Hanesbrands (HBI): A Very Cheap, Very Leveraged Stock That’s #1 in an Industry that Changes So Little Even Warren Buffett Loves It
Hanesbrands (HBI) has gotten very cheap lately. In fact, the stock is back at prices that are pretty close to where it was spun-off from Sara Lee back in 2006. I talked a little about the stock back then. It was a spin-off I liked – I haven’t found many of those lately – and I’d assume the business has become more valuable over the last 14 years, not less. We’ll see if that’s true.
The business hasn’t changed much in 14 years. Hanesbrands acquired other businesses. It has grown in athleticwear. And it has grown internationally. However, a lot of this growth was acquired with the free cash flow produced by the innerwear segment. Hanesbrands divides itself into 3 parts: U.S. innerwear, U.S. activewear, and international. By my math, profit contribution is roughly 55% from U.S. innerwear, 25% from U.S. athleticwear, and 20% from international. All segments are profitable. And innerwear has seen shrinking profits over the last several years while international has grown (mostly through acquisitions).
Hanesbrands has a very strong brand position in U.S. innerwear and a pretty strong position in U.S. athleticwear. It also owns a lot of the top brands in various countries through acquisitions made to build up its international business. There may be some synergies between international and U.S. – but, they aren’t brand synergies. This gets into the issues I have with the company: 1) Acquisitions, 2) Debt, and 3) Management / Guidance etc. I’m not necessarily opposed to acquisitions, the use of debt, or management here. But, each of those 3 issues do complicate things a bit. For example, I’m not sure I like what the company has done in terms of acquisitions over the years – but, it’s hard to tell.
So, this is one area that changed over these 14 years. Originally, Hanesbrands seemed like it was interested in taking its core brands: Hanes, Champion, Maidenform, Bali, Playtex, Wonderbra, etc. and exporting them into other countries. This never seemed like a great strategy to me. Underwear brands are sold mostly as “heritage” brands. They’re like chocolate bars and breakfast cereal. There are countless countries around the world that have some very popular chocolate bar or very popular breakfast cereal that they’ve been eating since about 1900 or 1950 or whenever. They love it. The rest of the world hates it. It’s successful in their country. It flops everywhere else. Trying to convert someone who eats Cadbury to switch to Hershey – or trying to get an American to start eating Weetabix instead of Kellogg’s Cornflakes just isn’t going to work. These are commodity products. Do they taste a little different? Maybe. Is one brand of underwear a bit cheaper, a bit higher quality, a bit more comfortable, a bit more stylish – maybe. But, any of those things can and will be tweaked. Any company can invest in some different synthetics or different cotton, can do a slight bit of R&D work combined with a lot of consumer research …
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