Like many other CEOs in the active lifestyle retail market these days, HanesBrands Inc. CEO Stephen Bratspies is working through heavy inventories in a tough retail environment, shifting consumer trends and the effects of inflation. Like many of the others, Bratspies and HBI boiled their strategy to turn their businesses around down to a few bullet points to get their teams focused and make it easier to communicate direction to the investor, and retail, community.
“Last quarter, we walked through an assessment of our strategy and how we are continually pressure testing it, looking at what’s working, where we need to improve, adapting our plan to match the near-term realities of the operating environment as well as looking at additional options to enhance shareholder value,” Bratspies shared in his opening remarks on the third quarter conference call with analysts.
“As we assess our progress to date and look at the path forward, we’ve outlined four drivers to unlock shareholder value creation. One, return gross margin and operating cash flow to historical levels; Two, pay down debt; Three, reignite our Innerwear business; And four, regain momentum and refocus our Champion business, which now includes an evaluation of strategic alternatives,” he summarized.
In looking at the global Champion business, Bratspies said the company continues to “experience near-term top-line challenges, including the difficult consumer environment” and offered that the company was “progressing on a number of strategic initiatives designed to build brand health, recover top-line momentum and drive long-term profitable growth.”
HBI in September announced it was evaluating strategic alternatives for the Champion business (read SGB Media’s coverage here).
“We’ve made a significant structural improvement to Champion such as segmenting and streamlining our supply chain, establishing globalized product design as well as implementing a new disciplined channel segmentation strategy,” Bratspies detailed.
“These improvements have highlighted an even greater distinction between our Innerwear and Activewear businesses. This has created the opportunity for us in conjunction with the Board to evaluate options for the global Champion business that could accelerate shareholder value creation.”
While cautioning that it is still very early in the process, the CEO suggested that they continue to evaluate the right path forward with Champion as they received strong initial interest from a broad group of global partners. But they also have to run the business and try to turn it around.
Global Champion brand sales decreased 19 percent on a reported basis (+20 percent constant-currency) in the third quarter as compared to the prior-year Q3 period. U.S. sales decreased 16 percent, which was said to be driven by the continued challenging activewear market dynamics. The U.S. performance also reportedly reflects the expected short-term impact from the company’s continued strategic actions taken to strengthen the brand and position Champion for long-term profitable growth, including disciplined product and channel segmentation, shifting its mix, and assortment changes.
Internationally, sales decreased 22 percent on a reported basis and 24 percent on a constant-currency basis. Constant-currency sales increased at a low double-digit rate in Japan, which was more than offset by decreases in Europe, where wholesaler ordering was even more cautious than expected, as well as the macroeconomic headwinds impacting demand in parts of Asia and Australia. Company CFO Scott Lewis said the Japan growth was below expectation as travel and tourism in the region recovered at a slower pace than expected.
Activewear sales decreased 17 percent to $383.6 million in Q3, compared to $461.0 in the prior-year period. The segment reportedly experienced decreases across most channels and brands driven by ongoing headwinds within the activewear category, including soft consumer demand and excess channel inventory.
Operating margin for the Activewear segment of 6.5 percent increased 770 basis points sequentially. Compared to the third quarter of last year, segment operating margin decreased approximately 510 basis points as operating profits fell 53.5 percent to $24.9 million for the period. The year-over-year decrease was said to be driven by the impact from unfavorable product mix, input cost inflation as the company continues to sell through its higher-cost activewear inventory and lower sales volume. These headwinds more than offset the benefits from the overlap of last year’s manufacturing timeout costs and disciplined expense management.
Overall U.S. Activewear segment sales decreased 17 percent year-over-year in the third quarter, which was said to be essentially in line with the company’s outlook for a mid-teens decline.
“With respect to our International segment, constant-currency sales decreased 11 percent,” Lewis shared. “In Australia, which is our largest international market, the previously discussed macroeconomic headwinds continue to pressure consumer demand in the quarter. The segment sales performance was below our outlook for a high-single-digit decline driven primarily by two markets.”
Lewis said the Champion sales performance reflected the expected short-term impact from the continued strategic actions the company is taking to “drive stronger brand health through a more disciplined product and channel segmentation approach, a shift in mix and changes to our assortment.”
“This was driven by continued category headwinds in the quarter, including soft consumer demand and excess channel inventory,” said Lewis.
“Irrespective of the outcome of this evaluation, we are leaning into and executing our detailed Champion plan for product, marketing, distribution and operations,” Bratspies shared. “We remain highly confident and committed to reaching the significant global potential of the brand.”
Bratspies said the company completed several strategic actions in the Champion business during the quarter related to inventory clean-up, store exits and operational streamlining.
“We continued our efforts to position Champion for growth by improving our product offering and channel mix, driving our channel segmentation strategy and working to strengthen Champion’s brand position with new marketing ahead of the launch of our fall/winter 2024 product line, which is our first global line for the new team,” said Bratspies. “In fact, as we conduct our account meetings for our Fall/Winter 2024 line, we received consistently positive reviews, particularly around the elevation of the product and our focus and connectivity to the brand’s heritage. And we believe we have opportunities to further increase our distribution in key channels.”
He said they are also “successfully reigniting brand heat,” driven by “good progress” with pinnacle product offerings and accounts. “While small in volume, these programs can generate a big and meaningful brand halo effect,” he suggested.
“Success in this channel is a leading indicator. Product being purchased by the most influential and engaged consumers over time leads to wider consumer desire and ultimately drives distribution opportunities and larger volume counts,” Bratspies opined. “To that end, we launched successful collabs with key accounts, driving brand awareness and increased brand interactions with consumers. And we’re encouraged by a robust calendar for additional future collabs.”
Bratspies said small back-to-school product offerings at two key specialty accounts in the U.S. drove strong double-digit sell-through rates, and said it was an indication that the new product direction is resonating with consumers.
“We’re seeing space gains and increased order backlogs within pinnacle accounts around the world driven by our new brand and product vision,” he said.
“And we’re seeing a meaningful uptick in brand consideration among key 18- to 24-year-old demographic driven by our new brand campaign,” he added. “We’re confident we’re taking the right steps to drive the long-term success of Champion, and the initial green shoots we’re seeing within our pinnacle accounts are encouraging. However, as previously discussed, it’s going to take some time for these strategic actions to translate to the P&L.”
Photo courtesy Champion