HanesBrands stock plunges as company directs all free cash flow to debt paydown

HanesBrands shares plunged more than 27% Thursday as the apparel maker pulled its dividend and said it would direct all of its free cash flow to paying off debt.

The big picture: The company's fourth quarter sales plummeted — a reflection of how fickle life can be for apparel companies that suddenly find themselves on the wrong side of shifting consumer preferences.

• Not long ago, the company's Champion brand was electric, enjoying a resurgence in sales among America's youth.
• Now, it's taken a turn for the worse.

Between the lines: HanesBrands said Thursday it's taking steps to strengthen its balance sheet after net sales fell 16% to $1.47 billion in the fourth quarter, including an 18% decline in sales of the Champion brand.

• The company blamed "soft consumer demand" in the U.S. and Europe, and retailers slashing inventory. Sales of innerwear and activewear fell 19% and 16%, respectively.
• In its continuing operations, the company swung from income of $68 million in the fourth quarter of 2021 to a loss of $418 million in the fourth quarter of 2022.

What they're saying: CEO Steve Bratspies said in a statement the company is taking "actions to navigate the extremely challenging environment" but has "created a clear path to improving cash flow and margins as the year progresses."

The big picture: HanesBrands is suffering a "severe slide" in sales, indicating that the company was caught flat-footed as consumer preferences changed, GlobalData Retail managing director Neil Saunders tells Axios.

• The "athleisure" trend — which had been bolstering the company — has slowed down, but not as much as HanesBrands is experiencing, Saunders noted.
• "The Champion brand has taken a big tumble," he said. "It’s a really sharp reversal. It was doing fairly well, and now it’s doing extraordinarily badly."

Of note: Bratspies told investors on a conference call that "innovation is coming" for Champion: "I'm confident that it's going to continue to improve, but we have work to do this year for sure."

Threat level: With $3.66 billion in long-term debt, HanesBrands has a "very negative looking balance sheet," Saunders said.

• In addition to its elimination of its dividend and focus on debt reduction, it's also planning to refinance debt due in 2024.
• The company's CFO resigned on Jan. 9.

Worth noting: It doesn't help that certain retailers have pivoted to selling more of their own activewear brands, such as Target with its All in Motion lineup.

• "Target used to sell quite a lot of Champion products," Saunders said.

The bottom line: HanesBrands needs to deliver "improvements to operating metrics and the balance sheet," CFRA Research analyst Zachary Warring writes.