It's been a tough year for apparel manufacturer Hanesbrands (HBI 0.22%). Not only are retailers reducing inventories, leading to lower orders, but the company itself has excess merchandise on its hands. As sales tumbled and cash remained tied up in inventory, Hanesbrands was forced to eliminate its dividend earlier this year as it tried to shore up the balance sheet.
Unsurprisingly, the stock has been a disaster. Since peaking in mid-2021, shares of Hanesbrands have lost about 77% of their value. Year to date, the stock is down nearly 20%.
Making progress
Hanesbrands' first-quarter results featured slumping sales and tumbling profits, but there were some positive signs.
Total sales were down 12% year over year, or down 10% on a constant-currency basis. Champion, the company's main activewear brand, suffered a 17% sales decline, while innerwear sales dropped 4%. A combination of weak consumer demand and high levels of retail inventories drove both declines.
Profits were also down across the board. For the innerwear segment, operating margin dropped to 13.1% from 17.6% in the prior-year period. For the activewear segment, operating margin fell to just 3.2% from 12.7% last year. And in the international segment, an 11.1% operating margin was down significantly from 17.5% in the first quarter of 2022. Overall, Hanesbrands reported an operating margin of 4.1%, down 6.7 percentage points year over year.
This all sounds bad, but the company managed to reduce inventories and produce cash flow. Total inventory was down 1% sequentially, and the company generated $20 million of free cash flow. Improvements in working capital drove much of the cash flow generation.
Hanesbrands' outlook for the year isn't nearly as rough as its first-quarter results. The company expects sales to drop by just 1% in 2023, and free cash flow should come in around $430 million. Generally accepted accounting principles (GAAP) operating margin should be close to 8%, a vast improvement over the first quarter. The company is making progress selling through its higher-cost inventory, and retail inventories should improve as the year goes on.
Dirt cheap
Hanesbrands isn't out of the woods yet, but its free cash flow generation should give investors confidence that the company can successfully weather this storm.
Hanesbrands' stock price has an extreme amount of pessimism baked in. Based on the company's 2023 guidance, the stock trades for just 4 times free cash flow. The price-to-adjusted-earnings ratio is higher, about 14, but it's important to remember that earnings are severely depressed. Analysts expect adjusted EPS to more than double in 2024 as Hanesbrands recovers.
The balance sheet is something to be concerned about, but the company should be able to use some of its cash flow to knock down its debt. Total cash stood at $213 million at the end of the first quarter, while debt totaled $3.64 billion. The company has already refinanced all debt maturing in 2024, which will give it some breathing room.
While a high debt load and an uncertain economic trajectory makes Hanesbrands a risky stock, the stock has been so beaten down that big gains are possible if the company can convince investors that the worst is over.
