Has Hanesbrands Reached a Bottom?

The past two years have been a disaster for apparel manufacturer Hanesbrands (NYSE: HBI). Since peaking above $21 in April 2021, HBI has fallen steadily and recently fell below $7.

The reasons are many including global supply chain disruptions, increased competition, and higher manufacturing costs. The net effect is falling sales and decreased profitability.

Last week, Hanesbrands released its fiscal 2022 Q3 results and the news was not good. On a year-over-year basis, net sales decreased 7% and gross profit was down 20%.

Those are the kind of results that gets a stock crushed on Wall Street. That day, HBI fell 9% to reach its lowest share price in ten years.

The company’s CEO, Steve Bratspies, did his best to put some lipstick on that pig: “Our global team’s agility and focus helped us deliver operating profit and earnings per share in line with expectations, despite the tougher-than-expected sales environment.”

Bratspies went on to state, “Our business fundamentals, brands and categories remain strong, and we are focused on controlling those things that are in our control.” Those things include reducing the number of SKUs, unloading excess inventory, and launching new products aimed at younger consumers.

In spite of that optimistic language, the company reduced its profit guidance for the current year. Now, it is expecting adjusted earnings per share of $0.95 – $1.02 versus an original estimate of $1.11 – $1.23.

Time to Load Up

I’m usually not a fan of turnaround plays. However, I can’t help but wonder if now would be a good time to load up on Hanesbrands.

After all, the company is still profitable and is taking corrective action to improve its operating metrics. From a valuation perspective, HBI looks ridiculously cheap.

At a recent share price of $6.50, HBI is valued at less than six times forward earnings and only 0.4 times sales. A year ago, both of those multiples were more than double what they are now.

For income investors, its quarterly cash dividend of 15 cents per share equates to a forward annual dividend yield of 8.5%. That high of a yield implies that Wall Street believes a dividend cut (or suspension) is a distinct possibility.

That may be so, but at this point nobody should be in this name for the income. If you believe HBI is headed for bankruptcy, then the dividend is irrelevant. And if you believe the company will soon turn things around, its capital appreciation potential far outweighs the dividend.

That’s why I’d like to see the company suspend its dividend so that money can be used to pay down debt. Especially with interest rates on the rise, which will only add to the company’s debt servicing costs.

Over 90% of the company’s shares are held by institutional investors. They don’t need the dividend income to make ends meet and they’d much rather see the stock appreciate.

Stretching for Bigger Profits

If you really feel like rolling the dice on Hanesbrands, consider buying a call option on it. A call option increases in value when the price of the underlying security goes up.

Last week while HBI was trading near $6.50, the call option that expires in January 2024 at the $5.00 strike price could be bought for $2.00. For that trade to be profitable, HBI must appreciate by 8% within the next fourteen months.

And if HBI makes it back to $10 by then, the return on investment would be 150%. If you owned the stock, the gain would be a little over 50%. That’s not bad, but 150% sounds a lot better.

Of course, HBI may not appreciate at all if it cannot find a way to increase sales. In that case, this option could end up having no value at all. That’s the risk you take when you buy options.

I can’t prove it, but my gut tells me that the third quarter will be a turning point for Hanesbrands. It has acknowledged its problems and is tackling them head on. Now, it just needs to execute that strategy for its share price to snap back.

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