Hanesbrands debt reduced from 3.3 to 2.9 times EBITDA and share repurchase of $200M planned in early 2020, but shares remain undervalued

Record net cash from operations of $803 million for full year. Guidance for 2020 is $700-800M.
Expectation of $200 million in share repurchases early in 2020.
Debt repayments greater than $600 million in 2019 and year-end inventory 7% lower.
Net debt reduced from 3.3 to 2.9 times adjusted EBITDA.
Shares seems undervalued given low multiples, share buyback, organic growth and debt reduction.

Hanesbrands issued a press release on their 4th quarter 2019 financial results on February 7th. The quarter was summarized by the CEO as follows:

“HanesBrands delivered a solid fourth quarter right in line with our guidance and concluded a very successful year with record operating cash flow, significantly reduced debt, continued organic revenue growth, and strong underlying business fundamentals.”

The quarter and the year is briefly visually summarized below before turning to the investment thesis.

Record operating cash flow

Hanesbrands achieved a record operating cash flow in 2019 of $803M.

Record net cash from operations of $803 million for full year and $559 million in 4Q.

This was achieved through a combination of increased net income and the reduction of year-end inventory.

Significantly reduced debt

Hanesbrands used their annual record operating cash flow of $803M to reduce their debt by $609M to $3394M; from 3.3 to 2.9 times EBITDA. The figures and tables below summarise their debt reduction.

Time series of long term debt (USDm). Long term debt was 4009 and 3394 USDm at the beginning and end of the year, respectively.

Debt (USDt) at the end of 2019 and 2018 as per the 2019 10-K.

Debt (USDt) at the end of 2018 and 2017 as per the 2018 10-K.

The development over time of the individual loans and credit facilities are visualized below.

The quarterly interest expenses have dropped to $40M in large part as a consequence of the debt repayments and to some extent also lower interest rates.

Organic revenue growth

“In the fourth quarter, constant-currency organic sales increased slightly, while full-year constant-currency organic sales increased 4%.”

“Consumer-directed sales, defined as all sales to consumers online or through brand stores, continue to increase and account for a larger portion of total sales. Consumer-directed sales in constant currency increased 17% in the fourth quarter and 16% for the full year. Consumer-directed sales in constant currency represented 30% of total sales in the quarter and 25% for the full year.”

DTC sales grew 15.4% YoY ($69 from $447 to $516 millions), whereas third party brick and mortar sales dropped 6.5% YoY ($86 from $1320 to $1234 millions).

“Global Champion sales, excluding C9 Champion in the U.S. mass channel, totaled $1.9 billion in constant currency in 2019, an increase of 40% over last year as a result of expanded product offerings and increased distribution. With balanced growth in the fourth quarter, Champion sales increased 22% both domestically and internationally.”
“Total International constant currency organic sales increased 10% in the fourth quarter and 12% for 2019. In the quarter, sales increased in all International regions, including the Americas, Asia, Australia and Europe.”

Time series of segmental revenue (USDm).

Gross profit margins have improved over the years and operating expenses have been kept somewhat in check.

This has led to an improvement in operating income and operating margins, which is led by the international segment.

Innerwear segment operating income (USDm, bars, left) and margin (%, line, right).

Share repurchase plan

Buying back shares worth $200M would equate to between 10.3 and 15.5 million shares, if $HBI continues to trade in the 52-week range between 12.90 and 19.38. That equates to 2.8-4.2% of the 367.3 million outstanding shares. Management is authorized to buy back as many as 40 million shares.

The dividend is $0.15 per share, which equates to approximately $200M per year. However for 2020 net cash from operations is expected to be in the range of $700 million to $800 million. The company can continue to spend $200M on dividends, buy back shares worth $200M and reduce debt (European Revolving Loan Facility, Term Loan A, Term Loan B) by $300-400M. The share repurchase plan is consistent with previous communication.

Further evidence that management considers the share price to be undervalued is their insider buying at a share price below $15.

Valuation and conclusions

C9 Activewear was discontinued at Target after 15 years in favor of their own brand All in Motion, but Hanesbrands are already in final discussions with a new partner and will provide more specifics in the coming months. There is less dependence on Target and Walmart in 2019, which account for 11% and 14% of total sales, respectively. Those numbers were higher in 2017 at 13% and 18%, respectively. Furthermore online sales are more heavily branded than brick & mortar sales; and the latter is outpaced by the former.

Time series of percentage of revenue from Target and Walmart (%).

Online sales are more heavily branded than brick & mortar sales and current sales are more branded than in the past.

Hanesbrands is trading at multiples not seen since 2012/2013. The company is attractively valued given the stable operating margins, the very decent return on capital, the low multiples, the share buyback, the organic growth and the debt reduction to the desired range of 2-3x EBITDA.