Is This Underwear Business a Buy After CEO Sells?

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In the second week of December, a Chairman and CEO has sold nearly a third of his stake in the company he is currently leading, when the stock reached its 4-year high recently. It is Richard Noll with Hanesbrands (NYSE: HBI). Since the beginning of December, he has disposed of nearly 250,000 shares of the company, including 213,535 shares sold in the market directly, in the price range of $35.76 - $36.20 per share. He is not alone though, as Kevin Oliver, Chief Human Resource Officer, has exercised his stock options at the lower price and sold it at the market price for more than $1.1 million. Should we be bearish when those key insiders are cashing out?

The Sara Lee Spun-off’s Overview

Hanesbrands, the spun-off from Sara Lee in 2006, is the apparel and intimates maker with several key brands including Hanes, Bali, Champion, Just My Size, Wonderbra, etc. The majority of the company’s revenue has come from two main reporting segments: Innerwear (44% of sales) and Outerwear (31% of sales), with sales concentration in the US. The domestic sales accounted for 87% of its total revenue, whereas the remaining 13% was derived internationally including Japan, Mexico, Canada, and Brazil. It is a good thing to see that the majority of sales were from the giant retailers in the US, with Wal-Mart Stores (NYSE: WMT) accounting for 25% of total sales, Target accounting for 16% and Kohl’s accounting for 6%, and the relationship between the company and its customers has been 10 years or more.

Underwear Market Leading Position

Hanesbrands has been quite famous for its market leading position in the US underwear industry, along with Warren Buffett’s Fruit of the Loom. It is quite reasonable and nice to see that Hanesbrands has been selling underwear to Wal-Mart for many years, accounting for 39% of its total underwear sales. It means that in 2011, Wal-Mart has purchased $780 million for underwear items from Hanesbrands. Wal-Mart typically needs the high-volume but low price merchandise. So personally I think with the long relationship it has established and the market leading position, Wal-Mart does not have many choices other than Hanesbrands and Fruit of the Loom. In addition, innerwear also a high margin business across the company’s segment, with a 13.5% operating margin compared to 11.5% average operating margin. So I might expect Hanesbrands would keep expanding its innerwear business in the future.

But High Leverage

Hanesbrands employed significant leverage for its operation; the majority has been for financing its high level of inventories. As of September, it had $777 million in stockholders’ equity, $182 million in cash, and as high as $1.5 billion in long-term debt. In addition, the goodwill and intangible level were also high, of more than $550 million. The inventory level was at nearly $1.35 billion. However, Hanesbrands has been paying down its debt significantly, from $2.3 billion in 2007 to only $1.5 billion, a nearly 35% reduction.

The balance sheet of Hanesbrands was better than that of Limited Brands (NYSE: LTD), one if its rivals. While Hanesbrands has been improving its total stockholders’ equity and reducing debts significantly, Limited Brands has done the opposite. Its equity went down from $2.2 billion to the negative $515 million, and its long-term debt increased by $1.6 billion to $4.5 billion in the same period. Its other rival, Maidenform Brands (NYSE: MFB) enjoyed a stronger balance sheet, with $223 million in equity, $68 million in cash and only $68 million in long-term debt. So the cash and debt could balance themselves out. Currently, Hanesbrands is valued at 10.65x EV/EBITDA, whereas Limited Brands is a little bit cheaper, at 9.41x EV/EBITDA. The cheapest stock belongs to Maidenform, with 8.64x EV multiples.

Foolish Takeaway

Among the three, Maidenform seems to be the best pick among the three. For Hanesbrands, I love the market leading position of the company in the underwear’s market, its long-term relationship with Wal-Mart, and its trend of reducing debt over time. However, it is still highly leveraged, and the insiders are selling out. Thus, I might wait for more deleveraging to think about initiating a position in the company.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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