Hanesbrands May be Signaling a Bad Week for Retail Stocks

Key Points

• Hanesbrands stock is trading at 10-year lows. And the real problem for investors is that shares may have further to fall.  
• The company faces strong competition for the cash-strapped low- to middle-income consumer. 
• Refinancing existing debt will expose the company to rising interest rates. 
• Without a better macroeconomic outlook, Hanesbrands appealing dividend looks like a yield trap. 

Hanesbrands (NYSE:HBI) is down just about 2% the day after reporting weak third quarter earnings and lowering its guidance for the coming quarter. But that drop of 2% is on the coattails of the broader market which is surging after the October Consumer Price Index (CPI) number came in lower than expected. Immediately after the company released its earnings report, the stock was down 6%.  

Next week many retailers will be reporting earnings and investors will want to hear about low inventory and pricing power. The problem is that with Hanesbrands, they heard neither. And with the economic outlook likely to get worse before it gets better, now is a time to avoid HBI stock even though it looks cheap.  

Inflation is Affecting the Company’s Core Customer 

A bullish case that some may offer for HBI stock is that sales could be better as items like underwear and socks have always served as low-cost holiday gifts. Add in the fact that the company sells Champion brand sportswear and there’s some merit to the argument. 

Except the company has already lowered its guidance for the current quarter which includes holiday sales. In the earnings report, Hanesbrands forecasts net sales of $1.4 billion to $1.5 billion. That’s well below expectations for $1.63 billion. It would also be the lowest net sales figure since the onset of the Covid-19 pandemic.  

And the earnings outlook is equally grim. The company is now saying earnings will come in between 4 cents and 11 cents per share. Analysts were expecting 21 cents per share. 

The issue is not the company’s pricing, per se. Hanesbrands fits into a price point that should be attractive for low- and middle-income consumers who are looking to stretch their dollars further. The problem is these consumers are feeling the biggest pinch from inflation. And that, according to a Wells Fargo (NYSE:WFC) analyst who downgraded the stock, “is driving lower replenishment orders and order cancellations at key mass retailers.” 

Rising Interest Rates Create a Double Whammy 

In addition to declining demand, the Federal Reserve already says it is likely to continue raising interest rates into 2023. The Fed also says it is prepared to keep interest rates at these higher levels for a sustained period. 

Hanes is carrying approximately $1 billion in notes that mature in the next 18 months. When interest rates were low, refinancing carried the same or lower costs. Not so at this time. The company will refinance. And they will have to pay heavily for the privilege.  

The same Wells Fargo analyst who downgraded the stock forecasts that refinancing will add between $55 million and $65 million of interest expenses to the company’s balance sheet heading into 2023.  

Don’t Count on the Dividend to Save HBI Stock 

At first glance, an attractive quality for Hanesbrands stock would be its dividend which currently sports a yield of over 8%. And the company just announced it would pay its dividend which comes out to 15 cents per share quarterly for this most recent quarter. That means shareholders of record on or before the ex-dividend date of November 21, 2022 will receive the dividend in mid-December.  

That currently calculates to about 49% of the company’s net income. A few years and several rate increases ago, that may have been sustainable. But with the company’s financials under pressure, a dividend cut or suspension is likely, particularly if the macroeconomic outlook deteriorates further.  

I can’t tell you that Hanesbrands doesn’t look cheap. But this looks like a time when stocks are cheap for a reason. If you want to buy the stock to collect a quick dividend, you have a window to make that work. But as a long-term play, there are better options than HBI stock.