HanesBrands Inc. said their Champion business, excluding the C9 line being phased out at Target, catapulted 75 percent globally on a currency-neutral basis in the first quarter, accelerating from gains of 50 percent in the fourth quarter and 40 percent in the third quarter.

The gains for Champion were driven by double-digit growth across wholesale and direct-to-consumer channels in each of the brand’s main geographies. In the U.S., Champion’s sales grew more than 80 percent excluding the mass channel due to strong comps and space expansions at existing accounts; new distribution, including the sporting goods channel; as well as growth in the brand’s consumer-directed channels.

On a conference call with analysts, Gerald Evans, CEO, said the success of Champion over the past several years is due to a coordinated global strategy to elevate the brand after the company acquired Champion Europe in 2016 to bring all facets of the brand under control of HanesBrands.

“Our broad strategy integrates design globally,” said Evans. “We’re optimizing our supply chain and distribution operations for improved efficiency and service. The brand is engaging directly with consumers, particularly millennials across various digital platforms, with both regional and global campaigns. And our strategy involves a detailed segmentation plan to drive differentiation between channels. This plan allows us to expand our distribution without over-extending the brand.”

He added, “In wholesale, we are working with our retail partners to offer the right mix of product to their specific customer base and within our direct-to-consumer platform, we’re continuing our online efforts while developing a network of branded stores, particularly in Asia. We believe Champion has a long runway for growth and we remain ahead of pace on our 2022 sales goal of $2 billion.”

Evans highlighted that the sporting goods channel “is now growing nicely” for Champion. Overseas, Champion is expanding “not only in the markets we’re in, but we see expansion opportunities in Asia, for example, and other European countries.” Australia was cited as a country where Champion is seeing broadening distribution due to HanesBrands’ local resources.

Evans declined to answer whether Champion was exploring an opportunity to sell into the mass channel with a sub-brand such as C9 but said management is already working on plans to expand beyond Champion’s goal of $2 billion by 2022.

Evans added, “Where we see ourselves now is that we have the opportunity to continue to deliver that goal first, but we are beginning to lay internal goals to take us beyond that $2 billion goal in the years ahead. We’ve got a lot of momentum and a lot of room to run here.”

U.S. Activewear Segment Sales Expand 17 Percent

Carried by Champion, U.S. Activewear Segment’s sales jumped 17.1 percent to $405.3 million. Champion sales increased more than 80 outside the mass channel in the U.S. As expected, sales of Champion at mass retail declined approximately 3 percent.

Target said last August it won’t renew its C9 contract when it expires in early 2020 and the range is being slowly phased out of stores. The lower-priced C9 line has been a mainstay among Target’s activewear mix since 2004 and accounted for about $380 million in sales for HanesBrands in 2017.

Champion’s growth more than offset the expected declines in its remaining Activewear businesses, including C9. The segments also include the Alternative and Gear for Sports brands as well as t-shirts, fleece and other non-innerwear items from Hanes, JMS/Just My Size and Hanes Beefy.

Barry Hytinen, CFO, said the declines in other Activewear businesses are part of a “long-term plan to migrate to higher-margin products” and that helped lift gross margins for the segment in the period. Hytinen added, “We feel very good about the way the Activewear business is trending.”

Operating profits in the U.S. Activewear segment in the quarter rose 13.9 percent to $43.6 million, benefiting from improved gross margin and the revenue gain

Activewear’s overall operating margin declined 30 basis points to 10.8 percent as higher levels of expediting costs were incurred in order to keep up with the strong Champion demand. Investments were also increased to support growth.

HanesBrands’ Q1 EPS Exceeds Wall Street’s Targets

Companywide, revenues grew 7.9 percent to $1.59 billion, exceeding Wall Street’s consensus estimate of $1.53 billion. The 10 percent constant-currency organic growth marked the seventh consecutive quarter of constant-currency organic growth. Beyond the strong U.S. Activewear growth, the gains were aided by broad-based International growth and increased sales of U.S. Innerwear basics.

Net earnings were basically flat at $79.5 million, or 22 cents a share, against $79.4 million, or 22 cents, a year ago. Adjusted EPS increased 4 percent to 27 cents a share, topping Wall Street’s consensus target of 25 cents.

GAAP operating profit in the quarter increased 1 percent to $148 million, while adjusted operating profit increased 2 percent to $169 million.

In its other segments, Innerwear sales reached $475.9 million, down 3.1 percent. Results were better than expectations of a 4 percent decrease. Operating profit increased 3.2 percent to $104.6 million, with the operating margin improving 130 basis points to 22 percent. Sales of Innerwear basics increased by nearly 2 percent, while Innerwear intimates decreased in line with company expectations. Sales increased for underwear, socks, and shapewear, while the company’s bra turnaround initiatives are continuing. Sales of Innerwear in the online channel increased 6 percent.

In the International segment, revenue jumped 13.4 percent to $646.2 million. Operating income accelerated 20.3 percent to $92.7 million and benefited from increased volume and integration synergies. Organic constant-currency sales increased by more than a $100 million, up 18 percent with regional growth in Europe, Asia, Australia, and the Americas. The segment’s total innerwear and total activewear sales each increased. Bras N Things growth, including increases in comparable-store sales, contributed to increased organic sales after the anniversary of its acquisition in February. The business contributed $18 million in non-organic sales prior to the acquisition anniversary.

Guidance Maintained For Year

Hanes reiterated its full-year 2019 financial guidance. The company expects 2019 net sales of $6.885 billion to $6.985 billion, GAAP operating profit of $900 million to $930 million, adjusted operating profit of $955 million to $985 million, GAAP EPS of $1.59 to $1.67, adjusted EPS of $1.72 to $1.80, and net cash from operations of $700 million to $800 million.

At the midpoint, the 2019 guidance versus 2018 results represents net sales growth of approximately 2 percent; GAAP and adjusted operating profit growth of 5 percent and 2 percent, respectively; GAAP and adjusted EPS growth of 7 percent and 3 percent, respectively; and operating cash flow growth of 17 percent.

Organic sales in constant currency for 2019 are expected to increase approximately 3 percent.

U.S. Activewear net sales growth at the midpoint of 2019 guidance is expected to approach 4 percent. Champion sales outside of the mass channel are expected to increase at double-digit rates each quarter, while the Champion mass business is expected to decrease by a low teens percentage, primarily in the second half. Full-year sales for the remainder of the Activewear segment are expected to decrease with a larger decline in the second half as the company transitions to a focus on higher-margin products. The company expects margin expansion for the Activewear segment for the year.

U.S. Innerwear net sales are expected at the midpoint of guidance for both the full year. International segment net sales are expected to increase approximately 5 percent and constant-currency organic sales are expected to increase slightly more than 9 percent.

For the second quarter, net sales are expected to be approximately $1.735 billion to $1.765 billion. GAAP operating profit is expected to be $223 million to $233 million, and adjusted operating profit is expected to be $238 million to $248 million. GAAP EPS is expected to be 40 to 42 cents, and adjusted EPS is expected to be 43 to 45 cents. The Activewear segment sales are expected to increase 11 percent, Innerwear to decline 2 percent, and the International segment sales on a reported basis to increase approximately 1 percent.

Photo courtesy Champion