Hanesbrands Eliminates Dividend and Offers Abysmal 2023 Outlook, but We See Long-Term Value

Hanesbrands Stock at a Glance

• Current Morningstar Fair Value Estimate: $22
• Hanesbrands Stock Star Rating: 5 stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Hanesbrands HBI reported 2022 fourth-quarter results that were largely in line with our expectations and its mid-January preannouncement. However, this report was overshadowed by a disappointing 2023 outlook, a large non-cash write-down of deferred tax assets, and the news that it has chosen to eliminate its dividend to focus on debt reduction.

While the latter was likely anticipated by the market (dividend yields have been close to 10%), we had expected that Hanes could continue to pay its dividend while working to refinance its $1.4 billion in spring 2024 debt maturities. However, the combination of higher interest rates and its lack of business momentum probably necessitated the move.

We expect to lower our $22 fair value estimate on Hanes by nearly 10%. The firm’s 2023 outlook includes sales of $6.05 billion-$6.20 billion, adjusted operating profit of $500 million-$550 million, and adjusted EPS of just $0.31-$0.42, shy of our prior estimates of $6.27 billion, $615 million, and $1.05, respectively.

Hanes Stock Undervalued Despite Tough Outlook

We had anticipated that Hanes would benefit from lower input costs and inventory replenishment by its mass retail partners, but soft consumer demand is expected to persist through the first half of the year. Even so, we view it as very undervalued and expect its sales growth, free cash flow, and margins will improve in 2024. While current market conditions are tough, we believe Hanes is largely holding market share and maintain our narrow-moat rating based on its brand intangible asset.

Hanes recorded a 16% sales decline in the fourth quarter, outperforming our forecast of an 18% drop. Its 34.3% adjusted gross margin was close to our 34.5% estimate, but its 5.6% adjusted operating margin fell short of our forecast by 100 basis point as operating costs declined less than expected. We do believe Hanes is making progress in cutting costs, but it needs to stabilize revenue to improve efficiency. Overall, reported adjusted EPS of $0.07 missed our forecast by $0.02.