HanesBrands Inc. reported net sales in the first quarter increased 8 percent on strength of 10 percent constant-currency organic growth, including global Champion constant-currency sales growth of 75 percent.

The sales gain marked the seventh consecutive quarter of constant-currency organic growth. Sales were fueled by strong U.S. Activewear growth, broad-based International growth, and increased sales of U.S. Innerwear basics. Globally, strong Champion sales growth accelerated.

GAAP operating profit in the first quarter increased 1 percent to $148 million, while adjusted operating profit increased 2 percent to $169 million. GAAP diluted earnings per share in the quarter were 22 cents a share, the same as a year ago, and adjusted EPS increased 4 percent to 27 cents a share.

“We are delighted to continue our business momentum with a very strong first quarter,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “We are generating broad-based growth across businesses and geographies. Our brands are strong, and growth-related investment is delivering results. In addition to the acceleration of Champion growth globally, Innerwear sales increased in Asia, Australia and the Americas, and sales of U.S. Innerwear basics increased for the second consecutive quarter.

“Our cash generation is on plan, our debt leverage is coming down, and our diversified business portfolio is paying dividends. We feel confident in achieving our long-term goals and enhancing value creation with our business model.”

Callouts for First-Quarter 2019 Financial Results:

Accelerated Growth Rates for Organic Net Sales and Champion. The 10 percent growth in constant-currency organic sales in the first quarter accelerated from the 6 percent growth rate in the fourth-quarter 2018. First-quarter sales for the Innerwear, Activewear and International segments all exceeded company expectations.

Growth initiatives drove a 75 percent increase in constant-currency global Champion sales outside the mass channel with strong double-digit increases in all regions. Contributors included: U.S. expansion across retail and online channels; strong wholesale expansion in northern and western Europe; strong wholesale and consumer-direct growth in Asia, including continued store openings in China and elsewhere; and distribution expansion beginning in Australia.

Total company consumer-direct sales, defined as brand retail stores and all online business, increased 16 percent in the first quarter. E-commerce sales increased for each of the Innerwear, Activewear and International segments.

Bad Debt Expense Lowers Operating Profit and EPS Results. The company incurred an unexpected bad debt charge of $4 million in the first quarter related to the insolvency of Heritage Sportswear, a U.S.-based apparel wholesaler for the screen-print industry. The charge affected both GAAP and adjusted operating profit and lowered GAAP and adjusted EPS by approximately $0.01.

Cash Flow on Track, Debt Leverage Reduced. Cash flow from operations was a use of $194 million in the first quarter, which was better than expected as a result of higher net income and improved working capital performance. The company’s debt leverage at the end of the quarter was 3.5 times adjusted EBITDA, down from 3.9 times a year ago. The company continues to expect the leverage ratio to decline to 2.9 times by the end of the year, which is within the company’s target range.

First-Quarter Business Segment Summaries:

  • Innerwear Segment Results Better Than Guidance. U.S. Innerwear segment sales decreased 3 percent in the first quarter, compared with expectations of a 4 percent decrease. Operating profit increased 3 percent, 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.
  • Activewear Segment Sales and Profits Increased on Organic Growth. U.S. Activewear segment first-quarter sales increased 17 percent and operating profit increased 14 percent. Operating margin declined 30 basis points as the company invested in distribution to maintain service levels and fulfill accelerating demand for Champion products. Champion sales increased more than 80 percent outside the mass channel. As expected, sales of Champion at mass retail declined approximately 3 percent.
  • Broad-based and Widespread Strength Drove Strong International Segment Growth. Despite stronger than expected currency headwinds in the quarter, International segment sales increased 13 percent, while operating profit increased 20 percent, benefiting 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.

2019 Financial Guidance
Hanes has reiterated its full-year 2019 financial guidance issued February 7, 2019, and has issued guidance for the second quarter.

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.

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 $0.40 to $0.42, and adjusted EPS is expected to be $0.43 to $0.45.

Guidance Assumptions
Key assumptions in the company’s guidance include a cautious outlook for the U.S. brick-and-mortar retail market, including continued door closures; continued progress in U.S. Innerwear revitalization initiatives; price increases and a conservative view on elasticity; negative effects of currency exchange rates; and increased marketing investment to support brand plans.

Organic sales in constant currency for 2019 are expected to increase by approximately 3 percent. Adverse foreign currency exchange rates for the year are expected to reduce net sales as reported by approximately $115 million compared with last year, up from previous expectations of approximately $60 million. The estimate includes the $46 million impact in the first quarter compared with last year and an estimated $40 million impact expected in the second quarter compared with last year. For operating profit, adverse foreign currency exchange rates are expected to reduce full-year results as reported by $17 million compared with last year, up from previous expectations of a $7 million effect.

Segment Guidance
At the midpoint of full-year guidance, 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. Growth drivers are expected to be Champion sales growth in Asia and Europe and increased innerwear sales in Asia, Australia and the Americas, including the Hanes and Bonds brands. For the second quarter, International segment net sales on a reported basis are expected to increase approximately 1 percent.

U.S. Innerwear net sales at the midpoint of guidance for both the full year and second quarter are expected to decrease approximately 2 percent, reflecting a cautious outlook for the impact from retail door closings and benefits from price increases taken in the first quarter.

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 of the year. 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. For the second quarter, Activewear segment sales are expected to increase by approximately 11 percent.

Additional Guidance
The midpoint of 2019 guidance implies approximately 50 basis points of gross margin enhancement and 10 basis points of adjusted operating profit margin expansion.

GAAP operating profit in 2019 is expected to be affected by approximately $55 million in pretax charges, including $21 million taken in the first quarter and an expected $15 million in the second quarter, related to acquisition integration and other supply chain actions. Approximately $20 million of the full-year charges are expected to be noncash. The charges reflect the completion of all outstanding acquisition integrations as well as Western Hemisphere supply chain realignment that includes speed-to-market initiatives that are part of the revitalization strategy for U.S. Innerwear.

Hanes expects interest expense and other expenses to be approximately $224 million combined, with an estimated $56 million expected in the second quarter. The company expects capital expenditure investment of approximately $90 million to $100 million. A pension contribution of approximately $26 million made in the first quarter is reflected in operating cash flow guidance.

The company’s priority for use of excess operating cash flow is to pay down debt. The company’s debt leverage on a net-debt-to-adjusted-EBITDA basis is expected to be 2.9 times at year-end. Consistent with the company’s seasonality, net cash from operations is expected to be in use in the first half.

The company expects an annual effective tax rate of approximately 14 percent and expects approximately 366 million shares outstanding, a slight increase versus 2018. For the second quarter, the company expects an effective tax rate of approximately 14 percent and slightly more than 365 million shares outstanding.