By Thomas J. Ryan
Excluding the C9 line that is being phased out of the Target chain, Champion’s sales on a currency-neutral basis jumped 26 percent in the third quarter, ahead of expectations for the third straight quarter this year.
Domestic Champion sales across activewear and innerwear increased 29 percent on a currency-neutral basis, and international Champion sales increased 24 percent, with double-digit gains in Europe, Asia, and Australia. Sales also increased by double-digits in the activewear and innerwear product segments for Champion.
Champion’s global sales expanded 25 percent on a reported basis, excluding C9.
In the third quarter, Champion also entered an agreement to add a distribution partner for South Korea. The company had previously announced the addition of a second distribution partner in China. Combined, the new distribution partners are expected to nearly double the number of Champion branded stores in China and Korea to more than 200 by the end of 2020.
Gerald Evans, CEO of HanesBrands, Champion’s parent, further said on a conference call with analysts that margins are expanding for the Champion business as brand investments normalize and prior distribution investments are leveraged.
Evans said that globally, Champion has generated over $1 billion of incremental sales in just three years and its dollar growth continues to increase. Year-to-date, on a constant currency basis, global Champion revenue increased approximately $470 million. The growth through the first nine months of this year is already more than $100 million higher than the growth at all of 2018.
Looking ahead, Evans said HanesBrands believes Champion is well-positioned to generate another $1 billion of growth over the next several years.
“We have several factors supporting our view,” said Evans. “We see strong secular trends within the activewear category. Champion’s brand equity scores are growing particularly with Gen Z and Millennials. We’re expanding Champion’s product portfolio, including a broader assortment within our performance, kids and women’s lines as well as in casual footwear and accessories, and we’re increasing distribution in large economies, such as China and South Korea, all of which positions us for continued double-digit Champion growth in 2020 and beyond.”
He added, “We believe we have strong momentum and long runways in each of our growth initiatives. This along with contributions from allocating our strong cash generation to drive continued long-term revenue, profit and cash flow growth for the total company.”
Overall, HanesBrands’ sales grew 1.0 percent to $1.86 billion and increased 2 percent in constant currency. Sales were in line with company guidance calling for sales in the range of $1.84 billion to $1.875 billion.
Third-quarter GAAP operating profit increased 5 percent to $270 million, while adjusted operating profit increased 1 percent to $280 million. Under its previous guidance, GAAP operating profit was expected to be $264 million to $274 million, and adjusted operating profit was expected to be between $276 million to $286 million.
GAAP diluted earnings per share of 51 cents increased 9 percent, while adjusted EPS of 54 cents increased 4 percent. Under its previous guidance, GAAP EPS was expected to be in the range of 49 to 52 cents, and adjusted EPS to be between 52 and 55 cents.
Among HanesBrands’ three segments, U.S. Activewear’s third-quarter sales decreased 1 percent to $548.1 million and operating profit increased 4 percent, to $97.3 million. Outside the mass channel, Champion’s activewear sales increased by 18 percent. At mass, a slight increase in C9 by Champion sales was better than an expected decrease due to continued strong sell-through.
For the non-Champion portion of the segment, the company continues to focus on remixing to branded products to drive improving segment margins. The sales decline in this portion of the segment was a result of the previously disclosed exit of commodity programs in the mass channel and softer industry demand trends across the printwear channel of trade.
The Activewear segment’s brands include Champion, Hanes, Alternative, Gear for Sports, JMS/Just My Size and Hanes Beefy-T.
The segment’s operating margin increased 90 basis points to 17.8 percent in the quarter despite higher growth investment. Driving margin growth was improved Champion profitability, benefits of remixing to branded products, and the benefit of pricing.
In the Innerwear Segment, net sales decreased 3.5 percent in the third quarter to $578.5 million, while operating profit fell 8 percent to $121.5 million.
Segment sales were modestly below company expectations, primarily as a result of a softer-than-expected back-to-school retail environment affecting Innerwear basics replenishment. Innerwear intimates sales were in line with company expectations.
Innerwear brands include Hanes, Champion, Maidenform, Bali, JMS/Just My Size, Polo Ralph Lauren, Maidenform, Bali, Playtex, Hanes, JMS/Just My Size, DKNY and Donna Karan.
International Segment sales increased 7 percent to $663.5 million despite currency pressure. Sales grew 11 percent in constant currency. Operating profit increased 8 percent to $107.2 million as reported and 10 percent in constant currency. In addition to double-digit Champion activewear growth in Europe, Asia and Australia, the segment’s innerwear sales increased across multiple brands in Australia, Germany, the United Kingdom, Mexico, and Canada, among others.
Other highlights of the quarter for HanesBrands included:
- Global consumer-directed sales, consisting of company-owned or brand retail stores and all online channel sales, increased 10 percent on a reported basis representing 23 percent of total sales. On a constant-currency basis, consumer-directed sales increased 13 percent, up double-digits both domestically and internationally.
- Cash flow from operations of $302 million in the quarter increased $96 million, or 47 percent, versus last year.
- Net debt was reduced at the end of the third quarter by approximately $250 million compared with the end of the second quarter. Compared with the end of the third quarter a year ago, net debt has been reduced $470 million. The company’s leverage at the end of the quarter was 3.3 times net debt to adjusted EBITDA and the company expects to further reduce leverage to 2.9 times by the end of the year, in line with the company’s preferred net debt range over time.
HanesBrands updated full-year financial guidance for 2019, including effectively raising the midpoint of the guidance ranges for net sales and EPS and tightening the high end of the range for operating profit.
The company expects 2019 net sales of $6.935 billion to $6.985 billion, GAAP operating profit of $900 million to $925 million, adjusted operating profit of $955 million to $980 million, GAAP EPS of $1.61 to $1.67, adjusted EPS of $1.74 to $1.80, and net cash from operations of $700 million to $800 million.
Prior guidance for the updated ranges were net sales of $6.885 billion to $6.985 billion; GAAP operating profit of $900 million to $930 million and adjusted operating profit of $955 million to $985 million; and GAAP EPS of $1.59 to $1.67 and adjusted EPS of $1.72 to $1.80.
At the midpoint, the updated 2019 guidance versus 2018 results represents net sales growth of more than 2 percent; GAAP and adjusted operating profit growth of 5 percent and 2 percent, respectively; GAAP and adjusted EPS growth of 8 percent and 4 percent, respectively; and operating cash flow growth of 17 percent.
For the fourth quarter, net sales are expected to be in the range of $1.719 billion to $1.769 billion. GAAP operating profit is expected to be $248 million to $273 million, and adjusted operating profit is expected to be $259 million to $284 million. GAAP EPS is expected to be 46 cents to 52 cents, and adjusted EPS is expected to be 48 to 54 cents.