Hanesbrands, Inc. said global Champion brand sales slumped 20 percent in the second quarter in constant currencies due in part to a ransomware attack but also softer-than-expected point-of-sale trends. On an analyst call, Steve Bratspies, CEO, HanesBrands, remained confident in Champion’s growth potential despite the rare top-line miss.
“I’m very confident the business is much stronger today than it was pre-pandemic,” said Bratspies. “That said, we have work to do.”
Global Champion brand sales were down 23 percent on a reported basis, with similar declines in the U.S. and globally. The brand faced tough comparisons, with constant-currency sales increasing 96 percent globally on a two-year stack basis.
Bratspies added, “There are a lot of good things happening, and we’re very committed to Champion being a big part and is a big part of our ‘Full Potential’ plan as we go forward.”
In February, Hanesbrands lifted its sales targets for Champion, expecting the brand to reach $3.2 billion by 2024, up from a previous goal of $3 billion. Sales were about $2 billion in 2021 when Hanesbrands’ established its “Full Potential program.
Among the newer developments, Bratspies, who became Hanesbrands’ CEO in August 2020 after previously serving as the chief merchant at Walmart, said Champion has a new management team.
In May 2022, Vanessa LeFebvre was appointed president of Hanesbrands’s Global Activewear segment, which primarily consists of Champion. She was previously SVP, commercial, North America, at Adidas, responsible for e-commerce, retail stores and wholesale.
Said Bratspies, “I’m pleased with the team, and it’s at the top level, and it’s down through the business that I think is incredibly committed and is going to take the brand to the next level on a global basis.”
Bratspies said Champion continued to simplify its distribution network in the U.S. during the second quarter to generate efficiencies and cost savings, improve service to its retail partners and support future growth. He added, “I’m very focused on defined segmentation strategy for product and channel and improving upon our execution against that going forward, which is an opportunity for us.”
On growth, he highlighted comments made at Hanesbrands’ Investor Day in May 2021 where management sees growth opportunities for Champion through expanding women’s and kids, tapping newer markets, including China, and moving into adjacent product categories, including footwear.
Bratspies added, “The consumer continues to ask for the brand, and they continue to ask for a more and broader assortment from us. We need to deliver that. The pipeline is the building of new product ideas, and I feel better today than I did in the past about what’s to come as we go forward. And we’re going to continue to expand into new business opportunities.”
Specifically, in footwear, Hanesbrands, during the second quarter, acquired the Champion trademarks for footwear in the U.S. and Canada from Wolverine Worldwide for $90 million in cash.
Bratspies stated, “The purchase gives the company greater control of the global Champion brand and products. In addition, the company will be able to deliver head-to-toe offerings across geographies through greater global coordination of design, product development and merchandising.”
Bratspies added, “We already have a very robust footwear business in Europe and Asia, so we know how to do this, and it’s going to be part of the globalization strategy of the brand.”
On international expansion, Bratspies said Champion remains “very early in China right now,” and pandemic-related lockdowns impact the region. He said, “We’re not moving as fast as we initially had planned, but that’s COVID-related and nothing to do with the brand or operations behind it.”
Bratspies concluded overall on Champion’s outlook, “I look at the business, and all the things we’re working on have not changed because we had a rough quarter. We think there’s still demand for the brand, and I’m encouraged about what the opportunity is for us going forward, and it’s going to be a big part of our overall execution strategy, and I think there’s a ton of upside.”
Companywide, Hanesbrands slashed its guidance as the cyber-attack and softness at retail led to softer results across its basics and intimate apparel business. Beyond Champion, the company’s major brands include Hanes, Bonds, Maidenform, Bali, Playtex, and Bras N Things.
“As you’ve heard through this earnings season, the global operating environment deteriorated in the second quarter,” said Bratspies. “Inflation continued to impact product costs and increasingly weighed on consumer demand. COVID remains a headwind in parts of Asia. And inventory has built up in pockets at retail, all of which drove softer-than-expected point-of-sale trends in the quarter. Adding to these macro headwinds was the unexpected impact of the previously disclosed cyber event, which disrupted our global operations in late May. As a result, our second quarter performance was below our expectations.”
He said that while profit margins were in line with forecasts, sales and profits were below guidance and inventory ended the quarter higher than planned, creating a near-term drag on cash flow.
He said, “Our team did a great job recovering from the cyber event, which temporarily shut down parts of our global supply chain network and limited our ability to fulfill customer orders for nearly three weeks. And despite the disruption, we shipped all of our Innerwear back-to-school commitments on time and in full.
“Absent the cyber event, we estimate second-quarter sales would have still been below our guidance. However, operating profit and earnings per share would have been at the high end of our guidance range.”
Overall, Hanesbrands estimated the cyber event negatively impacted the second-quarter of 2022 results by approximately $100 million in net sales, $35 million dollars in adjusted operating profits and 8 cents in adjusted EPS.
In the second quarter ended June 30, sales of $1.51 billion decreased 14 percent over the prior year. Sales in the quarter of $1.51 billion were well below guidance in the range of $1.68 billion to $1.73 billion.
The lower-than-expected sales performance was driven by the impact of the previously announced ransomware attack and softer-than-expected POS trends.
Adjusting for the $38 million unfavorable impact from foreign exchange rates, net sales decreased 11 percent on a constant-currency basis. Net sales, excluding PPE, increased 75 percent on a two-year stack basis.
Adjusted income fell 40.6 percent to $98 million, or 28 cents per share, from the adjusted income of $165 million, or 47 cents, in the second quarter of 2021. Adjusted earnings were below Hanesbrands’ guidance in the range of 32 cents to 36 cents.
Net income totaled $93 million, or 26 cents, against $148 million, or 42 cents, last year.
Adjusted gross margin of 37.8 percent declined 120 basis points compared to the prior year. The margin decline was driven by the impact of lower sales volume, input cost inflation, the incremental costs associated with the cyber event, and foreign currency exchange rates. These headwinds more than offset the benefits from the business mix, the first-quarter price increase in its Innerwear business, cost savings, and less air freight.
Adjusted SG&A expenses, which exclude certain costs related to its Full Potential plan, were 27.7 percent as a percent of sales, up 215 basis points compared to the prior year. The year-over-year deleverage in SG&A was driven by lower sales volume and planned increased investments in brand marketing and technology, which more than offset cost controls and expense efficiencies from Full Potential initiatives in the quarter.
Adjusted Operating Profit of $154 million declined by $82 million compared to the second quarter of 2021. The adjusted operating margin of 10.2 percent declined approximately 335 basis points over the prior year.
Among its segments, Activewear sales declined 18 percent over the prior year. The company saw continued growth in its collegiate channel in the quarter, which was more than offset by declines in its other channels due to headwinds from POS trends, retailer inventory levels and the impact of the cyber event.
By brand, Champion sales within the Activewear reporting segment decreased 25 percent compared to the prior year and increased more than 115 percent on a two-year stack basis. Sales of other activewear brands within the Activewear reporting segment decreased 8 percent over the prior year in the quarter and increased approximately 130 percent on a two-year stack basis.
Besides Champion, Hanesbrands’ Activewear segment makes products under Hanes, Alternative, Gear for Sports, Comfortwash, JMS/Just My Size, and Hanes Beefy-T.
Operating margin for the Activewear segment of 6.9 percent decreased 325 basis points compared to the prior period as lower volume, increased brand investments and an unfavorable product mix more than offset the benefits from SG&A cost controls.
Innerwear sales decreased 12 percent compared to last year as the impact of the cyber event and softer-than-expected POS trends more than offset the benefits from the first-quarter price increase and retail space gains. On a two-year stack basis, Innerwear sales increased 50 percent in the quarter. Hanesbrands’ Innerwear business makes products under Hanes, Bali, Maidenform, Playtex, Champion, JMS/Just My Size, Bras N Things, and Polo Ralph Lauren.
The operating margin in the Innerwear segment of 20.7 percent decreased by 320 basis points compared to the prior year. The impact of input cost inflation, lower sales volume and an unfavorable product mix offset the benefit of higher prices and SG&A cost controls.
On a constant-currency basis, International sales decreased 3 percent compared to the prior year. Sales declined at a low-single-digit rate in Europe and Australia, which offset growth in the Americas. Constant-currency sales in Asia were consistent with the prior year, including the $38 million impact from unfavorable foreign exchange rates.
International sales decreased 11 percent on a reported basis.
Operating margin for the segment of 13.2 percent increased approximately 25 basis points over the prior year driven by SG&A cost controls
Inventory at the end of the quarter was $2.09 billion, an increase of 37 percent over the prior year. The increase was driven predominantly by higher inflation on input and transportation costs, lower sales, and the early arrival of products related to third-quarter commitments. Inflation alone represented essentially half of the year-over-year increase. Hanesbrands said it is confident in the quality of its inventory as approximately 80 percent of the year-over-year gain is in replenishment innerwear categories. On a unit basis, inventory increased 19 percent over the prior year. Through various mitigation initiatives that were put in place, the company expects to end 2022 with lower units in inventory as compared to year-end 2021.
Looking ahead, Hanesbrands now expects sales from continuing operations of approximately $6.45 billion to $6.55 billion, including a projected headwind of roughly $165 million in changes in foreign currency exchange rates. At the midpoint, this represents an approximate 2 percent decline as compared to the prior year on a constant-currency basis and a 4 percent decline on a reported basis.
Previously, sales were expected between $7.0 billion to $7.15 billion.
Adjusted EPS is expected to range from approximately $1.11 to $1.23, down from previous guidance in the range of $1.64 to $1.81.
Bratspies said the reduced outlook reflects the changes in FX rates, the short-term costs associated with inventory reduction actions and an assumption that slow consumer demand continues and the retail environment remains challenging. He added, “While our estimated reduction may prove conservative, we felt it was prudent, given the softer-than-expected point of sales trends in the second quarter and the overall macro environment.”
Photo courtesy Hanesbrands/Champion