HanesBrands reported strong net sales growth and comparable diluted earnings per share in the second quarter of 2011, in line with company expectations.
Diluted EPS for the second quarter ended July 2 was 87 cents, the same as a year ago when EPS benefited from 20 cents per share from a lower income tax rate. Net sales for the second quarter increased nearly 14 percent to $1.23 billion, with sales gains in all business segments and particularly strong growth in the Outerwear and International segments.
Hanes has confirmed its full-year 2011 diluted EPS guidance of $2.70 to $2.90 and net sales guidance of $4.9 billion to $5 billion. The guidance represents EPS growth over 2010 of 25 percent to 34 percent and net sales growth of 14 percent to 16 percent.
“We continued our strong start in 2011 and are performing in line with our growth expectations,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “Our brand strength, international expansion and acquisition contributions have driven six consecutive quarters of accelerating sales growth. We are leveraging this sales growth with our low-cost global supply chain and tight control of selling, general and administrative costs.”
Financial Highlights and Business Segment Summary
Growth in the quarter was driven by sales increases in each business segment, including strong double-digit increases in the International segment as well as the Outerwear segment, which benefited from last November’s acquisition of Gear For Sports.
The second-quarter operating margin increased 70 basis points over the year-ago quarter, despite $51 million in higher cotton and commodity costs and an operating profit decline in the Innerwear segment. The company’s operating margin in the quarter improved to 12.1 percent of sales, the highest since the company’s spinoff in September 2006.
Key business segment and brand highlights include:
- Innerwear segment sales in the quarter increased 8 percent while operating profit declined by 1 percent. Sales of socks, male underwear and women’s panties increased by double digits, and price increases taken this year contributed to sales growth and partially offset inflationary input costs. “Innerwear segment operating profit declined as a result of margin pressure from cotton and other cost inflation, but price increases reduced the negative impact compared with the first quarter,” said William J. Nictakis, Hanes co-operating officer, president U.S. “We instituted a price increase in February and another in June for cotton-intensive products. We continue to expect the segment’s profitability to return to historical levels as we implement price increases appropriate to the input-cost environment.”
- Outerwear segment sales and operating profit increased as a result of strong contributions from Gear For Sports, as well as Champion activewear sales growth. Segment sales increased 26 percent — 23 percentage points of the gain came from Gear For Sports — and operating profit more than doubled. Gear For Sports, a leading seller of licensed logo apparel in collegiate bookstores and the leisure/golf channels, contributed 6 percentage points of total company sales growth and 7 cents of EPS. Gear For Sports sales, operating profit and acquisition synergies are all progressing in line with company expectations.
- International segment sales in the quarter increased 24 percent, the third consecutive quarter of 20-percent-plus growth. Operating profit increased 18 percent. Excluding changes in currency exchange rates, segment sales increased 14 percent and operating profit increased 7 percent. The company had strong growth in Asia, Latin America and Europe and has instituted price increases to offset cost inflation. The TNF Group asset acquisition in Australia contributed 3 percentage points of International growth. “We had strong growth across nearly all of our key international markets, including China, India, Japan and Korea in Asia and Mexico and Brazil in Latin America,” said Gerald W. Evans Jr., Hanes co-operating officer, president international. “We have new programs coming on line for 2011 and 2012 to continue our expansion into core product categories in key markets.”
- The Direct to Consumer and Hosiery segments both swung to increases in sales and operating profit from declines in the first quarter. The Direct segment’s sales increased 4 percent from a year ago and operating profit was up 29 percent, while the Hosiery segment’s sales and operating profit increased 6 percent and 10 percent, respectively.
2011 Guidance and Macro Trend Discussion
Hanes has confirmed its full-year guidance for net sales and diluted EPS – $4.9 billion to $5 billion in net sales and $2.70 to $2.90 in EPS. Net sales in 2010 were $4.33 billion, and EPS was $2.16.
The company expects net sales growth in each of the third and fourth quarters to be in the low double digits to mid teens. For earnings, the company believes third-quarter EPS could increase as much as 30 percent over last year’s 63 cents.
Full-year earnings expectations reflect multiple price increases throughout the year, the majority of which are already secured. The company has locked in its cotton requirements for the full year. EPS projections also assume: efficiency savings from supply chain optimization and the expectation that added costs in 2010 to service strong growth will not recur in 2011; continued investment in trade and media spending consistent with the company’s historical rate; slightly higher interest expense; and a higher full-year tax rate that could range from a percentage in the teens to the low 20s. The high end and low end of the guidance ranges represent consumer spending and demand elasticity that are better than or worse than, respectively, the company’s baseline assumptions.
Hanes continues to expect free cash flow in 2011 in the range of $100 million to $200 million in spite of higher-than-expected inflation. Included in the free-cash-flow expectation are the substantial inflation impacts on all year-end working capital components, including inventory, accounts receivable and accounts payable. Year-end inventory units are expected to be slightly lower than last year.
The company expects its year-end net debt level to decrease over 2010 by the amount of free cash flow generated in 2011 and expects its year-end net-debt leverage ratio to improve to 3.0 to 3.5 times EBITDA.
HANESBRANDS INC.
Supplemental Financial Information
(Dollars in thousands)
(Unaudited)
Quarter Ended Six Months Ended
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July 2, 2011 July 3, 2010 % Change July 2, 2011 July 3, 2010 % Change
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Segment net sales:
Innerwear $ 604,678 $ 559,250 8.1 % $ 1,056,014 $ 1,010,067 4.5 %
Outerwear 331,413 263,331 25.9 % 662,084 505,179 31.1 %
Hosiery 33,968 31,923 6.4 % 78,570 79,831 -1.6 %
Direct to Consumer 97,456 93,861 3.8 % 180,254 178,353 1.1 %
International 157,718 127,487 23.7 % 284,721 230,262 23.7 %
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Total net sales $ 1,225,233 $ 1,075,852 13.9 % $ 2,261,643 $ 2,003,692 12.9 %
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Segment operating profit(1):
Innerwear $ 92,552 $ 93,150 -0.6 % $ 151,968 $ 170,647 -10.9 %
Outerwear 35,918 17,185 109.0 % 61,423 22,685 170.8 %
Hosiery 9,403 8,580 9.6 % 25,673 28,001 -8.3 %
Direct to Consumer 9,396 7,294 28.8 % 9,762 8,329 17.2 %
International 17,612 14,871 18.4 % 37,775 25,714 46.9 %
General corporate expenses/other (16,413) (18,275) -10.2 % (36,290) (46,859) -22.6 %
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Total operating profit $ 148,468 $ 122,805 20.9 % $ 250,311 $ 208,517 20.0 %
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EBITDA(2):
Net income $ 86,782 $ 85,412 $ 134,891 $ 121,925
Interest expense, net 39,178 36,573 80,283 74,068
Income tax expense (benefit) 21,694 (1,808) 33,722 8,490
Depreciation and amortization 22,448 19,893 44,135 42,729
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Total EBITDA $ 170,102 $ 140,070 21.4 % $ 293,031 $ 247,212 18.5 %
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