While Hanesbrands faced a number of challenges in the third quarter, including absorbing a bad-debt charge from Sears, currency headwinds and replenishment lags in Innerwear, the Champion business remains on fire. Champion’s sales grew in excess of 30 percent globally on a currency-neutral basis in the quarter and 40 percent excluding the mass channel.

On a conference call with analysts, Gerald Evans, Hanesbrands’ CEO, said Champion’s better-than-expect performance supported growth in both its Activewear and International segments. The 40 percent growth in constant-currency came on top of last year’s 33 percent increase and operating margins continued to expand.

“We also saw growth across global channels of trade, including wholesale, owned-retail and online,” said Evans. On a trailing 12-month basis, sales were over $1.2 billion at the end of the quarter and full-year Champion sales outside of the mass channel are expected to exceed $1.3 billion. Added Evans, “Even though, we’re cycling tougher comparisons, Champion’s growth rate continues to accelerate.”

Over the past five quarters, constant-currency growth for Champion has been 33 percent, 29 percent, 32 percent, 39 percent and 40 percent. Evans stated, “This is a clear indication that our coordinated global strategy to elevate the Champion brand is driving increased demand for the product.”

Based on bookings, Champion’s strong double-digit growth is expected to continue through the first half of 2019, putting the brand ahead of schedule to achieve its $2 billion revenue goal.

Evans also touched briefly on the Champion mass business. In early August, Target announced that the wildly-successful C9 by Champion line would be exiting Target once the contract expires in January 2020. A phase out the collection is expected slowly in ensuing years.

Evan said Champion’s sales in the quarter at mass were up mid-single digits compared to last year, while on a trailing 12-month basis, sales declined at a mid-single digit rate. Looking forward, mass channel bookings through the first half of 2019 are essentially flat for Champion to the first half of 2018.

Companywide, net earnings for Hanesbrands were down 15.7 percent to $171.4 million, or 47 cents a share, pulled down by $14 million charge tied to the bankruptcy of Sears. Operating profits were $256.9 million, off 0.6 percent.

On an adjusted basis excluding Sears and other non-recurring items, EPS was down 8.3 percent to 55 cents a share and operating profit increased 6 percent to $292 million.

Revenues were up 2.7 percent to $1.85 billion, coming in at the low end of guidance due to greater-than-expected FX pressure.

Evans said earnings were in line with guidance, benefiting from business diversification and the company continued to make progress toward its long-term goals with a fifth consecutive quarter of organic revenue growth, improved profit margins, reduced leverage and continued strong sales growth of Champion around the globe.

On an organic basis, Activewear revenue increased nearly 4 percent and International segment sales increased 10 percent in constant-currency. Organic growth in both segments accelerated in the quarter, and results were above the high-end of expectations; driven primarily by the continued strength of Champion globally.

U.S. Innerwear sales declined 7 percent, below Hanesbrands’ outlook for 1 percent to 2 percent growth as replenishment orders lagged. Said Evans, “While we were disappointed that our Innerwear segment had lower-than-expected results, there were a number of positive consumer signals in the quarter that point to improved revenue trends in the fourth quarter.”

Looking ahead, Hanesbrands raised its sales guidance for the year due to the strong Champion performance but lowered its earnings guidance due to the bankruptcy of Sears Holdings and the strengthening dollar.

The outlook for the year becomes:

  • Sales are expected to range between $6.74 billion and $6.78 billion versus $6.72 billion to $6.82 billion previously,
  • GAAP operating profit is now expected between $860 million to $875 million versus $870 million to $905 million previously,
  • Adjusted operating profit excluding actions is now expected in the range of $940 million to $955 million versus $950 million to $985 million previously,
  • GAAP EPS from continuing operations is now expected in the range of $1.50 to $1.54, down from $1.54 to $1.62 previously,
  • Adjusted EPS excluding actions for continuing operations is now expected in the range of $1.69 to $1.73, down from $1.72 to $1.80 previously,
  • Net cash from operations is now expected in the range of $625 million to $675 million, down from $675 million to $750 million previously.

Driving the changes were:

  • Prior to the bankruptcy filing, Hanes had expected fourth-quarter sales of approximately $15 million and operating profit of approximately $5 million from Sears.
  • For the fourth quarter, the company expects currency exchange rates to reduce sales by $29 million year over year, up from the previous outlook of a $12 million headwind.
  • The company’s updated operating cash flow guidance now includes incremental inventory investment to support accelerating Champion growth.
  • Updated full-year interest expense and other guidance is $221 million, up from previous guidance of $207 million primarily as a result of the yearlong effect of higher interest rates on variable-rate debt.
  • The company expects the 2018 full-year tax rate to approach 15 percent, down from previous guidance of approximately 16 percent.

For the fourth quarter, sales are expected to range between $1.70 billion to $1.74 billion. The midpoint of guidance represents approximately 5 percent growth versus the fourth-quarter a year ago and organic constant currency growth of approximately 3.5 percent.

The guidance assumes strong Champion growth will continue to drive increased sales in the Activewear and International segments in the fourth quarter. Based on strong order bookings through the first half of 2019, Champion growth is expected to continue at a significant double-digit rate. Innerwear sales in the fourth quarter are expected to be comparable to a year ago.

Fourth-quarter GAAP operating profit is expected to be in the range of $236 million to $251 million, and GAAP EPS to be 42 cents to 46 cents.

Fourth-quarter adjusted operating profit excluding actions is expected to be in the range of $251 million to $266 million. Adjusted EPS excluding actions for the quarter is expected to be 46 cents to 50 cents.

Image courtesy Champion