Hanesbrands: I see great value in recession-proof clothing (NYSE: HBI)

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If you only had $5 to spend and you had no socks, would you buy a pair? Or would you rather venture barefoot and buy an iced coffee at Starbucks (SBUX)? Hopefully, like most reasonable humans, you would choose the former and take a new one.

That pretty much sums up my thesis for Hanesbrands (NYSE: HBI). Thanks for reading and good luck to all…

Ok, ok, I will write a full article. And in this article, I’ll explain why I think Hanesbrands has a compelling value proposition, thanks in part to its highly recession-proof products and also the absolute destruction the stock has suffered over the past year.

Insight

Hanesbrands operates in the global homewear (underwear, socks, bras, etc.) and sportswear segments of the apparel industry, producing low to mid-priced apparel under brands such as Hanes, Champion, Bonds, Bali, Playtex and others.

The company claims the number 1 or 2 position in the North American market in the following categories: men’s underwear, women’s underwear, children’s underwear, socks, stockings and t-shirts. The company also boasts of a growing position throughout Europe, Latin America, Asia and Australia.

Hanesbrands At a Glance

Hanesbrands

In addition to an extensive loungewear offering, the company has extensively developed the Champion brand, which is its flagship activewear product line. Now, I think all of us can relate to “sportswear” being a bit of a misnomer, because sweatpants and hoodies pretty much sum up most of our nights out. I would venture to guess that most of us aren’t training for a triathlon exactly.

The “athletic apparel” market is driving the company’s growth, as it is for most apparel manufacturers these days, given its comfortable and unrestricted appeal. Let’s face it, sane people don’t wear khakis to eat a tub of ice cream while watching Netflix (NFLX).

Hanesbrands - Champion

Hanesbrands

This mostly comfortable and comfortable product offering of late has certainly not led to a thriving stock price, or a happy investor base. Shares of the company have slumped over the past year on concerns ranging from supply chain issues, inflation, debt worries and now a possible recession in the near future.

Hanesbrands share price
Data by YCharts

To narrow down some of the concerns that seem to have driven the stock price, frankly, they are all valid. Supply chains have been and still are a mess, inflation continues to ravage the world, the company certainly has high debt levels and a recession, if we are not already one, seems imminent.

However, unless you expect these negative factors to be fatal to the business, they are only valid up to a point. I want to point out that the cure for supply chain problems and probably inflation as well is, in fact, a recession. And to the point of Hanesbrands-specific recession worries, I’d like to dig into the product offering to get a sense of the potential damage.

Recession

In April 2022, shares of Hanesbrands began to fall precipitously from $15 to the current level of $10.25, or around 33%. The move coincides with greater concerns in equity markets about a possible recession on the horizon.

Yes, the company appeared cautious on the first quarter conference call given the highly volatile macro environment, but I could literally list hundreds of far more exposed companies whose stocks did not come close to the decline Hanesbrands suffered. .

Recall that 62% of total sales at Hanesbrands are mainly underwear and socks. These are not exactly discretionary purchases. If you need a new pair of underwear, you NEED a new pair of underwear. Sure, these products will be affected during a recession, but it’s not like they’re designer brands. Hanesbrands already primarily serves mid-to-low prices, making them much less exposed to consumers moving down the value chain.

Looking more closely at the actual numbers for the last severe recession year of 2009 (aside from COVID-19), I found that in the men’s underwear segment, which accounts for a large percentage of the Hanesbrands products, sales fell a rather tiny 2.3%, only to rebound the following year and continue on an upward trajectory.

Men's underwear can tell you how the economy is doing

Quart.com

And looking at the company’s entire product line, including its more discretionary items like activewear, t-shirts, and more. The decline in revenue, while more severe, was still a reasonable 14%, followed by a rapid return to above 2008 figures by 2011.

Hanesbrands turnover
Data by YCharts

Remember, this was the financial crisis of 2008-09 that I am talking about here. Most people rightfully believed that the financial world was coming to an end and rumors of a new Great Depression abounded.

I would say that a 2008-09 level recession is probably not in the cards this time around. However, if so, I would say that Hanesbrands is far better positioned than others in the consumer discretionary sector and certainly far better than others in the apparel or retail industry.

Valuation and debt

At a very basic level, the business is currently very cheap. Hanesbrands current P/E ratio is 5.76. This is about 40% lower than the 10 year average. Additionally, the company pays a dividend of 5.85% which is very well covered with only a payout ratio of 33.71%.

An obvious and legitimate reason for this discount is the debt on the balance sheet, not so much the amount of debt, but the schedule. Basically, all of the company’s $3.325 billion long-term debt matures between 2024 and 2026, leaving the company with rather limited options other than refinancing at potentially higher interest rates.

Since April 2, 2022

Interest rate

Principal amount ($)

Due date

Senior Secured Credit Facility:

Revolving loan facility

1.69%

20,000

November 2026

Term Loan A

1.75%

993 750

November 2026

4.875% Senior Notes

4.88%

900,000

May 2026

4.625% Senior Notes

4.63%

900,000

May 2024

3.5% Senior Notes

3.50%

552 425

June 2024

Source: Gurufocus.com

The most pressing deadlines appear to be the roughly $1.45 billion due in 2024 and with rates likely to remain high until those deadlines, investors are certainly looking for high interest payments to boot.

Over the past 12 months, the company has paid approximately $150 million in interest charges for debt service, which included a portion of debt that was repaid in December 2021. With credit ratings of BB by S&P and Ba3 by Moody’s, the company’s debt is rated just below investment grade, indicating that current leverage ratios for newly issued bonds could be around 6-7%.

So in the current worst-case scenario of refinancing the $1.45 billion, the 2024 debt is currently carried at a blended rate of 4.16%, costing about $61 million per year. With newly refinanced debt at 7%, the interest cost would drop from $61 million to $101 million, adding about $40 million in interest expense.

While that’s certainly not ideal, or a positive development, it’s not a killer blow for a company producing over $500 million in free cash flow a year. The company will clearly take it on the chin for the 2024 maturities, but it still has time for the 2026 tranche and if we get the recession we currently anticipate, interest rates are unlikely to stay high indefinitely.

I would argue that this bad news, along with a potential recession, is more than factored into the current stock price.

Conclusion

I believe Hanesbrands operates in a recession-proof niche of the apparel industry. While the debt is certainly frustrating and management certainly won’t get a gold star for their handling of the situation, it’s not a sword of Damocles hanging over their heads until nothing really disastrous occurs in the financial markets, which in this case, all will suffer.

The company, in my opinion, operates in an industry that I find attractive and appears to be successful in growing the Champion brand, which appears to be a key growth driver going forward. Not to mention the attractive and well-covered dividend yield of 5.85%.

I think stocks have been punished unreasonably lately and provide a margin of safety given the currently assigned valuation. I see a clear path to returns of over 50% over the next few years as the debt refinancing issue is resolved and supply chain and inflation issues ease.

I plan to open a medium sized position in the very near future and look forward to your comments below.

Thanks for reading and good luck everyone!

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