HanesBrands First Quarter Dragged Down by Imagewear Business

HanesBrands reported a net loss for the quarter of 27 cents per diluted share, compared with EPS of 49 cents in the year-ago first quarter. Net sales were $1.01 billion, a decrease of 3 percent compared with $1.04 billion a year ago. The results were better than the company’s guidance for an EPS loss of up to 35 cents and net sales of approximately $1 billion.

“We are tracking consistent with our expectations, and now with the worst of the cotton inflation behind us, our operating profit margin for the remainder of the year should average in the low double digits,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “Sales, profits and cash flow are running consistent with, or better than, our plans. When coupled with the visibility of our pricing and costs for the rest of the year, we feel very good about our momentum and are confident in our ability to achieve our full-year financial goals.”

Several of the company’s product categories, especially those that sustained the largest price increases to offset cotton inflation, generated solid sales growth and better than expected retail point-of-sale growth in the quarter. On a percentage basis, Hanes men’s underwear sales increased mid-single digits, Hanes women’s panty sales increased in the high teens, and total Innerwear segment sales, including sheer hosiery, increased 1 percent. In the Outerwear segment, Champion activewear sales increased in the mid-teens.

Imagewear, cotton prices, supply chain rebalancing hurt margins

As anticipated, cotton inflation also negatively affected margins in the quarter, as did supply chain actions of $13 million to balance capacity with unit demand. Supply chain operations are performing well, and continued optimization is expected to yield substantial cost savings.

Hanes will benefit from declining inventory levels for the rest of the year. Inventory reached its peak for the year in the first quarter and ended the quarter slightly lower than originally expected. Free cash flow was slightly better than a year ago.

The company has good visibility to product pricing and costs for the remainder of the year. Product pricing has been confirmed with retailers for more than 95 percent of the company’s domestic unit volume. Cotton costs are locked in through December.

Hanes has reconfirmed its 2012 guidance of 2 percent to 4 percent net sales growth and EPS of $2.50 to $2.60. Consistent with these expectations, gross profit as a percent of sales is expected to reach the high 20s in the second quarter with an operating profit margin in the mid- to high single digits. In the second half, gross margins are expected to improve to the low 30s, while the operating profit margin is expected to average in the low double digits.

The company continues to expect full-year free cash flow in the range of $400 million to $500 million. The company’s priority for use of free cash flow is to deleverage its balance sheet by reducing long-term debt. The company ended the first quarter with long-term bond debt of $1.8 billion and expects to pay off approximately $300 million in floating-rate notes in 2012. In 2013, the company’s goal is to pay off its $500 million of 8 percent notes, reducing bond debt to approximately $1 billion.

Interest expense in 2012 is expected to be $15 million lower than 2011 as a result of debt reduction. The full-year tax rate is expected to be in the low double digits, consistent with the average of the past three years.

First-Quarter Business Segment Highlights

• The Innerwear segment, which now includes hosiery operations, reported a net sales increase of 1 percent over last year led by strong contributions from men’s underwear, women’s panties and sheer hosiery. Operating profit decreased 31 percent compared with last year. 
  
• Outerwear segment sales decreased 9 percent but increased 4 percent excluding imagewear, with strong contributions from retail categories. In addition to strong Champion retail activewear sales, new Hanes retail casualwear programs partially offset lower Just My Size sales. Outerwear had an operating loss in the quarter. Gear For Sports continues to perform well and is on plan to generate full-year synergies and operating profit of $40 million.
  
• International segment sales decreased 5 percent in the quarter, while operating profit fell 84 percent. In addition to significant cotton and other inflation, International results were affected by softness in the European imagewear category, which is under the same review process that the company conducted for its U.S. imagewear category.
  
• The Direct to Consumer segment continues to make good progress improving operating margins. In the quarter, sales increased 2 percent and operating profit tripled.