%

5%

10%

15%

20%

25%

30%

Ha

ne

s

Ch

am

pio

n

Ma

rke

t S

ha

re

Ma

ide

nfo

rm

Ha

ne

s

Ch

am

pio

n

Ma

rke

t S

ha

re

Ha

ne

s

Ch

am

pio

n

L'e

gg

s

Ma

rke

t S

ha

re

Ha

ne

s

Ma

ide

nfo

rm

Ch

am

pio

n

Ma

rke

t S

ha

re

Men'sUnderwear

. Women'sUnderwear

. Hosiery . Underwear

HEDGEYE 47

COMPETITIVE OVERVIEW

Though that seems to be changing on the margin. THIS HAS BEEN A CONSOLIDATED INDUSTRY


VS

Fruit of the

Loom

Maidenform Jockey Vanity

Fair

Hanes

All Others

Women's Underwear Market Share

Hanes Fruit of the

Loom

Jockey Nike

Private label

American

Eagle

All Others

Men's Underwear Market share

VS Fruit of the

Loom

Hanes

Jockey Maidenform

Private label

All Others

All Underwear Market Share

HEDGEYE 48

SHRINKING BARRIERS TO ENTRY

UnderArmour was the pioneer in mens performance underwear, now there are dozens of gimmicky brands. Unlike years past where you needed manufacturing assets, now you need a design and link to Asia.

MENS PERFORMANCE UNDERWEAR BRANDS ARE PLENTIFUL

DATA SOURCE: COMPANY WEBSITES, LINKEDIN, YOUTUBE

HEDGEYE 49

CUSTOMER DEMOGRAPHIC

Hanes.com appeals to older customers and has a larger % of female traffic than the internet average. HANES.COM VS TOTAL INTERNET % OF ONLINE TRAFFIC

DATA SOURCE: COMSCORE

0%

5%

10%

15%

20%

25%

30%

35%AGE

HBI Total Internet

0%5%

10%15%20%25%30%35%40%45%50%INCOME

HBI Total Internet

0%

10%

20%

30%

40%

50%

60%

70%

80%

GENDER HBI Total Internet

HEDGEYE 50

TAX HAVENS

Inverse correlation between Sales and Long-Lived assets. Low tax rate due to earnings fed through foreign subsidiares, mainly in the Cayman Islands.

U.S. IS 80% SALES, ONLY 20% LONG-LIVED ASSETS


80%

12%

2% 2% 2% 1% 1% 0% 0%

20%

12%

0% 0%

8%

0% 1%

16%

42%

0%

10%

20%

30%

40%

50%

60%

70%

80%

United States Europe Japan Canada Other Mexico Brazil China C. America +Caribbean

Basin

HBI % Sales % Long-Lived Assets

HEDGEYE 51

COTTON STOCK:USE RATIO

Responding to lower prices, world consumption is projected to exceed production by 3 million bales in 2015/16. When stock to use ratio goes back down, HBI’s COGS will go up.

USDA PREDICTS CONSUMPTION WILL EXCEED PRODUCTION FOR 1ST TIME IN 6 YEARS

DATA SOURCE: USDA

0.25

0.45

0.65

0.85

1.05

1.25

0.25

0.35

0.45

0.55

0.65

0.75

0.85

0.95

1.05 Cotton Price Cotton Total Stock:Use

HEDGEYE 52

US COTTON DEMAND

Responding to lower prices, world consumption is projected to exceed production by 3 million bales in 2015/16. When stock to use ratio goes back down, HBI’s COGS will go up.

USDA PREDICTS CONSUMPTION WILL EXCEED PRODUCTION FOR 1ST TIME IN 6 YEARS

DATA SOURCE: USDA

-2700bps

-1700bps

-700bps

300bps

1300bps

2300bps

(55%)

(35%)

(15%)

5%

25%

45%US Stock to Use RatioYY Bps Change


HEDGEYE 53

COTTON PRODUCTION & SUPPLY

International production is slowing on the margin.

DATA SOURCE: USDA

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%19

85

/86

198

6/8

7

198

7/8

8

198

8/8

9

198

9/9

0

199

0/9

1

199

1/9

2

199

2/9

3

199

3/9

4

199

4/9

5

199

5/9

6

199

6/9

7

199

7/9

8

199

8/9

9

199

9/0

0

20

00

/01

20

01/

02

20

02

/03

20

03

/04

20

04

/05

20

05

/06

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10/1

1

20

11/1

2

20

12/1

3

20

13/1

4

20

14/1

5

20

15/1

6 (e

st)

Total Supply YY % change

Production YY % change

Data Source: Hedgeye Risk Management USDA

HEDGEYE 54

US % OF LONG-LIVED ASSETS VS US % OF SALES

LONG LIVED ASSETS

From 2014 to 2015, US sales declined while US long-lived assets increased as a % of total.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015

Other United States long-lived assets US % of Sales

HEDGEYE 55

REGIONAL UNDERWEAR SALES UNDERWEAR SALES GROWTH 2-YR AVG - BY REGION


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USA Eastern Europe Latin AmericaMiddle East and Africa Western Europe Asia Pacific

HEDGEYE 56

HANES SKU BREAKOUT

HANES SKU BREAKOUT

The average SKU price on hanes.com has increased more than 50% since 2010

DATA SOURCE: COMPANY WEBSITE, HEDGEYE ESTIMATES

29.6% 40.4%

26.4% 14.9%

16.8% 12.8%

27.2% 23.4%

8.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2016

Other

Shirts

Briefs

Boxers

Boxer Briefs

HEDGEYE 57

FOR MORE INFORMATION, CONTACT US AT:

[email protected] (203) 562-6500

hanesbrands inc - hedgeyedocs.hedgeye.com/he_hbi_may2016.pdf · 8) accelerated deal activity: wrong...

Documents