With the pullback on innerwear replenishment orders and weaker-than-expected Champion activewear sales, along with a highly leveraged balance sheet, Hanesbrands Inc. is facing some balance sheet pressures.
In a Nutshell: The North Carolina company had to eliminate its dividend in order to shore up it balance sheet.
The problem? Slumping sales as department stores and mass marketers ditched orders to right-size their own inventory glut. For Hanesbrands, this was bad for innerwear categories which usually run on replenishment orders. Crumbling activewear sales weren’t good for Champion, though with a new team in place, and product innovation in progress, sales are expected to improve later this year—although that hinges on whether people are in the mood to spend.
Following word of its dividend cut and lackluster sales projections for 2023, investors began selling off the shares of the company. Hanesbrands shares lost just over a quarter of their value in trading Thursday to the $2.24 billion range from about $3.05 billion. The higher market capitalization is based on Wednesday’s closing price and the number of shares outstanding at the end of the fourth quarter. Shares of Hanesbrands are trading in the $6.36 range after closing at $8.71 on Wednesday.
Wells Fargo analyst Ike Boruchow, who has an underweight rating on the stock, or the equivalent of a “sell” rating, has a new price target of $5.00.
“Inflation pressures continue to weigh on the low-end/value consumer—which is driving lower replenishment orders and order cancellations at key mass retailers. We believe Walmart/Target represent 25 percent of Hanesbrand’s revenue today,” Boruchow wrote in a research note.
Given the concerns about America’s economic picture, “we are concerned that debt covenants may be breached,” he went on to say. Of concern is $1.4 billion in notes that have a floating rate, which could be subject to higher interest expenses as rates rise, Boruchow added. In a conference call, Hanesbrands said it will refinance $900 million of its 4.875 percent senior notes due May 2024 and $521 million 3.5 percent senior notes due June 2024. However, Boruchow said the company could end up the refinancing at higher rates than what it’s paying now.
“The global operating environment has been anything but easy,” Hanesbrands CEO Steve Bratspies told Wall Street Thursday. “We expect the macro economic challenges, impacting consumer demand and the lingering pressure from inflation to continue between 2023, particularly in the first half.”
He didn’t go into much detail about the company’s innerwear brands or the activewear line, except to note Champion’s refreshed team, stronger activewear innovation pipeline and global design calendar now three months shorter.
Discussing restocking in the mass channel, Bratspies said Hanesbrands and its retail partners want to match point-of-sale to need so neither ends up with too much or too little inventory. He expects more expects this to be the case by the “late first quarter, early second quarter.”
The company is still working through sales of higher-cost inventory, while the “lower-cost inventory we’re currently producing should begin to hit our P&L [profit and loss statement] in the second half, particularly in the fourth quarter,” he said. Though Hanesbrands whittled down its internal inventory levels, those actions eroded second half gross margins as some manufacturing facilities were temporarily offline to get units in line with demand.
In addition to laying off staff last month, the company also exiting unproductive facilities and consolidated sourcing vendors to cut costs. Cost savings are expected to help Hanesbrands generate $500 million in operating cash flow in 2023, Bratspies said.
Bratspies remains confident that the company can deliver on reaching $8 billion is sales, though now it might take until 2026 to get there instead of next year. For now, he said the mass channel in the U.S. is starting to improve, although shipments are still lagging. The European market remains challenging as consumer sentiment is low, while China is opening up. Bratspies said that’s an encouraging sign, but the stores have been closed for so long that they likely still have old inventory that needs to be cleared out.
Finance chief Michael Dastugue, who is leaving Feb. 28 due to family reasons, said input costs for cotton are coming down.
Net Sales: For the fourth quarter ended Dec. 31, net sales dropped 15.9 percent to $1.47 billion from $1.75 billion in the same year-ago period.
For the full year, net sales fell 8.3 percent to $6.23 billion from $6.80 billion.
Earnings: The company posted a massive net loss of $418.1 million, or $1.19 a diluted share, for the quarter against net income of $60.0 million, or 17 cents a diluted share, a year ago.
Wall Street was expecting adjusted diluted earnings per share (EPS) of 7 cents on revenue of $1.46 billion.
Given expectations for a muted consumer demand environment, Hanesbrands forecasted net sales for the first quarter, ending April 1, 2023, in the range of $1.35 billion to $1.40 billion, representing an 11 percent decline when compared to the prior year. The GAAP loss per share was guided to a range of 9 cents to 14 cents.
Hanesbrands expects net sales in fiscal year 2023, ending Dec. 30, to be between $6.05 billion to $6.20 billion, or a 1 percent decline from the prior year. GAAP EPS was guided to the range of 14 cents to 25 cents.
For fiscal year 2022, the net loss was $127.2 million, or 36 cents a diluted share, against of net income of $77.2 million, or 22 cents, in the prior year.
CEO’s Take: “Investing in the business and our full potential growth plan remains the priority for capital allocation, and we believe we are well positioned to fund these investments through operating cash flow,” Bratspies said. “What’s changing is the allocation of our free cash flow, which we will now fully direct [toward] accelerating debt reduction.”