Moody’s Investors Service downgraded Hanesbrands, Inc.’s debt ratings to reflect the company’s significant earnings declines through 2023 and Moody’s expectation that leverage and coverage credit metrics will remain weak through the rest of 2023 and the first half of 2024.
Ratings affected include Hanesbrand’s corporate family rating (CFR) to B1 from Ba3, probability of default rating (PDR) to B1-PD from Ba3-PD and the senior unsecured ratings to B3 from B1. Moody’s also affirmed the Ba2 senior secured bank credit facilities ratings and the SGL-2 speculative grade liquidity rating (SGL) remains unchanged. The outlook is maintained at negative.
Moody said that from 2022 through early 2023, Hanesbrands had dealt with an industrywide pullback in large retailer inventory purchases, a dynamic exacerbated by the company’s material customer concentration. Additionally, the company contended with the impact of inflation on consumer spending and input costs, which weighed on topline and margins.
While the company’s innerwear business has recently stabilized, the Champion business has remained challenging because of lower customer demand, high competition, a promotional environment, and execution missteps, leading to revenue dropping at a high percentage rate for the last four quarters.
The company has also been dealing with higher interest rates. Consequently, debt/EBITDA has increased to 6.8x for the LTM ending September 30, 2023 from 4.5x for the LTM ending September 30, 2022 and EBITA/Interest has deteriorated to 1.4x from 4.3x over the same period.
While Moody anticipates that Hanesbrands will benefit from continued stabilization of its core innerwear business, lower input costs, increased cash flow from inventory reductions, and the impact of various recent cost savings initiatives, material headwinds remain on the activewear business. To a lesser extent, Moody’s expects softness in the company’s international operations, where the Australian market is seeing challenges.
Nonetheless, Moody’s anticipates leverage and EBITA/Interest coverage to improve to about 4.5x and 1.9x by the end of 2024. The company announced a review of strategic options for the Champion business, which Moody’s views as a credit positive given the difficulties of turning around that business and the likelihood that proceeds of any transaction would repay debt given management’s stated focus on leverage reduction, and a transaction would allow for increased focus on its core innerwear business.
The outlook remains negative, reflecting the risks associated with a difficult consumer spending environment, challenging Champion business and uncertainty around a potential transaction for Champion, all of which could temper or delay an improvement in credit metrics.
Moody’s wrote, “Hanesbrands’ B1 CFR reflects the company’s significant scale in the global apparel industry, its well-known brands, leading share in the innerwear product category and typically low-cost supply chain.”
Moody expects HanesBrands to focus on reducing leverage to its stated long-term net leverage target of 2.0x-3.0x on reported EBITDA while executing its multiyear strategy (Full Potential Transformation Plan). Following a recent amendment, the B1 CFR also reflects the company’s good liquidity and sufficient covenant cushion. Also, management has taken creditor-friendly steps such as halting dividends and reducing capital expenditures, bolstering free cash flow and liquidity.
“However, the company is dealing with uncertain consumer demand and significant topline and earning weakness at its Champion business, which are weighing on credit metrics. The company announced a review of strategic options for the Champion brand, which Moody’s views as a credit positive given that the business’ line’s particular challenges. However, there is uncertainty around the probability and timing of any transaction,” said Moody’s.
Photo courtesy Hanesbrands