HanesBrands, Inc. reduced its sales and earnings outlook due to “increased macro-related challenges within the global operating environment.”  Third-quarter earnings came in line with expectations despite global Champion sales decreasing 9 percent on a currency-neutral basis.

Net sales in the third quarter of $1.67 billion were below company guidance in the range of $1.73 billion to $1.78 billion. Adjusted EPS of 29 cents per share was in line with guidance in the range of 27 cents to 32 cents.

“Our global team’s agility and focus helped us deliver operating profit and earnings per share in line with expectations, despite the tougher-than-expected sales environment,” said Steve Bratspies, CEO HanesBrands. “Our business fundamentals, brands and categories remain strong, and we are focused on controlling those things that are in our control. We’re making progress in reducing SKUs and inventory while optimizing our global supply chain. We’re launching products aimed at younger consumers. We’re taking aggressive actions to manage through the near-term challenges as we execute the Full Potential strategy, which will put us in an advantaged position when the macro environment stabilizes.”

Third-Quarter Highlights

A strong pipeline of new product and innovations continue to roll out for younger consumers. In addition to the successful launches of the Hanes Total Support Pouch with X-Temp and Hanes Retro Rib, the company continues to get younger in innerwear with the rollout of new products from its innovation and product pipeline. Beginning in the fourth quarter, the Hanes Originals product line will be available in certain retail channels followed by expanded distribution in early 2023. Hanes Originals consists of enhanced core men’s and women’s innerwear products with a fit and style aimed at younger consumers. In its Maidenform brand portfolio, the company launched a seamless collection of bras and underwear delivering stretch-to-fit comfort as well as a lace-based shapewear short that combines shaping with style. These Maidenform products, aimed at younger consumers, quickly became top sellers on maidenform.com with expanded distribution for bras beginning in 2023.

Continued progress on executing Full Potential global supply chain initiatives to drive simplification, increase speed and flexibility, expand margins and improve cash flow generation. As part of the Full Potential plan, the company did an in-depth analysis of its entire global network to best position its global supply chain to match the revenue growth opportunities. The work has begun and is expected to continue over the course of the Full Potential plan across distribution, manufacturing, and sourcing. As previously disclosed, within its distribution network the company is consolidating to fewer, bigger distribution centers in the U.S., increasing the use of direct-ship to its large retail partners, using dedicated DTC facilities as well as increased automation. Within its own manufacturing network, the company holds a clear advantage to sourcing in terms of cost and speed for high-volume, cotton-based products. HanesBrands continues to build on this advantage and increase efficiency, which created the opportunity to exit two facilities, further reducing costs. Within its existing large sourcing operations, the company is taking actions to further reduce cost and improve speed. At the same time, the company is building sourcing capabilities in areas such as synthetic fabrics and short-term fashion offerings to capture incremental growth opportunities that align with its Full Potential plan.

Third-Quarter 2022 Results

Net sales from continuing operations decreased 7 percent to $1.67 billion, which includes a $59 million unfavorable impact from foreign exchange rates, compared to last year. On a constant currency basis, net sales decreased 3 percent, or $60 million. The constant currency decline was due to the macro-driven slowdown in consumer spending in the U.S. and certain Asian markets coupled with the impact to orders as U.S. retailers tightly manage their overall inventory levels. These headwinds more than offset innerwear growth in Australia and the Other Americas as well as Champion growth in Europe.

Global Champion brand sales decreased 14 percent on a reported basis as compared to the prior year, with similar declines in both the U.S. and internationally. In constant currency, Global brand sales decreased 9 percent. As compared to the prior year, constant currency sales increased in Europe and the U.S. collegiate channels. However, this growth was more than offset by soft consumer demand in the U.S., order cancellations in the U.S. from late shipments as retailers tightly managed inventory and lingering COVID challenges in certain Asian markets.

Gross Profit of $563 million declined 20 percent as compared to the prior year. Gross margin was 33.7 percent, down from 39.1 percent in the prior year. Adjusted Gross Profit, which excludes certain costs related to the company’s Full Potential plan, was $576 million. Adjusted Gross Margin of 34.5 percent declined approximately 460 basis points compared to the prior year. Near-term headwinds, including commodity and ocean freight inflation as well as manufacturing time-out costs related to its inventory reduction actions represented more than 500 basis points of year-over-year margin headwinds in the quarter. These headwinds were partially offset by pricing actions, decreased use of air freight, and Full Potential cost savings initiatives.

Selling, General and Administrative (SG&A) expenses declined 9 percent to $421 million as compared to last year. Adjusted SG&A expenses, which exclude certain costs related to its Full Potential plan, declined 6 percent from last year to $408 million. As a percent of net sales, adjusted SG&A expense of 24.4 percent was comparable with prior year as cost controls and expense efficiencies from its Full Potential initiatives offset investments in brand marketing and technology related to Full Potential.

Operating Profit and Operating Margin in the third quarter of 2022 were $141 million and 8.5 percent, respectively, compared to $235 million and 13.1 percent, respectively, in the prior year. Adjusted Operating Profit of $168 million declined $96 million as compared to the third-quarter 2021. Adjusted Operating Margin of 10.0 percent declined nearly 470 basis points over the prior year.

The GAAP and Adjusted Effective Tax Rates for third-quarter 2022 were both 17.0 percent. For the third quarter of 2021, GAAP and adjusted effective tax rates were 7.9 percent and 15.0 percent, respectively.

Income from continuing operations totaled $80 million, or $0.23 per diluted share. This compares to income from continuing operations of $177 million, or $0.50 per diluted share, last year. Adjusted income from continuing operations totaled $102 million, or $0.29 per diluted share. This compares to adjusted income from continuing operations of $188 million, or $0.53 per diluted share, in the third quarter of 2021.

Third-Quarter 2022 Business Segment Summary
Innerwear sales decreased 11 percent compared to last year. The year-over-year sales performance was driven by macroeconomic pressures that weighed on consumer spending as well as the impact of retailer actions to manage inventory. Although the company’s inventory at retail was below the prior year, retailer actions to tightly manage overall inventory levels negatively impacted near-term replenishment orders and delayed the timing of certain events. These pressures more than offset the benefits from the first-quarter price increase and retail space gains. Operating margin of 16.0 percent decreased 505 basis points compared to the prior year. The impact from input cost inflation, lower sales volume, manufacturing time-out costs and an unfavorable product mix more than offset the benefit from higher prices and SG&A cost controls.

Activewear sales were comparable to the prior year. Relative to last year, the company experienced continued growth in the collegiate channel as well as solid growth in the printwear channel for both its Champion and Hanes brands. This growth was essentially offset by declines in its other channels due to lower point-of-sale trends and higher Activewear inventory levels at retail that drove order cancellations, particularly within Champion. By brand, Champion sales within the Activewear reporting segment decreased 9 percent as compared to prior year while sales of other activewear brands within the Activewear reporting segment increased by 15 percent. Operating margin for the segment of 11.6 percent decreased by approximately 490 basis points compared to the prior year as the impact of inflation, manufacturing time-out costs and an unfavorable product mix more than offset the benefits from price increases and SG&A cost controls.

International sales decreased 6 percent on a reported basis, including the $59 million from unfavorable foreign exchange rates. International sales increased 5 percent on a constant currency basis compared to the prior year, driven by Champion growth in Europe as well as innerwear growth in Australia and the Other Americas. This growth more than offset Champion’s decline in certain Asian markets. Operating margin for the segment of 13.9 percent decreased by approximately 220 basis points compared to the prior year driven primarily by the impact of inflation, which more than offset SG&A cost controls.

Cash Flow, Balance Sheet and Stockholder Capital Returns

  • Total liquidity position at the end of third-quarter 2022 was $863 million, consisting of $253 million of cash and equivalents and $610 million of available capacity under its credit facilities;
  • Based on the calculation as defined in the company’s senior secured credit facility, the Consolidated Net Total Leverage Ratio at the end of third-quarter 2022 was 3.9 times on a net debt-to-adjusted EBITDA basis as compared to 2.6 times at the end of third-quarter 2021 (See Table 6-C). In early November, the company proactively worked with its bank partners to amend its credit agreement, including altering its two financial covenants, to provide increased near-term financial flexibility given its current leverage ratio and the near-term outlook for the global operating environment. For the five quarters from fiscal fourth quarter 2022 through the end of fiscal fourth quarter 2023, the company’s maximum allowable consolidated net total leverage ratio will range from 5.25 times to 5.75 times net-debt to adjusted-EBITDA and its minimum consolidated net interest coverage ratio will be 2.6 times adjusted EBITDA-to-net interest expense. Beginning in its fiscal first quarter 2024, its leverage ratio will revert to 4.5 times and its interest coverage ratio will move to 2.75 times.
  • Inventory at the end of third-quarter 2022 was $2.14 billion, an increase of 31 percent over prior year. The increase was driven predominantly by the combination of higher units and higher inflation on input and transportation costs. On a unit basis, inventory increased 16 percent over prior year but decreased 6 percent as compared to second-quarter 2022. The company is progressing on its previously disclosed mitigation initiatives and continues to expect to end 2022 with lower units in inventory as compared to year-end 2021. By comparison, second-quarter inventory, on a year-over-year basis, was up 37 percent in dollars and 19 percent in units.
  • Cash flow from operations was a use of $51 million in the third-quarter 2022 driven primarily by the working capital impact from higher inventory.
  • The company’s Board of Directors declared a regular cash dividend of $0.15 per share to be paid on December 13, 2022 to stockholders of record on the close of business November 22, 2022. The declared dividend represents the company’s 39th consecutive quarterly return of cash to stockholders. The company did not repurchase any shares in the third quarter and has approximately $575 million remaining under its current repurchase authorization.

Fourth-Quarter and Full-Year 2022 Financial Outlook

For fourth-quarter 2022, which ends on December 31, 2022, the company currently expects:

  • Net sales from continuing operations of approximately $1.40 billion to $1.45 billion, which includes a projected headwind of approximately $68 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 15 percent decline as compared to prior year on a constant currency basis and a 19 percent decline on a reported basis.
  • GAAP operating profit from continuing operations to range from approximately $53 million to $83 million.
  • Adjusted operating profit from continuing operations to range from approximately $70 million to $100 million and includes a projected headwind of approximately $9 million from changes in foreign currency exchange rates.
  • Charges for actions related to the Full Potential plan of approximately $17 million.
  • Interest and other expenses of approximately $54 million.
  • An effective tax rate of approximately 17 percent on both a GAAP and adjusted basis.
  • GAAP earnings per share from continuing operations to range from approximately $0.00 to $0.07.
  • Adjusted earnings per share from continuing operations to range from approximately $0.04 to $0.11.
  • Fully diluted shares outstanding of approximately 350 million.
  • Earnings per share and fully diluted share count guidance exclude any potential impact from future share repurchases.

For fiscal-year 2022, which ends on December 31, 2022, the company currently expects:

    • Net sales from continuing operations of approximately $6.16 billion to $6.21 billion, which includes a projected headwind of approximately $196 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 6 percent decline as compared to prior year on a constant currency basis and a 9 percent decline on a reported basis. (Prior, $6.45 billion to $6.55 billion, down 2 percent constant currency and 4 percent reported.)
    • GAAP operating profit from continuing operations to range from approximately $512 million to $542 million. (Prior, $570 million to $620 million.)
    • Adjusted operating profit from continuing operations to range from approximately $567 million to $597 million, which includes a projected headwind of approximately $26 million from changes in foreign currency exchange rates. (Prior, $630 million to $680 million.)
    • Charges for actions related to the Full Potential plan Full Potential of approximately $55 million. (Prior,  $60 million.)
    • Interest and other expenses of approximately $167 million. (Prior, $161 million.)
    • An effective tax rate of approximately 17 percent on both a GAAP and adjusted basis.
    • GAAP earnings per share from continuing operations to range from approximately $0.82 to $0.89. (Prior, $0.97 to $1.09.)
    • Adjusted earnings per share from continuing operations to range from approximately $0.95 to $1.02. (Prior, $1.11 to $1.23.)
    • Cash flow from operations to be a use of approximately $400 million.
    • Capital investments of approximately $140 million, consisting of approximately $90 million of capital expenditures and approximately $50 million of cloud computing assets. Per GAAP, capital expenditures are reflected in cash from investing activities and certain cloud computing assets are reflected in Other Assets within cash flow from operating activities.
    • Fully diluted shares outstanding of approximately 351 million.
    • Earnings per share and fully diluted share count guidance exclude any potential impact from future share repurchases.