HanesBrands Inc. said its Champion business, excluding the C9 line being phased out at Target, catapulted 50 percent in the fourth quarter, reached $1.36 billion in the full year, and is well on track to hit $2 billion in annual sales by 2022.
Overall, HanesBrands reported earnings and sales that topped Wall Street’s targets due to strength also in international and consumer-direct channels. Management also provided an upbeat outlook for the current year. Shares of HanesBrands were up nearly 20 percent in late-afternoon trading Thursday.
But the star in the quarter was Champion. The 50 percent growth excluding C9 in the quarter came on top of last year’s 29 percent gain. On a conference call with analysts, Hanesbrands’ CEO Gerald Evans said Champion’s success “highlights that our coordinated global strategy to elevate the Champion brand is driving increased demand for the product.”
For the full-year, Champion’s constant currency revenue, excluding C9, was $1.36 billion, up 37 percent from approximately $1 billion in 2017. Sales were split equally between Domestic and International.
Asked further about Champion’s growth in the Q&A session, Evans said the Champion is benefiting from the acquisition of Champion Europe in 2016 that helped create a unified global approach for the brand as well as efforts to better diversity and elevate the brand.
“The reuniting and elevating of that that brand globally has had tremendous success for us,” said Evans. “As we noted in our comments, it grew at above 30 percent rate in 2018, and we are expecting that again in 2019 leaving us on pace to reach our goal of $2 billion by 2022. The strength is really around the world.”
He added that the growth reflects expansion through its wholesale partners, its own and partner stores and online. China and Korea are newer markets doing well for Champion. Evans added, “We see a lot of runway to continue to build the business as we look forward. I just had a personal opportunity to review the fall line. It looks great and we see lots of opportunity to continue to incorporate more and more style into the brand.”
For 2019, Champion is expected to continue to see double-digit growth. The brand just launched its first global campaign to mark its hundredth anniversary. The campaign has “a particular focus on that young consumer that’s really adopting the brand at 18 to 24-year-old group is going to carry this brand on to the next generation for us,” said Evan
Regarding C9, Evans said the brand “continues to perform very well” at point-of-sale at Target as it slowly is being phased out and HanesBrands is exploring avenues for new placement for C9. Said Evans of C9, “Our first priority is to continue to optimize the performance of the growing Champion business, but we continue to look at options for that as well. And if one were to emerge that would just be upside to the strong momentum we have in the brand.”
Target said last August it planned to phase out the C9 brand from its floors by July 2020. C9 Champion has cemented itself as Target’s go-to activewear staple since being launched in 2004.
Companywide in the quarter, HanesBrands’ sales grew 7.5 percent to $1.76 billion. Wall Street’s consensus estimate had been $1.71 billion.
Earnings reached $161.6 million, or 44 cents a share, against a loss of $384.6 million, or $1.06, a year ago. Year-ago results were affected by charges related to U.S. tax reform and an earn-out settlement related to the purchase of Champion Europe, and a higher tax rate in 2018 as a result of tax reform.
On an adjusted basis excluding actions, fourth-quarter adjusted operating profit of $260 million increased 10 percent, and adjusted EPS was 48 cents, exceeding Wall Street’s consensus estimate of 44 cents. Adjusted earnings were down from 52 cents a year ago as the latest year was impacted by a higher tax rate in 2018 as a result of U.S. tax reform. When applying the 2018 fourth-quarter tax rate of approximately 15 percent to 2017 Q4 results on a pro forma basis, 2018 adjusted EPS increased 12 percent.
Among its segments, Innerwear sales reached $594.2 million in the quarter, down 0.1 percent. Operating profits inched up 0.3 percent to $134.0 million.
Results came in as expected. sales of Innerwear basics increased 2 percent with growth in men’s and women’s underwear. Sales of Innerwear intimates decreased 7 percent, although shapewear sales realized double-digit growth after the successful relaunch of the Maidenform product lineup featuring cooling innovations. The intimates sales trend was sequentially better than the third quarter.
HanesBrands said its intimates is being hurt by its heavy concentration the mid-tier and department store channel that’s being affected by door closings and seeing sales weakness. The company’s ongoing bra turnaround strategy includes expansion within the online and mass channels, increased investment, and speed-to-market initiatives.
Activewear sales climbed 13.5 percent to $485.4 million. The sales growth was driven by increased Champion sales and sales growth of American Casualwear, which consists of branded printwear sales to the screen-print industry, seasonal wholesale activewear programs, and Alternative Apparel. The anniversary of the Alternative Apparel acquisition occurred early in the quarter.
The 50 percent on global growth at Champion outside the mass channel reflected broad-based gains across channels, including sporting goods retailers, mid0tier department stores, specialty retailers, college bookstores, online, and company-owned stores. As expected, sales of Champion at mass retail declined nearly 3 percent.
American Casualwear sales increased on the strength of branded printwear replenishment sales to the screen-print channel.
Activewear’s operating profits moved up 3.8 percent to $78.0 million. The segment’s operating profit growth trailed its sales growth as a result of product mix and planned investments to support growth initiatives.
International sales reached $608.9 million, up 11.7 percent. International’s operating profits jumped 27.7 percent to $98.5 million. In constant currency, International sales increased 16 percent and operating profit increased 33 percent. Constant-currency organic sales increased 9 percent.
International growth came from Champion strength in Europe and Asia and constant-currency organic sales growth for innerwear in Australia, Asia and the Americas. In addition, net sales for Australia-based Bras N Things, acquired in February 2018, were $43 million.
The segment’s operating margin of 16.2 percent increased 200 basis points over the year-ago quarter, benefiting from the acquisition of Bras N Things, organic growth, and integration synergies from past acquisitions. The segment’s operating margin has surpassed the corporate average for two consecutive quarters.
Looking ahead, HanesBrands’ outlook calls for:
- Revenues in the range of $6.885 billion to $6.985 billion, or growth of approximately 2 percent at the midpoint;
- International segment net sales are expected to increase approximately 6 percent and constant-currency organic sales are expected to increase approximately 8 percent, At the midpoint of full-year guidance. 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;
- S. Innerwear net sales for the year at the midpoint of guidance are expected to decrease by approximately 2 percent. An improving trend is expected as the year progresses through the year following mid-first-quarter price increases.
- S. Activewear net sales, at the midpoint of 2019 guidance, are expected to increase by approximately 2.5 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. American Casualwear sales are expected to decrease primarily in the second half, as the company shifts to higher-margin products. The company expects significant margin expansion for the Activewear segment for the year with expansion in each quarter.
- GAAP operating profit of $900 million to $930 million, or growth of 5 percent at the midpoint;
- GAAP EPS of $1.59 to $1.67, growth of 7 percent at the midpoint;
- Adjusted EPS excluding actions of $1.72 to $1.80, or growth of 3 percent at the midpoint.
For the first quarter, sales are expected to be approximately $1.52 billion to $1.55 billion and adjusted EPS is expected to be $0.24 to $0.26. International segment net sales on a reported basis are expected to increase approximately 8 percent, including acquisition contributions from Bra N Things and a $40 million negative effect of currency exchange rates.
Image courtesy Champion