HanesBrands, Inc. reported first-quarter net sales from continuing operations declined 12 percent to $1.39 billion, which includes a $31 million unfavorable impact from foreign exchange rates, compared to last year’s strong first-quarter results. On a constant-currency basis, net sales decreased 10 percent due to the macro-driven slowdown in consumer spending in the U.S. and Australia.

Global Champion brand sales decreased 17 percent on a reported basis as compared to the year-ago quarter, with a 22 percent decline in the U.S. and a 12 percent decline internationally. In constant currency, Global Champion brand sales decreased 15 percent, with a 7 percent decline internationally. As compared to the prior-year quarter, constant-currency sales increased in Europe, Japan, the Americas, and Australia. This growth was more than offset by the soft consumer demand environment and strategic channel clean-up actions in the U.S. as well as a decline in China as re-orders and sell-in shipments were impacted by higher retail channel inventory that resulted from COVID-related closures in prior periods. Sell-through demand in China increased at a low double-digit rate in the first quarter.

Innerwear segment sales decreased 4 percent compared to last year and were ahead of the company’s outlook. The year-over-year sales performance was driven by macroeconomic pressures that weighed on consumer spending, which more than offset the partial quarter benefit from wrapping last year’s mid-quarter price increase.

Activewear sales declined 19 percent compared to last year driven by the slowdown in consumer spending, which resulted in lower point-of-sale and higher inventory levels at retail, as well as strategic channel clean-up work within Champion in the U.S. By channel, continued growth in the collegiate channel was more than offset by declines in other channels, particularly printwear. By brand, Champion sales within the Activewear reporting segment decreased 19 percent as compared to the year-ago quarter while sales of other activewear brands within the Activewear reporting segment also decreased 19 percent.

International sales decreased 9 percent on a reported basis, including $31 million from unfavorable foreign exchange rates. International sales decreased 3 percent on a constant-currency basis compared to the year-ago quarter as growth in Europe, the Americas and Japan was offset by declines in Australia and China.

Gross Profit of $450 million declined 23 percent and gross margin declined 470 basis points to 32.4 percent of sales as compared to the year-ago quarter. Adjusted Gross Profit, which excludes certain costs related to the company’s Full Potential plan, was $454 million. Adjusted Gross Margin of 32.7 percent declined approximately 440 basis points compared to the year-ago quarter. As expected, headwinds from commodity and ocean freight inflation represented approximately 310 basis points of year-over-year margin headwind in the quarter as the company continues to sell through its higher-cost inventory. Additional headwinds included lower sales volume, unfavorable product mix and higher labor rates. Partially offsetting the margin headwinds in the quarter were benefits from Innerwear pricing actions taken in the mid-first quarter 2022, lower air freight expense as compared to last year and Full Potential cost savings initiatives.

Selling, General and Administrative (SG&A) expenses declined 5 percent to $392 million as compared to the year-ago quarter. Adjusted SG&A expenses, which exclude certain costs related to the company’s Full Potential plan, declined 5 percent, or $19 million, from last year’s Q1 to $391 million. The year-over-year decline in adjusted SG&A was driven by benefits from Full Potential cost savings initiatives, particularly in distribution, disciplined expense management, channel mix as well as lower variable expenses, including selling and marketing. As a percent of net sales, adjusted SG&A expense of 28.1 percent increased 215 basis points over the year-ago quarter as fixed cost de-leverage from lower sales more than offset cost controls and the expense efficiencies from Full Potential cost savings initiatives.

Operating Profit and Operating Margin in the first quarter of 2023 were $57 million and 4.1 percent, respectively, compared to $171 million and 10.8 percent, respectively, in the year-ago quarter. Adjusted Operating Profit of $63 million declined from $175 million in the first quarter of 2022. Adjusted Operating Margin of 4.6 percent declined approximately 660 basis points from the year-ago quarter and was in line with the company’s guidance.

Innerwear operating margin of 13.1 percent increased approximately 480 basis points sequentially as its operations normalized following the fourth-quarter 2022 manufacturing time-out actions taken as part of its 2022 inventory reduction initiative. As compared to the first quarter last year, the segment operating margin decreased by approximately 450 basis points. The impact from lower sales volume, input cost inflation and an unfavorable product mix more than offset the benefit from ongoing Full Potential cost savings initiatives as well as the wrap from last year’s mid-quarter price increase.

Activewear operating margin of 3.2 percent decreased by approximately 950 basis points compared to the year-ago quarter. The decline was driven by the impact of lower sales volume, input cost inflation, unfavorable mix and higher reserves as compared to last year due to higher inventory levels at retail. These headwinds more than offset the benefit from higher prices and Full Potential cost savings initiatives.

International operating margin of 11.1 percent decreased approximately 645 basis points compared to the year-ago quarter driven primarily by the impact from input cost inflation, the transaction impact from foreign exchange rates as well as an unfavorable business mix.

Interest and Other Expenses for the first quarter of 2023 were $73 million as compared to $33 million in the year-ago quarter. The increase was driven by $7 million in expenses associated with the company’s first quarter refinancing of its 2024 maturities as well as higher debt balances and higher interest rates. Adjusted Interest and Other Expenses, which exclude the refinancing expenses, increased $33 million from last year to $66 million.

Tax Expense for first-quarter 2023 was $18.5 million, in-line with the company’s expectation. For the first-quarter 2022, tax expense and adjusted tax expense were $23 million and $24 million, respectively. The Effective Tax Rate for the first-quarter 2023 was (116.3) percent. For the first-quarter 2022, the effective tax rate was 17.0 percent. The company’s effective tax rate for the first-quarter 2023 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets.

Loss from continuing operations totaled $34 million, or 10 cents per diluted share. This compares to income from continuing operations of $114 million, or 32 cents per diluted share, in Q1 last year. Adjusted loss from continuing operations totaled $21 million, or 6 cents per diluted share. This compares to adjusted income from continuing operations of $118 million, or 34 cents per diluted share, in the first-quarter 2022.

“We delivered first-quarter results in-line with our outlook, generated positive cash flow and reiterated our full-year outlook,” said Steve Bratspies, CEO of Hanesbrands, Inc. “I want to thank all of our associates for their continued dedication and hard work as they once again delivered near-term results while implementing our transformation strategy. We continue to make progress on several of our Full Potential initiatives. We expanded our Innerwear innovation globally, successfully completed a key technology milestone, progressed on our industry-leading sustainability initiatives and continued to generate cost savings across the organization. We’re confident in the progress we’re making to become a more consumer-centric, data-driven company that consistently generates higher sales and profit growth over time.”

Inventory at the end of first-quarter 2023 declined 1 percent sequentially from 2022 year-end to $1.97 billion. As compared to first-quarter 2022, inventory increased by approximately 8 percent. This quarter represents the third consecutive quarter of improvement in the company’s inventory growth rate as it continues to sell through its higher-cost inventory and benefit from its SKU reduction initiatives.

Cash flow from operations was approximately $45 million in first-quarter 2023 as compared to a use of cash of approximately $231 million last year. The $276 million year-over-year improvement in operating cash flow was driven by improved working capital. Free cash flow was $20 million in first-quarter 2023, a $271 million increase from last year’s $251 million use of cash.

Looking ahead, the company’s outlook continues to reflect, but is not limited to, the following assumptions: a muted consumer demand environment given the continued macroeconomic uncertainty; first-half margin pressure as it continues to sell through its higher-cost inventory; and year-over-year improvement in second-half margins, particularly the fourth quarter, as lower-cost inventory currently being produced is sold and it anniversaries last year’s manufacturing time-out costs related to its inventory reduction initiative in 2022.

The company is providing 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.

For fiscal year 2023, which ends on December 30, 2023, the company continues to expect:

  • Net sales from continuing operations of approximately $6.05 billion to $6.20 billion, which includes a projected headwind of approximately $40 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 1 percent decline as compared to the prior year on a constant-currency basis and a 2 percent decline on a reported basis;
  • GAAP operating profit from continuing operations to range from approximately $446 million to $496 million;
  • Adjusted operating profit from continuing operations to range from approximately $500 million to $550 million, which includes a projected headwind of approximately $5 million from changes in foreign currency exchange rates;
  • Charges for actions totaling approximately $61 million including Full Potential plan-related charges of approximately $54 million included in operating profit and refinancing-related charges of approximately $7 million included in interest and other expenses;
  • Adjusted interest and other expenses of approximately $300 million;
  • Tax expense of approximately $90 million to $100 million;
  • GAAP earnings per share from continuing operations to range from approximately 14 cents to 25 cents a share;
  • Adjusted earnings per share from continuing operations to range from approximately 31 cents to 42 cents a share;
  • Cash flow from operations of approximately $500 million;
  • Capital investments of approximately $150 million, consisting of approximately $70 million of capital expenditures and approximately $80 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 $80 million of cloud computing arrangements is factored into the full-year cash flow from operations guidance of approximately $500 million;
  • Free cash flow of approximately $430 million; and
  • Fully diluted shares outstanding of approximately 352 million.

For the second-quarter 2023, which ends on July 1, 2023, the company currently expects:

  • Net sales from continuing operations of approximately $1.42 billion to $1.47 billion, which includes a projected headwind of approximately $20 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 3 percent decline as compared to the year-ago second quarter on a constant-currency basis and an approximate 5 percent decline on a reported basis;
  • GAAP operating profit from continuing operations to range from approximately $55 million to $75 million;
  • Adjusted operating profit from continuing operations to range from approximately $70 million to $90 million and includes a projected headwind of approximately $3 million from changes in foreign currency exchange rates;
  • Charges for actions related to the Full Potential plan and other items of approximately $15 million;
  • Interest and other expenses of approximately $80 million;
  • Tax expense of approximately $10 million;
  • GAAP loss per share from continuing operations to range from approximately 9 cents to 4 cents per share;
  • Adjusted loss per share from continuing operations to range from approximately 5 cents to $0.00 a share; and
  • Fully diluted shares outstanding of approximately 351 million.

Photo courtesy Champion