HanesBrands Inc. said Champion’s sales outside of the mass channel in the U.S. catapulted over 50 percent in the first quarter, driven by strong consumer demand, space gains in the specialty channels and growth in the online channel.
The Champion brand also led healthy organic gains for the international segment.
Overall sales in the U.S. for Champion grew high-single digits. Gains at specialty and online more than offset a decline in the Champion mass business, which Barry Hytinen, HanesBrands’ CFO, on a conference call with analysts, said the company believes “is mature.”
Champion’s mass business includes the C9 Champion activewear line sold exclusively at Target. A JoyLab fashion-forward fitness wear was launched at Target last October.
Elaborating on Champion’s momentum in the U.S., Gerald Evans, HanesBrand’s CEO, said the company domestically is “seeing space gains across the board in Champion outside of the mass channel, and certainly it’s a very strong performance in the specialty channel as well as department store and sporting goods. And so there’s just nothing but good things to say about the Champion business.”
Overall U.S. Activewear sales, which also include Hanes activewear business, Gear For Sports and Alternative Apparel, increased 5.7 percent in the quarter to $346.1 million due to the $16 million contribution from the acquisition of Alternative Apparel and a 1 percent increase in organic sales. The increase in organic sales exceeded expectations as growth in Champion and replenishment Activewear more than offset the expected space declines in the mass channel, particularly Hanes.
Online channel sales for the segment increased 26 percent in the quarter and represented 10 percent of sales.
Activewear’s operating profits eroded 11.7 percent to $38.3 million. Operating margins declined 210 basis points in the quarter to 11.1 percent as favorable product mix was more than offset by the impact from higher raw material and short-term higher distribution costs. HanesBrands continues to expect pricing and distribution efforts to mitigate these margin pressures in the second half of the year.
Global Activewear sales increased 15 percent in the quarter or 8 percent on an organic constant currency basis. The global gain likewise exceeded expectations due to earlier placement of some spring offerings for Champion. For the quarter, Champion revenue grew 17 percent globally in constant currency, with high single-digit growth in the U.S. and strong double-digit growth in both Asia and Europe. The global growth in Champion more than offset the anticipated space reduction in Hanes casualwear business within the U.S. mass channel.
“Our Activewear strategy for the past several years has been to drive revenue and margin growth by focusing on the branded segments of the market, while de-emphasizing the commodity segments,” said Evans on a call. “This brand-focused strategy has been working in both our domestic and our international businesses. Going forward, we’ll continue to concentrate on the higher-return segments and channels of the market by leveraging our strong brands, Champion and Hanes, as well as our latest addition, the Alternative brand.”
Evans also noted that Alternative Apparel, a maker of “better apparel” basics acquired last October, is performing well. Although HanesBrands didn’t own it last year, revenue was up 8 percent in the quarter versus prior-year levels. Said Evans, “Alternative adds another solid brand to our portfolio, one with a strong millennial and sustainability appeal.”
In its other segments, Innerwear sales slumped 2.8 percent to $491.1 million, as expected. Innerwear Basics sales decreased less than 1 percent, with growth in socks and children’s underwear sales offset by declines primarily in women’s underwear. Innerwear Intimates sales decreased 7 percent, primarily affected by soft shapewear sales and retailer door closings within the past year. Operating income in the Innerwear segment declined 13.0 percent to $101.4 million, affected by raw material inflation and lower volume.
Innerwear brands include Hanes, Champion, Maidenform, DIM, Bali, Playtex, JMS/Just My Size,L’eggs, Lovable and Wonderbra.
International sales climbed 19.4 percent to $569.9 million while operating profits advanced 46.3 percent to $77.1 million. The segment benefited from foreign currency exchange rates, organic growth, synergies from past acquisitions and contributions from the mid-quarter acquisition of Bras N Things. International constant-currency organic sales increased 7 percent on strong double-digit Champion sales growth in Europe and Asia. Organic consumer-directed sales, which consist of all online channel sales and company retail stores, increased 22 percent and accounted for 28 percent of total segment sales.
Hytinen said Champion largely drove the organic international gain. He said, “It’s broad-based, but Champion is growing very well across the world, whether it be in Europe or Asia, and that is the principal driver of the growth, and we feel very good about how that started the year and opportunity going forward.”
Companywide, net earnings rose 12.5 percent to $79.4 million, or 22 cents a share, exceeding guidance in the range of 17 to 20 cents.
Adjusted to exclude non-recurring items, earnings declined 12.2 percent to $95.8 million, or 26 cents a share. compared with guidance of 23 to 25 cents.
Gross margins eroded to 40.1 percent from 40.2 percent, below the outlook for a slight increase, as expansion in international gross margin was offset by higher input costs, which were expected. Excluding $14 million of raw material inflation in the quarter, gross margin would have been up 80 basis points.
SG&A as a percent of sales increased to 28.8 percent from 28.3 percent a year ago due to increased media investments to support the company’s new Bonds product line in Australia, as well as its U.S. Intimates business and higher distribution costs.
Operating earnings on an adjusted basis inched up 0.5 percent to $165.7 million. The decline on an adjusted basis in net earnings reflected a 16 percent tax rate in the quarter and included $4 million of one-time expense related to a tax law change in one of its foreign jurisdictions.
Looking ahead, HanesBrands reiterated full-year financial guidance for 2018. Guidance calls for full-year 2018 net sales of $6.72 billion to $6.82 billion, GAAP EPS of $1.54 to $1.62 and adjusted EPS excluding actions of $1.72 to $1.80. That compares to sales of $6.47 billion, GAAP EPS of 17 cents and adjusted EPS excluding actions of $1.93 in 2017.
Second-quarter net sales are expected to be in the range of $1.7 billion to $1.725 billion. At the midpoint of this guidance range, constant-currency organic sales are expected to decline less than 1 percent. GAAP EPS is expected to be 38 cents to 40 cents, and adjusted EPS excluding actions is expected to be 44 to 46 cents. That compares to sales of $1.65 billion, GAAP EPS of 47 cents and adjusted EPS excluding actions of 53 cents in 2017 second quarter. Charges related to acquisition integration and other actions are expected to total approximately $25 million in the current second quarter.
Photo courtesy Champion