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shares hansbrands (New York Stock Exchange: HBI) It has seen some life again after investors saw a long period of dismal returns, driven by an over-leveraged balance sheet, as a result of faulty capital allocation policies as well as operational policies. weakness.
By the end of last year, I believed Hansbrands was still falling behind amid sluggish operating performance, coupled with a high net debt load. In light of this situation, it has asked an activist investor to come in, and/or the company to deliver asset sales, which is finally happening now, sending a sign of relief into the stock price.
A trip down memory lane
Hanesbrands largely entered into its current presence after the company acquired Champion Europe in 2016, creating a $6 billion business and generating approximately $800 million in EBITDA, with earnings power approaching $2. per share. Share $27 It trades at a reasonable valuation, although its net debt load of over $3 billion has translated into a high leverage ratio of 4x.
Amid stagnant results, shares fell to the $15 mark before the pandemic, and have already fallen to the $7 mark in early 2023, amid a combination of sluggish operating performance and the company being a stubborn payer of a very high dividend, unsupported by actual profits.
In fact, the company has seen quite stable results, with a $6 billion business in 2016 driving sales to $6.8 billion in 2021, with operating profits reported flat at $800 million, while leverage has declined modestly to $2.8 billion. The company made a huge mistake in 2022, when it announced an aggressive $600 million buyback program, in a year when revenue unexpectedly fell to $6.2 billion. This has seen net debt rise to $3.6 billion, while EBITDA has fallen to less than $800 million, resulting in the leverage ratio nearly tripling to 4.5 times in one year.
Furthermore, the company headed for a terrible 2023, seeing sales as low as $6.05-6.20 billion, yet adjusted earnings were seen at just $500-550 million, causing management to eliminate the dividend entirely (a bit too late for my taste). Things got worse as the company lowered the midpoint of its full-year sales guidance to $5.85 billion alongside the release of third-quarter results, with adjusted operating profit coming in at $450 million.
Net debt of about $3.5 billion remained very high, with the company’s 351 million shares giving the company an equity valuation of about $1.5 billion at $4 and change, a small fraction of the debt load. Although strategic alternatives were already being considered at the time, I failed to see enough catalysts for a long-side investment case, even though it was too late to be bearish.
Modest recovery
Since November, Hanesbrands shares have traded in a range between $3.50 and $5.50 per share, with shares trading toward the higher end of the range now, amid some good news.
In February, Hanesbrands reported a nearly 10% decline in full-year sales to $5.64 billion. GAAP operating profit decreased 44% to $289 million, and if we exclude restructuring charges, operating profit was reported at $405 million. Net debt actually decreased to $3.1 billion after strong cash flow generation last quarter. Adjusted EBITDA for the year fell to $602 million, resulting in a leverage ratio of 5.2x.
The company didn’t give upbeat guidance for 2024 either, seeing sales fall further to $5.35-$5.47 billion, down slightly from 2023, though that’s partly due to a small divestment and foreign exchange headwinds.
Adjusted operating earnings from operations are in the range of $500 million to $520 million, which seems adequate compared to the $405 million figure on that metric in 2023, where that number led to a reported adjusted loss of five cents per share for the year. These year-over-year earnings improvements show a good, much-needed boost to tighten the balance sheet.
In May, the company reported a nearly 17% decline in first-quarter sales to $1.16 billion. While the company posted an impressive improvement in overall profits, operating profits were largely flat amid this combination of two distinct trends. Net debt stabilized at US$3.1 billion, with EBITDA improving to US$630 million, reducing leverage ratios to 5.0x.
The company’s 351 million shares still give the company a valuation at only a fraction of its net debt load. Trading at $5 and change, the shares are valued at about $1.8 billion here.
Finally, a deal
Champion’s long-awaited divestment was announced in early June. The company has reached an agreement with Authentic Brands Group to sell the Champion business in a deal valued at $1.2 billion, with a conditional cash consideration that has the potential to increase that number to $1.5 billion.
The deal creates a more focused Hanesbrands, with a greater focus on lingerie. While the deal was much anticipated, Hanesbrands is not out of the woods as the net cash proceeds from the deal of $1.2 billion are pegged at just $900 million, meaning net debt will fall by about 30% to $2.2 billion, as The spin-off is the potential to reduce net debt to less than $2 billion.
The company generated $75 million in adjusted EBITDA on a trailing basis, all of which makes it likely that this leverage will decline, with pro forma EBITDA expected to be around $550 million. . This means that the leverage ratio of 5 times will decrease to 4 times. Furthermore, a big assumption in this is that the company can reduce $60 million in stranded costs, which is what the company claims and aims to do in the first year after closing, which is essential to achieving the relative deleveraging goals here.
What now?
The Champion deal was done within the expected and rumored price range, but there is a significant contingency element, as well as transaction costs/or tax leakage, with some optimistic assumptions on stranded costs as well.
Given all this, the near-term leverage profile has certainly improved, however the company is not out of the woods yet. I’m keen to learn more about the pro forma business implications in terms of profitability and leverage, as the worst of the near-term risks appear to be being managed, although so far this has been a value creation endeavor.
In the midst of all this, I am taking a wait-and-see approach, looking for more details to finalize, and the administration still does not have credibility on its part, which makes me take a cautious stance here, but I am eager to learn more about the new situation from here.
