Hanesbrands Inc.

Moat: 1.5/5

Understandability: 2/5

Balance Sheet Health: 2.5/5

Hanesbrands Inc. is a global apparel manufacturer and marketer, primarily known for its innerwear and activewear brands, along with licensed apparel products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hanesbrands’ moat is very weak, and in my opinion it should be rated as a 1.5 / 5. While Hanesbrands possesses strong brand recognition, particularly with names like Hanes and Champion, that does not translate into sustainable competitive advantages as competitors often offer similar products. It doesn’t appear that the company has strong enough pricing power to be classified as a wide-moat company.

  • Brand Recognition: Brands like Hanes and Champion are well-known, but this recognition does not create significant barriers to entry or allow for price premiums compared to similar products in the market. As such, it can be considered a narrow moat, but its strength appears very low, so a 1.5 / 5 rating is suitable.
  • Limited Switching Costs: There are very few switching costs for consumers buying innerwear or basic activewear, and thus Hanes does not possess this kind of advantage.
  • Low Product Differentiation: Most products are essentially commodities, with the competition being based on pricing or market strategies, rather than something like a truly different offering.

Risks to the Moat and Business Resilience:

  • Commoditized Products: The risk of offering commodity-type products means that it is difficult to sustain higher margins or pricing power. Competitors can easily match many of Hanesbrands’ basic products, hindering its ability to generate stable higher returns for the company.
  • Competition: Hanesbrands faces intense competition from other apparel companies, as well as from new entrants.
  • Changing Consumer Preferences: As consumer preferences change rapidly it may be difficult for Hanesbrands to adapt to these changes and may lead to poor sales.
  • High Debt: A large amount of debt could threaten the company’s financial stability during times of financial or economic crisis. (discussed further in the Financials section)

Business Overview

  • Revenue Distribution: Hanesbrands’ revenue is broken down primarily into three segments: Innerwear, Activewear, and International.
    • Innerwear: This segment includes brands like Hanes, Bali, and Maidenform, and contributes to a larger portion of their revenues.
    • Activewear: This segment, which includes Champion, is also a large part of the revenue for the company, but has been in decline for a long while now.
    • International: The remaining revenue is generated from the international operations of the company.
  • Trends in Industry: The apparel market is characterized by rapid change in consumer preferences and tough competition. There is a constant move towards low-cost production, with companies often outsourcing manufacturing to countries with cheap labor and low overheads. However, there is also a trend for higher emphasis on ethical and sustainability practices.
  • Margins: Hanesbrands has been historically known for achieving average margins. But there has been a noticeable margin contraction during 2022. Their net margin in the last financial year was -4.7%, down from 7.7% from last year. This is also reflected in their operating margin, with an operating loss of $168.2 million, compared to an operating profit of $726.8 million in 2021.
  • Competitive Landscape: The competitive landscape is crowded with many other players, both big and small. There is strong competition from companies such as Under Armour, Nike, Adidas, and many more companies which have similar offerings.
  • What Makes Hanesbrands Different?: Their products are somewhat well-known and established, but ultimately just another clothing maker. Nothing really stands out. They have a wide range of brands, but it is difficult to say if the variety of brands are actually contributing to the value creation and not a hindrance.

Financials

  • Recent Performance: Hanesbrands had a very bad year in 2022. Net sales were down 1.9%, while operating loss increased dramatically from $54.8 million in 2021 to -$168.2 million in 2022. This resulted in a huge drop in their net income with a net loss of $251.2 million compared to a net profit of $521 million from last year. Their free cash flow is also way down, from $611 million in 2021 to $440 million in 2022.
  • It is important to note that these figures have been affected due to impairment of goodwill and trade name which resulted in a loss of $378.2 million. However, even when excluding that loss, their profitability has been down significantly.
  • The major reason for their poor performance was a big drop in revenue in North America, and high supply chain costs. However, there was also decline in gross margins, partly related to inflationary pressures on material costs and freight prices.
  • Liquidity and Solvency: The company’s current ratio was 1.44, meaning there was $1.44 of current assets for each dollar of current liabilities. Which is fine but not really reassuring. There has been some negative trends. Their net debt went from approximately $3.7 billion to $3.8 billion in one year. Their adjusted EBITDA margin has gone down from 14.5% to 9.2% in that same time. As such the company’s ability to pay its debts could be challenged in the near future.
  • Debt: Hanesbrands has a significant amount of debt on its books ($3.8 billion), and it is a big concern as it makes the company vulnerable during periods of economic distress. The cost of this debt is also quite high, as evident by their high interest expense. This is not a very reassuring situation.
  • Recent Concerns/Controversies: In recent earnings calls the company has emphasized that they will be streamlining the business, cutting costs, and improving efficiency in their business operations. They are focusing on increasing sales, but it will be interesting to see if their strategies will pay off in the future. There has also been quite a bit of concern from investors that the company will not be able to repay its debt due to its poor financials, it still has to be proven that the company will do okay. Another major concern is the recent announcement about the departure of their CFO, which may create instability among the company.
  • Share Repurchase and Dividends: In recent times the company has been very hesitant to commit to share buybacks or even providing dividends. This is not a good sign. And since it is unlikely to change in the near future, it will make things more difficult for investors.

Understandability: 2 / 5 The business model of Hanesbrands is pretty easy to understand. They produce and sell clothing which is an easy concept for most. However, to really understand the financial and competitive implications can be rather difficult, and requires some knowledge of the textile market, which can make things complicated.

Balance Sheet Health: 2.5 / 5 Hanesbrands’ balance sheet is concerning. The company has very high levels of debt which is putting the company in a very vulnerable situation. Although most debt is long term, that doesn’t make a big difference in terms of the sustainability. Another important fact is their decreasing margins and cash flows, which reduces the company’s ability to pay back those debts. I would rate the balance sheet to be a 2.5 out of 5, which is concerning.