Has Hanesbrands hit rock bottom?

The last two years have been a disaster for the clothing manufacturer Hanesbrands (NYSE: HBI). Since peaking above $21 in April 2021, the HBI has fallen steadily and recently fell below $7.

The reasons are many, including global supply chain disruptions, increased competition and higher manufacturing costs. The net effect is lower sales and lower profitability.

Last week, Hanesbrands released its Q3 FY2022 results and the news was not good. Year-on-year, net sales were down 7% and gross margin down 20%.

These are the kinds of results that crush a stock on Wall Street. On that day, HBI fell 9% to its lowest stock price in ten years.

Company CEO Steve Bratspies did his best to put lipstick on this pig:The agility and focus of our global team helped us deliver operating profit and earnings per share in line with expectations, despite a tougher-than-expected business environment.

Bratspies went on to say, “Our business fundamentals, brands and categories remain strong, and we are focused on controlling what is within our control.” These things include reducing the number of SKUs, offloading excess inventory, and launching new products aimed at younger consumers.

Despite this upbeat language, the company cut its profit forecast for the current year. Now he expects adjusted earnings per share of $0.95 to $1.02 from an initial estimate of $1.11 to $1.23.

It’s time to load

I’m generally not a fan of flipping games. However, I can’t help but wonder if now would be a good time to stock up on Hanesbrands.

After all, the company is still profitable and taking corrective actions to improve its operating parameters. From a valuation perspective, HBI looks ridiculously cheap.

At the recent share price of $6.50, HBI is valued at less than six times forward earnings and just 0.4 times sales. A year ago, these two multiples were more than double what they are today.

For income investors, its quarterly cash dividend of 15 cents per share equates to a forward-looking annual dividend yield of 8.5%. This high yield implies that Wall Street thinks a cut (or suspension) of the dividend is a distinct possibility.

It may be, but at this point no one should be in that name for the income. If you think HBI is heading for bankruptcy, the dividend is irrelevant. And if you think the company will turn things around soon, its potential for capital appreciation far outweighs the dividend.

That’s why I’d like the company to suspend its dividend so the money can be used to pay down debt. Especially with rising interest rates which will only increase the company’s debt servicing costs.

More than 90% of the company’s shares are held by institutional investors. They don’t need the dividend income to make ends meet and they much prefer to see the Stock enjoy.

Stretch for bigger profits

If you really want to roll the dice on Hanesbrands, consider buying a call option on it. A call option increases in value when the price of the underlying security increases.

Last week, when HBI was trading close to $6.50, the call option that expires in January 2024 at a strike price of $5.00 could be purchased for $2.00. For this trade to be profitable, HBI must appreciate by 8% in the next fourteen months.

And if HBI returns to $10 by then, the ROI would be 150%. If you owned the stock, the gain would be just over 50%. It’s not bad, but 150% sounds much better.

Of course, HBI may not like it at all if it doesn’t find a way to increase sales. In this case, this option could end up having no value. This is the risk you take when you buy options.

I can’t prove it, but my gut tells me the third quarter will be a turning point for Hanesbrands. He has recognized his problems and is tackling them head-on. Now all he has to do is execute this strategy for his stock price to come back.

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