By Thomas J. Ryan
HanesBrands, while reporting steep declines in sales and earnings in the first quarter due to the pandemic, said it has developed a four-step response strategy to maximize its operating flexibility under a number of modeling scenarios. One scenario assumed stores reopen in late May and another in early July.
Currently, stores that represent approximately half of its sales are closed, HanesBrands estimated.
On a conference call with analysts, Hanes CEO Gerald Evans said that prior to the pandemic’s late-quarter disruption, the company was experiencing strong revenue and profit trends in the first quarter.
“We experienced an unprecedented sudden drop in sales and profit late in the quarter although we have seen orders resumed in April,” said Evans. “Our global shipments and sales essentially stopped in the last two weeks of the quarter as our customers reacted aggressively to the shelter in place announcements by delaying or canceling their orders. This abrupt reaction by our customers more than offset the strong revenue and profit performance across our businesses through the second week of March, particularly within U.S. innerwear and U.S. activewear.”
The U.S. activewear segment outperformance was again being fueled by Champion.
The four pandemic-response steps include:
- Support current customers — Evans said that the company is supporting its existing customers that remain open “in a safety-first manner” and is starting to see a new baseline of orders from these customers. He added, “We’re focused on aligning our inventory and production to be able to meet back-to-school and holiday plans.”
- Reduce cash-based expenditures — Capital expenditures have been reduced to critical needs and share repurchases have been suspended. Steps have been taken to reduce inventory, including plant-capacity reductions. HanesBrands is working with suppliers to extend payable terms, and many of its largest customers continue to pay on schedule. Approximately $200 million of cost reduction initiatives have been implemented of which the majority came from temporary salary reductions and furloughs that began in mid-April. The remainder is a mix of discretionary spending areas including media and marketing. Continued investments are being made in media and marketing dollars within digital channels as the pandemic is driving online shopping.
- Ramp up new revenue opportunities — Production has been shifted to create a new business line for cloth masks and personal protection garments that Evans said “has the potential to be a substantial contributor of incremental profit and cash flow over the next several years.” Reusable face masks are currently being made for the U.S. government, and a Hanes branded mask program is being launched for consumers. Masks are expected to generate “well over $300 million” in sales in 2020, largely from government purchases. Looking forward, the pandemic is expected to result in more widespread mask usage by consumers and businesses globally, and HanesBrands has seen a “strong influx of inquiries” across a number of geographies from governments, retailers, large corporations and individual consumers. Said Evans, “Based on the current interest from potential customers as well as the anticipated change in consumer behavior around the world, we believe our mask and protective garment business could be a sizable revenue opportunity with growth potential over the next several years.”
- Ensure ample liquidity — Subject to market conditions, HanesBrands intends to secure approximately $500 million in debt financing, with the proceeds used to repay its revolver facility, thereby increasing its liquidity to nearly $1.6 billion. The move was based on an ultra-conservative stress test scenario that assumes doors would not be able to reopen until early October. Said Evans, ‘While this may prove to be overly conservative, we want to be prudent and proactive given the unpredictability of the virus.”
In the first quarter ended March 31, sales slumped 17.1 percent to $1.32 billion. The net loss came to $7.9 million, or 2 cents a share, against earnings of $81.1 million, or 22 cents, a year ago. First-quarter GAAP operating profit fell 77.3 percent to $34 million while adjusted operating profit, excluding actions, fell 63.2 percent to $63 million.
The year-ago quarter included net sales of $94 million from the now exited C9 Champion mass program at Target and the DKNY intimate apparel license. Excluding the exited programs, the impact of COVID-19 and foreign exchange rates, total constant-currency net sales for the first-quarter would have increased 1.6 percent.
The company estimates the late-quarter impact of the pandemic reduced revenue by approximately $181 million, operating profit by approximately $86 million and EPS by approximately 20 cents per share. HanesBrands said EPS would have been up 14 percent including the impact.
Among segments, U.S. Activewear’s first-quarter sales decreased 29 percent, or $117 million, as a result of the COVID-19 impact and $85 million of C9 Champion sales in mass retail in the year-ago quarter. When the year-ago quarter is rebased for the C9 Champion program exit, net sales decreased 10 percent.
Prior to mid-March, the segment’s sales were up mid to high-single digits, driven by Champion and was higher than expected. Increases for other activewear brands were also being seen in the sports licensing business’ mass and mid-tier channels and seasonal activewear in the online channel. The segment also includes sports licensing sales under Gear for Sports and Hanes as well as the Alternative label.
In the U.S. Innerwear segment, sales and profit prior to mid-March were trending significantly better than expected with net sales down less than a percentage point as “our turnaround initiatives were gaining momentum,” said Evans. Point of sale at its top seven customers, which is where the revitalization efforts were focused, increased 3 percent in both basics and intimates, and market share improved “meaningfully” at those retailers in basics, bras and shapewear.
As reported for the full quarter, net sales in the U.S. Innerwear segment decreased 11 percent while operating profit decreased 22 percent, both affected by the pandemic and exit of the C9 Champion mass retail program. When year-ago results are rebased for program exits, segment net sales decreased 9 percent, and operating profit decreased 21 percent.
International segment sales declined 14 percent while operating profit decreased 48 percent. On a constant-currency basis, net sales decreased 11 percent and operating profit decreased 47 percent. Globally, COVID-19 led to not only wholesale business declines, but approximately 1,000 of the company’s 1,200 brand stores, which closed in March, are located in international geographies.
Prior to the impact of the pandemic, International segment constant-currency sales were in line with expectations. On a constant-currency basis, revenue through the end of February was up at a low-single digit rate in all main geographies. Europe’s growth over that time was led by Champion.
Globally, the Champion business, excluding year-ago results from the C9 Champion mass line that was discontinued by Target, saw constant-currency revenue for the quarter decline in the quarter both domestically and internationally. Adjusted for the impact of COVID-19, global Champion sales would have increased approximately 7 percent over the prior year.
In answer to an analyst’s question, Evans noted that the C9 Champion line launched on Amazon in mid-March and “it’s off to a good start” and performing in line with expectations amid the COVID-19 disruptions. He said, “I think we’re both very pleased with where it is and we’ll see how it ramps up.”
Operating cash flow was a use of $83 million in the first quarter compared with a use of $194 million in the year-ago quarter. Working capital management and a 12 percent reduction of inventory drove the $111 million improvement despite a reduction in GAAP net income. HanesBrands ended the quarter with nearly $1.1 billion of cash on hand, and leverage was 3.6 times a net debt to adjusted EBITDA basis, as compared to 3.5 times last year.
Evans said he was encouraged by the improving trends seen in April, including accelerating online momentum, and believes the company has taken the necessary steps to manage any fallout from the pandemic.
The company has seen orders resume in April as consumers and retailers have begun to adapt and online growth is “rapidly” accelerating each week, reaching triple-digit growth rates across a number of HanesBrand’s online platforms, including Champion.com. He added that consumers are also buying its categories at stores within the mass, hypermarket, dollar store and drug-store channels; the ongoing basics reset at a large mass retailer is progressing, and the company has back-to-school orders from some of its large customers.
“Make no mistake, the COVID-19 environment is a true challenge,” said Evans. “However, we’re encouraged by our pre-COVID performance, and underlying business trends. This underscores the health of our brands, building momentum in our U.S. innerwear business, the continued consumer demand for Champion, and the strength of our cash flow model. Given the long term stability of our categories, we’re confident our business can return to these performance levels in time.”
Due to the uncertainty and unpredictability of the pandemic, HanesBrands withdrew its first-quarter and full-year guidance.
Photo courtesy HanesBrands