HanesBrands, Inc. reported net sales for the first quarter declined approximately 17 percent $1.16 billion, reaching the midpoint of the company’s expected revenue range. The company said approximately 120 basis points of the decline percentage was due to the U.S. Sheer Hosiery divestiture and approximately 105 basis points was due to the unfavorable impact from foreign exchange rates.

On an organic constant-currency basis, net sales reportedly decreased approximately 15 percent compared to the 2023 first quarter. Both reported and organic constant-currency sales reportedly reflect a headwind of more than 400 basis points due to the expected discrete items impacting the Activewear segment in the first quarter.

Champion Brand
Global Champion brand sales were said to be in line with the company’s expectation, including growth in Japan, China and Latin America. As compared to the prior-year quarter, global Champion brand sales decreased 26 percent on a reported basis and 25 percent on a constant-currency basis, with approximately 500 basis points of the decrease due to the planned strategic shift of its Champion kids’ business to a license model at the beginning of 2024.

  • Champion U.S. sales decreased 35 percent, with approximately 900 basis points of the decrease said to be from the shift of the kids’ business to a license-model and the remainder driven by the continued challenging activewear market dynamics as well as the strategic actions taken to strengthen the brand, particularly ahead of the new Fall-Winter 2024 product line.
  • Champion International sales decreased 17 percent on a reported basis and 16 percent on a constant-currency basis. Constant-currency sales increased in Japan, China and Latin America, which were more than offset by decreases in Europe and Australia as macroeconomic headwinds continued to impact demand in these regions.

The global Champion performance plan includes actions and related charges regarding the Company’s accelerated and enhanced strategic initiatives to further streamline the operations and position the brand for long term profitable growth and the evaluation of strategic alternatives for the global Champion business, which includes approximately $17 million of charges in the quarter ended March 30, 2024 related to professional fees, severance and other costs. These charges are primarily reflected in the company’s selling, general and administrative expenses line.

Activewear Segment
Activewear segment sales, which includes the Champion brand, decreased 31 percent, or $97 million, compared to prior-year quarter, also in line with the company’s outlook. As expected, approximately two-thirds, or $65 million, of the decrease was due to three discrete items impacting year-over-year comparability in the first quarter. These three items include: the strategic shift of the Champion kids’ business to a license model beginning in 2024; an unseasonably strong collegiate sales performance in first-quarter 2023; and, accelerated orders into first-quarter 2023 ahead of the company’s SAP implementation. The remainder of the year-over-year sales decrease was said to be driven by the ongoing combination of challenging activewear apparel market dynamics, including soft consumer demand and cautious ordering from retailers, and the near-term impact from the strategic actions taken to strengthen the Champion brand, particularly ahead of the new Fall-Winter 2024 product line.

Operating margin for the segment of 0.5 percent of net sales increased 440 basis points sequentially. Compared to the first quarter of last year, segment operating margin decreased approximately 265 basis points year-over-year as the impact from lower sales volume and increased brand marketing investments more than offset the benefits from lower input costs, business mix and disciplined SG&A expense management.

Consolidated Financials
Gross Profit and Adjusted Gross Profit, which excludes certain costs related to the Company’s Full Potential transformation plan and its global Champion performance plan, were both $461 million, representing an increase of approximately 2 percent year-over-year.

Gross Margin and Adjusted Gross Margin were both 39.9 percent of net sales, representing a year-over-year increase of 750 basis points and 720 basis points, respectively. Adjusted Gross Margin was 140 basis points ahead of the company’s outlook for the quarter. The year-over-year improvement, which delivered gross margin in line with historic levels, was driven primarily by lower input costs as commodity and ocean freight inflation moderated, the benefits of cost savings initiatives, and the impact from business mix.

Selling, General and Administrative (SG&A) Expenses increased 4 percent to $409 million in the quarter. Adjusted SG&A Expenses, which exclude certain costs related to the company’s Full Potential transformation plan and its global Champion performance plan, decreased 3 percent, or $13 million, year-over-year to $378 million. The year-over-year decrease in adjusted SG&A was driven by benefits from cost savings initiatives, lower distribution expense, and disciplined expense management, which more than offset planned increases in brand marketing investments in both its U.S. Innerwear and global Champion businesses. As a percent of net sales, adjusted SG&A expense of 32.7 percent increased 450 basis points over prior year with 185 basis points due to increased brand marketing investments. The remainder of the year-over-year increase was reportedly driven by deleverage from lower sales volume, which was partially offset by the benefits from cost savings initiatives.

Operating Profit and Operating Margin in first-quarter 2024 were $52 million and 4.5 percent, respectively, which compared to $57 million and 4.1 percent, respectively, in the prior year. Adjusted Operating Profit of $84 million increased 32 percent over prior year, which was above the Company’s outlook. Adjusted Operating Margin of 7.3 percent increased approximately 270 basis points over first-quarter 2023.

Interest Expense and Other Expenses for first-quarter 2024 were approximately $67 million and $9 million, respectively, which compared to approximately $58 million and $15 million, respectively, in the prior year. With debt lower by more than $500 million as compared to prior year, the increase in interest expense was reportedly driven by higher average interest rates.

Tax Expense for first-quarter 2024 was $15 million as compared to $19 million in the prior-year Q1 period. Effective and Adjusted Tax Rates for first-quarter 2024 were negative 64 percent and 194 percent, respectively. For first-quarter 2023, the effective tax rate and the adjusted effective tax rate were negative 116 percent and negative 689 percent, respectively. The company’s effective tax rate for 2024 and 2023 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets.

Net Loss totaled approximately $39 million, or a loss of 11 cents per diluted share, in first-quarter 2024. This compares to a net loss of $34 million, or a loss of 10 cents per diluted share, in Q1 last year.

Adjusted Net Loss totaled $7 million, or 2 cents per diluted share. This compares to adjusted net loss of $21 million, or 6 cents per diluted share, in first-quarter 2023.

“We delivered solid first quarter results with sales at the midpoint of our outlook, better-than-expected adjusted operating profit, positive cash flow generation and further reduction of our leverage. With the year unfolding as anticipated and our profit visibility, we reiterated our outlook for the full-year,” said Steve Bratspies, CEO. HanesBrands, Inc. “Over the past three years, we’ve taken necessary actions across the business to enhance and strengthen both the operating and financial models of the Company. With our leading brand positions, lower fixed-cost structure, reestablished gross margin, consistent cash generation and a commitment to reduce debt, we have created a multi-year flywheel designed to accelerate earnings, deleverage faster, and invest in growth initiatives, which we believe will drive strong shareholder returns over the next several years.”

Cash Flow, Balance Sheet and Liquidity
Total liquidity position at the end of first-quarter 2024 was more than $1.2 billion, consisting of $191 million of cash and equivalents and more than $1 billion of available capacity under the Company’s credit facilities.

Based on the calculation as defined in the company’s senior secured credit facility, the Leverage Ratio at the end of first-quarter 2024 was 5.0X on a net debt-to-adjusted EBITDA basis, which was below its first-quarter 2024 covenant of 6.75X and below 5.4X at the end of first-quarter 2023.

Inventory at the end of first-quarter 2024 was $1.42 billion, decreasing 28 percent, or $550 million, year-over-year. The year-over-year decrease was reportedly driven predominantly by the benefits of its inventory management capabilities, including SKU discipline and lifecycle management, as well as lower input costs as commodity and ocean freight inflation moderated.

Cash Flow from Operations was $26 million in first-quarter 2024 as compared to $45 million in Q1 last year. Free Cash Flow was $6 million in first-quarter 2024 as compared to $20 million in first-quarter 2023.

Second-Quarter and Full-Year 2024 Financial Outlook
The company provided guidance on tax expense due to the expected fluctuation of its quarterly tax rate, stemming from the deferred tax reserve matter previously disclosed in the fourth quarter of 2022. Importantly, the reserve does not impact cash taxes. Some portion of the reserve may reverse in future periods.

The company closed the sale of its U.S. Sheer Hosiery business on September 29, 2023. For the full year 2023, its U.S. Sheer Hosiery business generated $50 million of net sales and an operating loss of $2 million. For second-quarter 2023, its U.S. Sheer Hosiery business generated approximately $13.5 million of net sales and an operating loss of approximately $1.5 million.

For fiscal year 2024, which ends on December 28, 2024, the company currently expects:

  • Net sales of approximately $5.35 billion to $5.47 billion, which includes projected headwinds of approximately $50 million from the U.S. Sheer Hosiery divestiture and approximately $45 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 4 percent decrease as compared to prior year on a reported basis and an approximate 2 percent decrease on an organic constant currency basis.
  • GAAP operating profit of approximately $430 million to $450 million.
  • Adjusted operating profit of approximately $500 million to $520 million, which includes a projected headwind of approximately $9 million from changes in foreign currency exchange rates.
  • Pretax charges for actions related to the Full Potential transformation plan and the global Champion performance plan of approximately $70 million.
  • GAAP and Adjusted Interest expense of approximately $260 million.
  • GAAP and Adjusted Other expenses of approximately $36 million.
  • GAAP and Adjusted Tax expense of approximately $55 million.
  • GAAP earnings per share of approximately 22 cents to 28 cents.
  • Adjusted earnings per share of approximately 42 cents to 48 cents.
  • Cash flow from operations of approximately $400 million.
  • Capital investments of approximately $75 million, consisting of approximately $65 million of capital expenditures and approximately $10 million of cloud computing arrangements. Per GAAP, capital expenditures are reflected in cash from investing activities and certain cloud computing arrangements are reflected in Other Assets within cash flow from operating activities. The approximate $10 million of cloud computing arrangements is factored into the full year cash flow from operations guidance of approximately $400 million.
  • Free cash flow of approximately $335 million.
  • Fully diluted shares outstanding of approximately 354 million.

For second-quarter 2024, which ends on June 29, 2024, the Company currently expects:

  • Net sales of approximately $1.335 billion to $1.375 billion, which includes projected headwinds of approximately $13.5 million from the U.S. Sheer Hosiery divestiture and approximately $25 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 6 percent decrease as compared to prior year on a reported basis and an approximate 3 percent decrease on an organic constant currency basis.
  • GAAP operating profit of approximately $96 million to $111 million.
  • Adjusted operating profit of approximately $115 million to $130 million, which includes a projected headwind of approximately $3 million from changes in foreign currency exchange rates.
  • Pretax charges for actions related to the Full Potential transformation plan and the global Champion performance plan of approximately $19 million.
  • GAAP and Adjusted Interest expense of approximately $67 million.
  • GAAP and Adjusted Other expenses of approximately $9 million.
  • GAAP and Adjusted Tax expense of approximately $14 million.
  • GAAP earnings per share of approximately 2 cents to 6 cents per share.
  • Adjusted earnings per share of approximately 7 cents to 11 cents per share.
  • Fully diluted shares outstanding of approximately 353 million.

Image courtesy HanesBrands, Inc.