- The Washington Times - Friday, February 26, 2010

Last week, I closed this column touching on one of the more successful investment themes we have employed over the past several quarters - the cash-strapped consumer. I received a response from a reader asking whether I could elaborate more on the theme and touch on one or two others.

Not a problem.

The concept behind the cash-strapped consumer is rather simple in my view, particularly with the economic backdrop of the past several quarters. Given the high unemployment rate, the need to rebuild savings after the 29 percent drop in the S&P; 500 from its October 2007 peak (even after the strong stock market of the past several months) and the lack of available credit, consumers are opting to save where they can and seek value for each dollar that is actually spent.

I continue to see this theme as having legs and would point to February’s consumer confidence reading, record home foreclosures, disappointing January new-home sales figures, media reports that more bank failures are likely in the coming months and recent jobless claims as proof points, all of which underscore ongoing unease for the consumer.

That is not to say the consumer is not spending. Clearly, we are, as was evidenced by the January retail sales data, which at +0.6 percent for the month was stronger than expected. However, when we start to dig deeper, we see stores such as Hot Topic, Wet Seal and Buckle that delivered negative comparisons in January despite it being a clean-up month for both clearance shoppers and gift-card redemptions.

To be fair, discounters such as BJ’s Wholesale Club, TJX Cos. and Ross Stores delivered solid performance, outstripping Dillard’s, Stein Mart, Macy’s, Saks and others. In my view, this along with several mall trips where I count shopping bags supports the cash-strapped consumer theme.

How to play that theme is another question. Sure, we could try to pick those retailers that are better positioned than others, but that can be risky, as Wal-Mart’s recent top line miss showed us last week. Rather, I am a “buy the bullets, not the guns” type of investor. By that, I mean I would rather buy shares of companies that are supplying those who sell end products. In general, a pretty clear-cut example would be semiconductor and technology companies that sell key components and such into the mobile-phone industry.

With regard to the cash-strapped consumer, it’s a tad tricky, but a good example would be Hanes Brands.

I first wrote about Hanes Brands just about a year ago, when the shares were trading near $9, compared with the $24.75 the shares are at as I write this. The reasons why I liked Hanes Brands then are the same reason I like it today. First and foremost, the company is described as a consumer-goods company, but I would argue that with brands such as Hanes, Champion, Playtex, L’eggs and more, that is a company with several household brands.

Products include T-shirts, bras, panties, men’s and children’s underwear, socks, hosiery, casual wear and activewear. Of that, 47 percent of the company’s revenues are derived from innerwear, where it boasts industry-leading positions in intimate apparel, men’s underwear, socks and hosiery/tights. For the most part, items that most people need and at a certain point need to be replaced in adults as well as for growing children.

Moreover, the company counts Wal-Mart, Target, Kohl’s, Kmart, Macy’s, JC Penney and others among its key retail partners, which is where the bullets-not-gun aspect falls into place. Remember, it’s these retailers that are seeing solid sales comparisons, so we know these are places the cash-strapped consumer is shopping.

The cash-strapped consumer argument for Hanes Brands is the following: Consumers will need to purchase these types of products and will do so given what is more or less a natural replacement cycle. Seeking more value, shoppers will opt for Hanes-branded products at the expense of more expensive competing products offered from Limited Brands’ Victoria’s Secret, Under Armour, Lululemon, Lucy and others. Another aspect of the bullets-not-guns concept that I like is, Hanes has far less real estate exposure unlike Limited Brands, Lululemon and others.

Hanes’ management continues to target cash generation and has improved its balance sheet in the past year as it now has the vast majority of the debt on its balance sheet due after 2015. These maneuverings as well as international growth opportunities recently enabled the management at Hanes to discuss long-term earnings-per-share targets of $3 to $4, compared with the $1.66 per share in earnings the company delivered in 2009.

Not bad at all, but there are some risks to keep our eyes on, including cotton and other raw-material pricing. With that in mind, however, I calculate Hanes shares are trading at 11.5 times consensus earnings expectations for 2010, compared with a peer average of 20.7 times, which reflects expectations for Limited Brands, Under Armour, Maidenform and Lululemon.

There are, of course, other companies that are positioned to be beneficiaries of the cash-strapped consumer theme, such as McDonald’s, Darden and others, because these investment themes can cut across industries. With that in mind, there are a number of other thematic perspectives that I will touch on in future columns. Some of these include powering the mobile consumer; the fattening of the consumer; education - tooling and retooling; and the maturing population, to name a few.

c Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at [email protected] .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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