Hanes Brands (NYSE:HBI) — mrkt cap $1.47B; Price $4.21; trailing P/E na
EXITED. Last month we wrote to readers that we were taking a small tactical position in this name. HBI is high risk—it is overleveraged with ~$4B of mostly variable debt. Our working thesis is that they will work through their 500mm of inflated inventory and create enough cash flow to survive until they reach a more normalized environment. HBI reported earnings last week and innerwear sales were stronger than expected, however activewear sales were down ~18% q/q. Although we are still convicted in their innerwear segment, the activewear segment is now more of a question mark. The position is down 20% since purchase and we are exiting and waiting for a more favorable risk/reward skew before entertaining reentry. We believe the company will internally generate the cash it needs to survive but it is less clear than we originally thought.
Graftech (NYSE:EAF) — mrkt cap $1.07B; Price $4.19; trailing P/E 4
PASS. Graftech manufactures graphite electrodes that are used in electric arc furnaces (EAF) to produce steel. EAFs are gaining share on Blast Furnaces due to the secular trend of decarbonization (EAFs use scrap steel to make other forms of steel whereas Blast Furnaces use coal to make virgin steel). Additionally, Graftech benefits from vertical integration, giving it control over its petroleum needle coke supply, a critical component for manufacturing graphite electrodes. Supply of petroleum needle coke is limited outside of China. The reason we write outside China is because there are no verifiable numbers of the petroleum coke China produces and by association, how many graphite electrodes they can produce. We suspect whatever that number is, it will continue to grow providing an enduring headwind for Graftech. Despite the potential growth opportunities, the lack of visibility on the supply side prevents us from viewing Graftech as a viable investment opportunity.
The Container Store (NYSE:TCS) — mrkt cap $151mm; Price $2.99; trailing P/E 4
PASS. The Container Store is a specialty retailer of containers and closets. Its brand is well loved and it has about 100 stores generating about $1B/year in revenue. About 50% of revenues are generated by private label and can be seen by high gross margins of about 60%. Although it has a great brand with a durable moat, TCS’s leverage gives us pause given the macro environment. It has about 200mm in long-term debt and current liabilities and most of its current assets are in inventory. Despite this, TCS continues to be aggressive with store expansions having spent almost $50mm in store expansions and additions the last three quarters. While valuations look attractive, our view is management needs to adopt a more conservative stance on capital allocation.