Image source: HBI investor presentation
Apparel maker Hanesbrands is working to change its fortunes with its “Sell More, Spend Less and Generate Cash” strategies, but its business is facing challenges that include a difficult US brick-and-mortar environment.
By Kris Rosemann
Former simulated Dividend Growth Newsletter portfolio idea Hanesbrands (HBI) is battling a challenging US brick-and-mortar retail environment and higher commodity costs as it works to transform its performance, and increased marketing spending is expected to weigh on bottom-line results in the near term. Recent acquisitions have helped boost top-line growth as the company turned in reported net sales growth of 7% from the year-ago period in its first quarter of 2018, results released May 1. Organic sales growth in constant currency was up 1% on a year-over-year basis, and the first quarter marked its third consecutive quarter of organic sales growth.
Strong growth in Hanesbrands’ Champion brand and direct-to-consumer (including online) sales were largely offset by declines related to its US brick-and-mortar channel, and operating profit growth in its International segment was offset by a weak showing from its domestic business. Adjusted operating profit was roughly flat compared to the first quarter of 2017, and adjusted operating profit margin contracted to 11.3% from 11.9%. GAAP earnings per share advanced 16% from the year-ago period to $0.22 thanks in part to lower one-time expenses related to acquisitions and other action-related charges.
Cash flow from operations in the typically weak first quarter came in substantially lower (and substantially negative) in the first quarter of 2018 from the comparable period of 2017, and the meaningfully negative free cash flow generation led to an increase in the company’s net debt position from the end of 2017. As of the end of the first quarter, its net debt position was nearly $4 billion, compared to just over $3.4 billion one quarter earlier.
Hanesbrands’ Dividend Cushion ratio was cut to 0.3 upon its latest update due to its growing long-term debt load and lower optimism surrounding its improving free cash flow generation despite recent improvements in its direct-to-customer business. When we highlighted the idea in the simulated Dividend Growth Newsletter portfolio, its debt load was a key concern, and the ongoing growth in financial leverage played a key role in our decision to part ways with the idea, not to mention the prolonged weakness in the traditional US retail space.
Hanesbrands continues to expect to deliver a growing free cash flow stream, with cash flow from operations guidance for 2018 coming in at $675-$750 million (the measure was ~$656 million in 2017), and net sales are expected to be $6.72-$6.82 billion in the year (was ~$6.5 billion in 2017). Adjusted earnings per share are expected to take a step back in the year to a range of $1.72-$1.80 from $1.93 in 2017 as increased marketing spending related to new product launches and commodity costs pressure the bottom line.
All things considered, we are sticking by our decision to part ways with Hanesbrands as an idea in the simulated Dividend Growth Newsletter portfolio. The company should continue to cover annual dividend obligations with free cash flow generation, but the rising debt load sours our opinion of its long-term dividend health. Its improving online and direct-to-consumer operations are nice improvements, but its far more significant exposure to traditional retail channels in the US will keep organic top-line growth in check for the time being. We currently value shares at $23 each, and the stock yields nearly 3.3% as of this writing.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.