HanesBrands, Inc. reported net sales from continuing operations decreased 16 percent to $1.47 billion, which includes a $55 million unfavorable impact from foreign exchange rates, compared to last year. On a constant-currency basis, net sales decreased 13 percent. The constant-currency decline was due to the macro-driven slowdown in consumer spending in the U.S. and certain international markets coupled with the continued impact on orders in the U.S. from retailers’ decisions to reduce broader inventory positions.

Global Champion brand sales decreased 18 percent on a reported basis as compared to the prior-year quarter, with a 21 percent decline in the U.S. and a 13 percent decline internationally. In constant-currency terms, Global brand sales decreased 14 percent, with a 3 percent decline internationally. As compared to the prior-year quarter, constant-currency sales increased in Asia and Australia. This growth was essentially offset by soft consumer demand and retailer inventory actions in the U.S. as well as a decline in Europe.

“We delivered fourth-quarter results at or above our guidance as we continue to take actions to navigate the extremely challenging environment,” said Steve Bratspies, CEO. “HanesBrands is a stronger, more disciplined company than we were even a year ago, and we’re not standing still. We have created a clear path to improving cash flow and margins as the year progresses. We shifted our capital allocation strategy, eliminating the dividend as we commit to reducing debt. We remain confident in our Full Potential plan and in achieving our long-term financial targets.”

Gross margin was 34.1 percent of sales in Q4, down from 38.1 percent in the prior-year quarter. Adjusted Gross Margin of 34.3 percent declined approximately 415 basis points compared to the prior-year quarter and was in line with the company’s expectations. Near-term headwinds from commodity and ocean freight inflation as well as manufacturing time-out costs related to its inventory reduction actions represented more than 500 basis points of year-over-year margin headwind in the quarter. Additional headwinds included de-leverage from lower sales as well as higher labor rates. Partially offsetting the margin headwinds in the quarter were benefits from pricing actions, decreased use of air freight, and Full Potential cost savings initiatives.

SG&A expenses declined 14 percent to $442 million as compared to last year. Adjusted SG&A expenses, which exclude certain costs related to its Full Potential plan, declined 7 percent, or $31 million, from last year to $422 million. Adjusted SG&A includes an approximate $5 million bad debt expense related to the bankruptcy filing by a customer in Brazil. The year-over-year decline in adjusted SG&A was driven primarily by lower variable expenses, including distribution, selling and marketing, and incentive compensation. As a percent of net sales, adjusted SG&A expense of 28.7 percent increased approximately 280 basis points over the prior-year quarter as fixed-cost de-leverage from lower sales and the bad debt expense more than offset cost controls and expense efficiencies from the company’s Full Potential cost savings initiatives.

Operating Profit and Operating Margin in the fourth quarter of 2022 were $60 million and 4.1 percent, respectively, compared to $156 million and 8.9 percent, respectively, in the prior-year quarter. Adjusted Operating Profit of $83 million declined from $220 million in the fourth quarter of 2021. Adjusted Operating Profit reflects an approximate $5 million bad debt expense (see Adjusted SG&A above), which was recorded after the company’s preliminary financial results were announced on January 12. Adjusted Operating Margin of 5.6 percent declined approximately 695 basis points from the prior-year quarter.

GAAP and Adjusted Effective Tax Rates for fourth-quarter 2022 was 6,053 percent and 17 percent, respectively. For the fourth-quarter 2021, GAAP and adjusted effective tax rates were 6.8 percent and 15.0 percent, respectively. In the fourth quarter 2022, the company recorded a non-cash reserve of $423 million related to deferred taxes, which was not contemplated in the company’s prior GAAP guidance. Based on recent results as well as the 2023 outlook, which reflects meaningfully higher interest expense, the company believes it is unlikely to use this asset in the short term. Accounting rules require that HanesBrands record a reserve against this asset. Importantly, this reserve is non-cash and does not impact cash taxes.

Loss from continuing operations totaled $418 million, or $1.19 loss per diluted share. This compares to income from continuing operations of $68 million, or 19 cents per diluted share, last year. Adjusted income from continuing operations totaled $24 million, or 7 cents per diluted share, which includes bad debt expense of approximately $5 million, or 1 penny per diluted share. This compares to adjusted income from continuing operations of $156 million, or 44 cents per diluted share, in fourth-quarter 2021.

Fourth-Quarter 2022 Business Segment Summary
Innerwear sales decreased 19 percent compared to last year. The year-over-year sales performance was driven by macroeconomic pressures that weighed on consumer spending as well as the continued impact of replenishment orders from retailers’ decisions to reduce broader inventory positions. These pressures more than offset the benefits from the first-quarter 2022 price increase and retail space gains.

Operating margin of 8.3 percent decreased approximately 860 basis points compared to the prior-year quarter. The impact from lower sales volume, input cost inflation, manufacturing time-out costs and an unfavorable product mix more than offset the benefit from higher prices, decreased use of air freight and Full Potential cost savings initiatives.

Activewear sales declined 16 percent compared to last year as continued growth in the collegiate channel for both Champion and Hanes Brands was more than offset by declines in other channels due to lower point-of-sale trends and higher Activewear inventory levels at retail. By brand, Champion sales within the Activewear reporting segment decreased 21 percent as compared to the prior-year quarter while sales of other activewear brands within the Activewear reporting segment decreased 8 percent.

Operating margin for the segment of 7.5 percent decreased approximately 550 basis points compared to the prior-year quarter as the impact from lower sales volume, unfavorable mix, input cost inflation and manufacturing time-out costs more than offset the benefit from higher prices and Full Potential cost savings initiatives.

International sales decreased 12 percent on a reported basis, including the $55 million from unfavorable foreign exchange rates. International sales decreased 2 percent on a constant-currency basis compared to the prior-year quarter as growth in Asia was offset by declines in Australia, the Americas, Europe and Canada.

Operating margin for the segment of 14.2 percent decreased approximately 490 basis points compared to the prior-year quarter driven primarily by the impact from inflation and the bad debt expense related to a customer bankruptcy in Brazil.

Full-Year 2022 Results
Net sales from continuing operations decreased 8 percent to $6.23 billion, which includes a $182 million unfavorable impact from foreign exchange rates, compared to last year. On a constant-currency basis, net sales decreased nearly 6 percent.

Gross margin was 35.6 percent, down from 39.0 percent in the prior-year. Adjusted Gross Margin of 35.9 percent declined approximately 320 basis points compared to the prior year.

SG&A expenses declined 8 percent to $1.7 billion as compared to last year. Adjusted SG&A expenses, which exclude certain costs related to its Full Potential plan, declined 4 percent, or $74 million, from last year to $1.7 billion. As a percent of net sales, adjusted SG&A expense of 26.6 percent in 2022 increased 110 basis points over the prior year.

Operating Profit and Operating Margin in full-year 2022 were $520 million and 8.3 percent, respectively, which compared to $798 million and 11.7 percent, respectively, in the prior year. Adjusted Operating Profit of $579 million declined from $929 million in full-year 2021. Full-year includes charges of $60 million related to the Full Potential plan. Adjusted Operating Margin of 9.3 percent declined approximately 440 basis points from the prior year.

GAAP and Adjusted Effective Tax Rates for full-year 2022 were 137 percent and 17 percent, respectively. For the full-year 2021, GAAP and adjusted effective tax rates were 10 percent and 15 percent, respectively. In the fourth quarter, the company recorded a non-cash reserve of $423 million related to deferred taxes, which was not contemplated in GAAP guidance. Based on recent results as well as the 2023 outlook, which reflects meaningfully higher interest expense, the company believes it is unlikely to use this asset in the short term. Accounting rules require that HanesBrands record a reserve against this asset. Importantly, this reserve is non-cash and does not impact cash taxes.

Loss from continuing operations totaled $131 million, or 37 cents loss per diluted share. This compares to income from continuing operations of $521 million, or $1.48 per diluted share, last year. Adjusted income from continuing operations totaled $342 million, or 98 cents per diluted share. This compares to adjusted income from continuing operations of $645 million, or $1.83 per diluted share, in full-year 2021.

Cash Flow, Balance Sheet and Liquidity
Total liquidity position at the end of 2022 was approximately $925 million, consisting of $238 million of cash and equivalents and nearly $690 million 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 fourth-quarter 2022 was 4.6 times on a net debt-to-adjusted EBITDA basis as compared to 2.6 times at the end of fourth-quarter 2021.

Inventory at the end of fourth-quarter 2022 was $1.98 billion, an increase of 25 percent over the prior year-end. The increase was driven by higher inflation on input and transportation costs as well as product mix. On a unit basis, the company achieved its goal as inventory units ended the year approximately 6 percent lower than the prior-year quarter.

Cash flow from operations was $133 million in the fourth-quarter 2022 driven primarily by the working capital impact from accounts receivables and lower inventory. For the full-year, cash flow from operations was a use of $359 million.

First-Quarter and Full-Year 2023 Financial Outlook
With respect to its 2023 guidance, the company’s outlook reflects, but is not limited to, the following assumptions: a muted consumer demand environment given the continued macroeconomic uncertainty; first-half margin pressure as it sells through the remainder of 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’s outlook also assumes completion of the expected refinancing of indebtedness with 2024 maturities.

The accounting treatment for deferred tax assets will increase accounting tax expense and the effective tax rate in 2023. The company is providing guidance on tax expense due to expected fluctuation of its quarterly tax rate, stemming from the non-cash reserve. Importantly, the reserve is non-cash and does not impact cash taxes. Some portion of this reserve may reverse in future periods.

For fiscal year 2023, which ends on December 30, 2023, the company currently expects:

  • Net sales from continuing operations of approximately $6.05 billion to $6.20 billion, which includes a projected headwind of approximately $42 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 $6 million from changes in foreign currency exchange rates;
  • Charges for actions totaling $60 million including Full Potential plan-related charges of approximately $54 million included in operating profit and refinancing charges of $6 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;
  • Adjusted earnings per share from continuing operations to range from approximately 31 cents to 42 cents;
  • Cash flow from operations of approximately $500 million; and
  • Capital investments of approximately $150 million, consisting of approximately $70 million of capital expenditures and approximately $80 million of cloud computing assets. Per GAAP, capital expenditures are reflected in cash from investing activities and certain cloud computing assets are reflected in Other Assets within cash flow from operating activities.
  • Fully diluted shares outstanding of approximately 353 million.

For first-quarter 2023, which ends on April 1, 2023, the company currently expects:

  • Net sales from continuing operations of approximately $1.35 billion to $1.40 billion, which includes a projected headwind of approximately $35 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 11 percent decline as compared to prior year on a constant-currency basis and a 13 percent decline on a reported basis;
  • GAAP operating profit from continuing operations to range from approximately $39 million to $59 million;
  • Adjusted operating profit from continuing operations to range from approximately $50 million to $70 million and includes a projected headwind of approximately $4 million from changes in foreign currency exchange rates;
  • Charges for actions totaling $17 million including Full Potential plan-related charges of approximately $11 million included in operating profit and refinancing charges of $6 million included in interest and other expenses;
  • Adjusted interest and other expenses of approximately $65 million;
  • Tax expense of approximately $17 million to $20 million;
  • GAAP loss per share from continuing operations to range from approximately 14 cents to 9 cents;
  • Adjusted loss per share from continuing operations to range from approximately 9 cents to 4 cents; and
  • Fully diluted shares outstanding of approximately 350 million.