HanesBrands announced fourth-quarter and full-year 2017 results, including full-year net sales growth of seven percent and strong annual operating cash flow of $656 million.
The company also: initiated full-year 2018 guidance for sales and profit growth and other financial measures; announced an agreement to acquire Australian specialty intimate apparel seller Bras N Things; declared a regular quarterly cash dividend of $0.15 per share and took a $457 million charge in the fourth quarter related to U.S. federal income tax reform.
“2017 was a successful year during which we focused on diversifying our business to be able to consistently deliver annual topline growth,” said Hanes chief executive officer Gerald W. Evans Jr. “We rebounded to achieve organic growth in the third and fourth quarters, including fourth-quarter organic growth for each of the Innerwear, Activewear and International segments. We have additional work to do, including addressing inflationary and short-term cost pressures, but our brands are strong, our key market shares are increasing, our international businesses are sizable and growing and we are driving significant direct-to-consumer growth worldwide.
“Cash flow from operations continues to be the engine of our business model, and tax reform will not have a meaningful effect on our cash generation. We believe we have significant opportunities to put our strong cash generation to work supporting the company’s growth initiatives, acquisitions and capital strategy. We expect another strong year of operating cash flow in 2018.”
For the year and quarter ended Dec. 30, 2017, full-year net sales increased seven percent to $6.47 billion, and fourth-quarter net sales increased four percent to $1.645 billion. Organic sales, which exclude acquisitions under a year old, increased two percent in constant currency in the fourth quarter, the second consecutive quarter of organic growth.
On a GAAP basis, which includes the effect of the tax charge related to U.S. federal income tax reform, the company reported a fourth-quarter loss per diluted share of $1.06, and full-year EPS was $0.17.
GAAP operating profit for the full year decreased seven percent to $723 million, and fourth-quarter operating profit of $120 million decreased 41 percent.
When excluding the tax-reform charge, as well as pretax charges for acquisition integration and charges for other actions, full-year adjusted EPS of $1.93 increased four percent and fourth-quarter adjusted EPS of $0.52 decreased from $0.53 a year ago. Adjusted operating profit of $916 million for the year increased slightly and fourth-quarter adjusted operating profit of $231 million decreased eight percent.
Key Callouts for Fourth-Quarter and Full-Year 2017 Financial Results
Working Capital Management and Income Growth Drive Strong Cash Flow. Hanes generated $656 million in net cash from operations for the full year, up from $606 million a year ago. Management of working capital, particularly inventory and payables, drove cash-generation growth. In the fourth quarter, the company repurchased approximately $100 million of stock at an average price of slightly more than $20 per share. For the full year, the company repurchased approximately $400 million of stock, or nearly 20 million shares.
Geographic Diversification Drives Organic Sales Growth. Hanes generated organic sales growth in the third and fourth quarters. Organic sales increased three percent in the fourth quarter and increased one percent in the third quarter. On a currency neutral basis, organic sales increased two percent in the fourth quarter and one percent in the third quarter.
Global activewear organic sales increased seven percent in the fourth quarter, with global Champion sales up 15 percent. Global innerwear organic sales increased two percent.
Double-Digit Online Sales Growth Continues. Global online sales increased 22 percent in the fourth quarter, up in every geography. The online channel, including company websites and traditional retailer websites, accounted for 11 percent of total sales in the fourth quarter and nine percent for the full year.
Selling, General and Administrative Expenses Increase in the Fourth Quarter. SG&A expenses and SG&A as a percent of sales increased on a GAAP and adjusted basis in the fourth quarter as a result of several factors, including higher distribution expenses as a result of increased volume and labor expenses to handle late-quarter customer orders. Increased marketing investment and mix of products sold also contributed to higher SG&A.
Additional Acquisition Integration Charges Taken in Fourth Quarter. In addition to expected acquisition integration charges in the fourth quarter, the company took the opportunity to accelerate certain integration actions and experienced higher costs to align its supply chain to support acquired European and Australian businesses. In total, Hanes incurred $50 million in integration-related charges in the quarter and $131 million for the year.
Business Segment Highlights
Innerwear Sales Return to Organic Growth. Innerwear segment sales increased one percent in the fourth quarter, driven by strong men’s and children’s underwear growth. For the full year, segment sales decreased three percent. Online channel sales increased 12 percent. Operating profit decreased six percent in the fourth quarter and for the full year.
Broad-Based Activewear Sales Strength. Activewear segment sales increased nine percent in the fourth quarter and three percent for the full year. Fourth-quarter organic sales increased four percent, while the acquisition of Alternative Apparel in October 2017 contributed $18 million in sales. Core Champion performance, including strong sales of the Champion Life line of products and reverse-weave fleece, and higher sports apparel sales drove quarter growth. Online channel sales for the segment increased 27 percent in the quarter. Segment operating profit increased two percent in the fourth quarter and one percent for the full year.
Space Gains and Strong Point of Sale Drive International Growth. Broad-based strength drove International segment net sales up eight percent in the fourth quarter and 34 percent for the full year. Organic sales in constant currency increased three percent in the quarter and five percent for the year. Space gains, including new store openings, and strong consumer demand at retail and online drove activewear and innerwear strength across all geographies–the Americas, Asia, Europe and Australia. Operating profit increased eight percent in the fourth quarter, and acquisitions contributed to 45 percent growth for the full year.
Acquisition of Bras N Things
Hanes has entered into a definitive agreement to acquire Bras N Things, a leading specialty retailer and online seller of intimate apparel in Australia, New Zealand and South Africa. In 2017, Bras N Things had net sales of approximately A$180 million (US$144 million).
The all-cash transaction is valued at A$500 million (approximately US$400 million) on an enterprise-value basis. The purchase price is approximately 10 times 2017 EBITDA and is expected to be less than eight times EBITDA after cost and revenue synergies. The pending acquisition is expected to be accretive to earnings in 2018.
“Bras N Things is a leading intimate apparel retailer and ecommerce business that is a strategic and natural complement to our very successful Bonds underwear business in Australia and New Zealand,” Evans said. “Bras N Things has a great business model that appeals to millennial consumers featuring core products supplemented by seasonal product offerings. This consumer-direct sales model has significant potential for expansion into other geographic markets. We are delighted that Bras N Things CEO George Wahby, who oversees a talented management team, will remain with our Hanes Australasia business unit.”
Bras N Things, based in Sydney, sells proprietary bras, panties and lingerie sets through a retail network of approximately 170 stores and a fast-growing ecommerce platform (www.brasNthings.com). The company’s three-year compound annual growth rate is 11 percent, and online sales last year increased 71 percent and represent nearly 10 percent of total sales.
The company operates 154 stores in Australia, 10 stores in New Zealand and seven stores in South Africa.
With the acquisition, the company’s combined Australian commercial businesses would hold the No. 1 market position in bras and the No. 1 market position in panties in Australia, as well as the No. 1 market position for underwear, socks and babywear.
The acquisition is expected to close in mid-February.
2018 Financial Guidance
Hanes has issued initial guidance for 2018 that includes growth expectations for net sales, operating profit, EPS and operating cash flow.
The company expects 2018 net sales of $6.72 billion to $6.82 billion, GAAP operating profit of $870 million to $905 million, adjusted operating profit excluding actions of $950 million to $985 million, GAAP EPS of $1.54 to $1.62, adjusted EPS excluding actions of $1.72 to $1.80 and net cash from operations of $675 million to $750 million.
With U.S. income tax reform, the company expects a typical annual tax rate of 15 percent to 16 percent. The 2018 full-year tax rate is expected to approach 16 percent.
Key assumptions in the company’s guidance include: a cautious outlook for the U.S. brick-and-mortar consumer environment, including the first-half effect of door closures; an increase in full-year organic sales driven by online, global Champion, and International growth and higher commodity costs and increased marketing investment to support additional planned product innovation.
Comparison of 2018 Guidance to 2017 Results. At the midpoint of 2018 guidance, net sales are expected to increase approximately five percent compared with 2017. Comparison of 2018 guidance to prior-year results for operating profit and EPS are affected by accounting rule changes and U.S. income tax reform, respectively.
A new 2018 Financial Accounting Standards Board rule on how to account for pension expense will result in pension expense being reported below operating profit on the income statement as interest and other expenses rather than the previous practice of accounting for this expense within selling, general and administrative expense. On a pro forma basis, applying this rule to 2017 results would result in an increase of $18 million in GAAP and adjusted operating profit. On a pro forma basis, 2018 GAAP operating profit guidance at the midpoint represents expected growth of 20 percent increase over 2017, and 2018 adjusted operating profit guidance at the midpoint represents expected growth of four percent over 2017.
Comparison of 2018 EPS guidance with 2017 EPS is affected by the expected increase in the 2018 full-year tax rate as a result of U.S. federal income tax reform.
On a pro forma basis, applying an income tax rate of approximately 16 percent to 2017 results, consistent with the effect of tax reform, GAAP EPS would have been $1.05 higher and adjusted EPS would have been $0.25 lower. At the midpoint of 2018 guidance, GAAP EPS would increase 30 percent compared with pro forma 2017 results and adjusted EPS would increase five percent on a pro forma comparison basis. (See Note on Adjusted Measures and Reconciliation to GAAP Measures for additional discussion and details.)
First-Quarter Guidance. First-quarter net sales are expected to be in the range of $1.42 billion to $1.44 billion. GAAP EPS is expected to be $0.17 to $0.20, and adjusted EPS is expected to be $0.23 to $0.25. In constant currency, organic growth is expected to decrease less than one percent in the quarter, reflecting the effect of retailer door closures in the United States and expectations of ongoing tight inventory management by retailers.
Additional Full-Year Guidance. Organic sales growth for 2018 is expected to be approximately one percent in constant currency. In addition, the company expects approximately $180 million in sales from the acquisitions of Alternative Apparel and Bras N Things. Foreign currency exchange rates for the year are expected to contribute a benefit of approximately $70 million to net sales.
Operating margins are expected to be affected in the first half by increased marketing investment and distribution expenses, while second-half margins will benefit from improvement in distribution efficiencies and price actions to reflect input-cost inflation.
GAAP operating profit in 2018 is expected to be affected by approximately $80 million in pretax charges, including approximately $25 in the first quarter, related to acquisition integration and other actions related to Hanes Europe Innerwear, Hanes Australasia, Champion Europe, Alternative Apparel and Bras N Things.
Acquisitions are expected to contribute approximately $30 million benefit to adjusted operating profit excluding actions.
The company expects capital expenditure investment of approximately $90 million to $100 million. A pension contribution of approximately $15 million and payment of $28 million for the finalized Champion earn out are reflected in operating cash flow guidance.
Hanes expects interest expense and other expenses to be approximately $207 million combined.
The company expects approximately 364 million shares outstanding.
Hanes has updated its quarterly frequently-asked-questions document, which is available at www.Hanes.com/faq.
Photo courtesy Champion