Dividend Investors Take Note

U.S. consumers are moving from expensive to lower-priced fashion.

According to a recent survey by The Business of Fashion, 72 to 74% of respondents, from low- to high-income consumers, sought cheaper options. 

It’s probably why we’ve seen a significant spike in searches for Hanesbrands (HBI) in our proprietary Trackstar data. 

Financial pros are likely considering it because of its:

• 10% dividend yield
• 6.2x P/E GAAP ratio
• 0.34x price/sales ratio

Yet the company is running negative cash from operations, and the stock price fell more than 65% to below $10 this year.

Many worry the dividend is on the chopping block.

So what’s the real scoop?

Hanesbrands’ Business

You’re probably familiar with their old slogan, “Just wait ’til we get our Hanes on you.”

Hanesbrands designs, manufactures, sources, and sells basic apparel for men, women, and children. It employs 59,000 associates in 33 countries. 

It owns the brands Hanes, Champion, Bonds, Maidenform, Bali, and Playtex. 

The company divides its operations into three segments: Innerwear, Activewear, and International. 

Source: Hanesbrands 

HBI generates 37% of its revenues from Innerwear, 27.5% from Activewear, and 30% from International.

Source: Hanesbrands

In Q3, the firm’s Innerwear sales dropped 11% from last year. While Activewear remained on par, International sales declined 6%. 

Operating margins declined 16% in Innerwear and 11% in Activewear. (There was no listing for International.)

You’d think underwear would be recession-proof.

Financials

Source: Stock Analysis

HBI has declared a dividend for 39 consecutive quarters, returning cash to shareholders. But the firm has a negative operating cash flow of -$395.65 million.  

Operating performance has been disappointing. The company’s net debt rose to $3.7 billion, while trailing EBITDA fell to $932 million. 

HBI’s consolidated net leverage ratio at the end of Q3 was 3.9x on a net debt-to-adjusted-EBITDA basis, compared to 2.6x at the end of Q3 2021.

Moreover, its total liquidity position at the end of Q3 was $863 million, consisting of $253 million of cash and equivalents and $610 million of available capacity under its credit facilities.

To help boost sales, HBI is creating new products, like Maidenform bras that attract younger consumers. 

In addition, it is taking steps to improve flexibility, lower costs within its global supply chain network, and work with bank partners to amend its credit agreements. 

Near term, the company appears to be financially stable, with a current ratio of 1.7x. 

But the company will likely face higher interest expenses and need to cut its dividend if things don’t turn around pronto.

Valuation

Source: Seeking Alpha

HBI trades at a price-to-sales ratio of 0.34x, significantly lower than its five-year average of 0.82x. 

Moreover, it’s cheaper than its peers Gildan Activewear (GIL) at 1.6x, Under Armour (UAA) at 0.94x, Columbia Sportswear (COLM) at 1.63x, and Carter’s (CRI) at 0.84x. 

Its P/E GAAP ratio of 6.2x is much lower than rivals GIL at 8.5x, UAA at NM (not meaningful), COLM at 16.3x, and CRI at 10.7x. 

In addition, it trades at an attractive dividend yield of 10%. GIL has a dividend yield of 2.45%, UAA has none, COLM is at 1.4%, and CRI is at 4.2%. 

But as we noted earlier, HBI’s dividend yield is likely in jeopardy.

Profitability

Source: Seeking Alpha

HBI has -$395.65 million in cash from operations. While it’s not as bad as UAA at -$1.65 billion, its other peers are cash-flow positive. GIL is at $378 million, COLM is at $41.9 million, and CRI is at $43.4 million. 

But it’s not all bad news for HBI. Its EBIT and EBITDA margins are in the double digits. And it has a return on equity of 54.1%, far higher than GIL at 33.7%, UAA at 19.1%, COLM at 18.5%, and CRI at 28.9%. 

Growth

Source: Seeking Alpha

Last quarter was rather disappointing for HBI, as the company’s earnings growth fell 47% YoY. Quarterly revenue growth fell 6.6%.

Its YoY revenue growth is -3.3%, notably weaker than GIL at 16.8%, UAA at 27%, COLM at 17.5%, and CRI at -1.5%. 

In addition, its EBITDA growth of -18% YoY is disappointing compared to GIL at 69.7%, UAA at 325%, and COLM at 6.1%, although CRI at -18.9% was even worse. 

Our Opinion 6/10

HBI management guided to positive cash flow next year.

Shares trade below $6 at writing.

If you think Hanes can pull it together, lower debt, and improve cash flow, the stock can easily get back over $10.

But this is speculation.

Another headwind could also slam management and bankrupt the company.

So there’s plenty of reward. And plenty of risk.