Hanebrands Inc., the owner of Hanes, Champion as well as Gear for Sports, said price hikes in apparel are indeed coming, especially in the fourth quarter of this year, largely due to surging cotton prices over the last year.
But Rich Noll, the companys chairman and CEO, said he’s hearing from retail partners that consumers will be less price-sensitive in basic categories such as underwear.
“There’s a lot of apparel that may not be quite so replenishment-driven, and maybe a little bit more discretionary, where you might see different impacts,” said Noll. “But in our categories, I think long-term youre not going to see a huge negative impact from overall negative consumer elasticity.”
Still, Noll said Hanesbrands is prepared for “quite substantial negative elasticity” in the near term as the marketplace transitions from a deflationary environment to an inflationary one. Disruptions may be particularly noticeable during the late third quarter and in the fourth quarter when major price increases take effect. He said some of those hits may stem from retail inventory adjustments as retailers readjust working capital needs but he also sees price gaps working themselves out.
“Were the branded leader, so generally, were going to be the ones that set the price and the timing, and everybody is going to be trying to follow behind us,” said Noll. “And that will probably create some lags for a few months. And we also think there could be some short-term sticker shock by customers, but eventually they will come back into the market.”
Asked about retailers reactions, Noll said he’s seeing “very different approaches” on how to deal with inflation.
“Some look at this as driving sales and share gain opportunity and are willing to be fairly loose with working capital increases and are managing especially the basics categories flat to units. Others are managing probably more on a dollar basis, and there’s others that are in between,” said Noll. “But I expect that youre going to have these different approaches until some of them start to become clear and more dominant than others, and I think that will take a couple of quarters for it to all sort through.”
Looking longer term, he expects to see moderate inflation “probably happen beyond 2012 because there’s no globalization left.”
On the brighter side, Noll believes that while consumer spending is sporadic, it’s generally healthier. He noted that the last 18 months has witnessed a pattern of “in-between periods,” when consumers pull back. He pointed to some softness seen across retail during May. But he said consumers are coming back strongly during key selling periods.
“We call it appointment shopping, whereas in those in-between times, consumers just arent coming out as much,” said Noll. “But in those key selling times, theyre coming out very, very strongly. And weve seen that pattern continue, and I expect it would continue through back to school.”
He also noted that gas prices likely impacted sales this late spring with consumers consolidating trips. Across retail, the company is hearing that trips are down but average tickets are up.
“So on the over-a-year perspective, it doesnt really have a big impact on overall consumer spending,” said Noll. “But in the short term, it can actually impact a month or two. So that is another effect that we are probably seeing. But that doesnt say that the consumer is actually pulling way back.”
Finally, Noll is encouraged that the consumer is spending money more on luxury items and at a higher price point across channels. Said Noll, “Weve been seeing that trend happen probably since, oh, second quarter or so of 2010 and continue. So that makes me feel confident that people are still willing to spend.”
He reiterated Hanebrands long-term targets to grow sales in the mid- to high-single-digits by increasing its leading share positions across categories. While still tapping underdeveloped opportunities in Brazil, Mexico and China, Noll still sees room in the U.S. to fill “distribution voids” with its core brands: Hanes, Champion, Playtex and Wonderbra.
“While we are number one in all of our categories, we are not number one in all of our accounts and all of our sub-categories, so we still have a lot of white space to fill in the U.S.,” said Noll.
He also noted that part of its growth strategy will include “small bolt-on acquisitions.” As an example, he pointed the Q410 acquisition of Gear For Sports that will add 20 cents a share to earnings this year and an additional 10 cents in 2012. With cost synergies particularly helping, the deal “extended us from what we are good at, which is selling a lot of stuff to huge retailers in the United States to what they are good at, which is selling a little bit of stuff to a lot of customers around the country.”
Internally, he noted that Hanesbrands just completed the acquisition of the Champion licensee in Australia and acquisitions in key categories will help the company gain “critical mass” in certain countries.
