HanesBrands reported earnings per share in the first quarter rose 12 percent in the first quarter excluding acquisition-related and integration charges while announcing that it launched a multiyear initiative to increase investment for growth, reduce costs, and drive cash flow.

The growth initiative, called Project Booster, is expected to drive the company’s Sell More, Spend Less, Generate Cash business strategy. By 2020, the effort is expected to generate approximately $300 million of incremental annual net cash from operations and $100 million in annualized net cost savings after annualized growth reinvestment of $50 million.

Incremental growth efforts will focus on leveraging the company’s global Champion activewear business, increasing global online and omnichannel sales, and investing in brand building. The project launched in the first quarter and is expected to be neutral to full-year operating results in 2017, while providing significant benefits in coming years.

“We are off to the strong start of 2017 that we sought,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “We had one of our best first quarters for cash flow as we executed a disciplined working capital plan. Acquisitions, our Champion brand and online sales are contributing to growth as we weather expected challenges in the retail environment. In addition, we are pleased to launch Project Booster, which we believe provides a clear roadmap to accelerating growth and value creation.”

For the first quarter ended April 1, 2017, net sales of $1.38 billion increased 13 percent on acquisition contributions. Sales for the Activewear and International segments increased, while sales decreased as expected for the Innerwear segment and manage-for-cash businesses.

On a GAAP basis for continuing operations, first-quarter operating profit of $121 million decreased 1 percent and EPS of 19 cents decreased 10 percent.

Operating income was down 0.9 percent to $121.3 million while net income dropped 12 percent to $70.6 million, or 19 cents a share. The bottom line was impacted by an increase in interest expense to $42.1 million from $31.6 million due to a number of acquisitions. The latest quarter also included a charge of $2.5 million from loss from discontinued operations.

When excluding pretax charges related to acquisition integrations, adjusted operating profit of $160 million increased 9 percent and adjusted EPS of 29 cents increased 12 percent.

Net cash from operations improved by $262 million in the first quarter compared with a year ago – a use of cash of $23 million this year versus a use of $285 million a year ago.

Key Callouts For First-Quarter 2017 Financial Results

Growth From Acquisitions, While Global Champion Activewear And Online Sales Increase
As indicated in the company’s first-quarter guidance, the sales from acquisitions more than offset the decline in organic sales, which was expected. Acquisitions completed in 2016 contributed approximately $210 million in net sales in the quarter. Organic sales decreased 4 percent, primarily as a result of the expected lower sales in Innerwear, which are anticipated to normalize in the second half, and domestic manage-for-cash businesses. Categories and businesses that posted organic sales growth included Champion in the United States and Asia, U.S. men’s underwear, and the U.S. online channel. The online sales channel in the United States accounted for 10 percent of domestic sales, compared with 9 percent in the year-ago quarter.

Segment Realignment Matches Business Model
In the first quarter of 2017, the company realigned its reporting segments to reflect the new model under which the business will be managed and results will be reviewed. The former Direct to Consumer segment, which consisted of outlet stores, the legacy catalog business and retail Internet operations in the United States, was eliminated.

With the realignment, the company’s U.S. retail Internet operations, which sell products directly to consumers, are reported in the respective Innerwear and Activewear segments. The Other category consists of the U.S. businesses for outlet stores, hosiery (previously reported in the Innerwear segment), and legacy catalog operations. Prior-year segment sales and operating profit results have been revised to conform to the current year presentation.

Segment Results Reflect Acquisition Contributions, Retail And Online Environment And Overhead Reduction Efforts
In the first quarter, Hanes incurred Project Booster-related expense of approximately $7 million to execute a voluntary separation program for corporate employees. The expense allocation is represented in the segment operating-profit results. Other highlights for segment results include:

• Innerwear segment affected by retail environment, as expected. Segment sales and operating profit decreased 6 percent as a result of reduced consumer traffic at retailers, store closings, and cautious retailer inventory management. These factors were partially offset by growth of online sales and men’s underwear.
• Champion growth and space gains contributed to Activewear segment results. Activewear sales increased 3 percent and operating profit increased 4 percent. Double-digit Champion sales growth benefited from space gains and overcame weak retailer store traffic and inventory management that affected the overall segment.
• International segment growth driven by acquisitions and Champion Asia space gains. Segment sales increased 71 percent with acquisitions and space gains more than offsetting pockets of soft consumer traffic trends and negative currency impacts. Operating profit more than doubled as a result of new acquisitions and synergies from prior acquisitions.

Project Booster
In the first quarter, Hanes began executing its multiyear Project Booster program to drive investment for sales growth, cost reduction and increased cash flow.

The Booster initiative is expected to generate approximately $150 million in annualized cost savings. The company expects to reinvest approximately $50 million of the savings in targeted growth opportunities, which would result in a run rate of net annualized savings of approximately $100 million starting by the end of 2019. Project Booster cost savings and working capital initiatives are expected to generate an incremental annual run rate of $300 million of cash from operations starting by the end of 2019.

“Our core Sell More, Spend Less, Generate Cash strategy is effective and creating value, but we feel we have the opportunity to energize these efforts to drive additional benefits, particularly by taking advantage of the strong global commercial and supply chain scale we have created through acquisitions,” Evans said. “Project Booster will unlock value beyond our ongoing growth efforts and the synergies we are reaping from acquisition integrations.”

Under Project Booster, the company will invest to accelerate worldwide omnichannel and global Champion growth, while also investing in marketing and brand building for its leading lineup of brands globally.

The company intends to bolster its organizational alignment and capabilities to take advantage of additional growth potential in the online channel in the United States and its international company retail and online operations. The company’s U.S. sales through the online channel, including retailer websites, pure-play Internet retailers, and company-owned websites, are increasing at double-digit rates. Last year, the online channel represented 8 percent of U.S. sales, up from 7 percent the year before. Internationally, the company has more than 650 stores and other retail locations, particularly in Europe and Australia, and is ramping up online capabilities.

Through the acquisition of Champion Europe, Hanes has unified the Champion brand globally across the Americas, Europe and Asia-Pacific. The company will invest to take advantage of its global brand platform, product development and design, to continue drive increased market penetration for Champion worldwide.

The company will also increase its investment in brand building for the rest of its leading global portfolio, including multinational brands and regional brands. The company holds the No. 1 or No. 2 market position in either underwear, intimates, hosiery or activewear in 12 countries. Investment will include brand building and marketing support.

To fund growth initiatives, reduce costs and increase cash flow, the company expects to reduce overhead, including headcount to reflect market trends and needs; drive additional supply chain optimization beyond integration synergies; and focus on inventory and inventory turns and other working capital improvements. The company intends to use its size and scale to drive supply chain optimization, including investing in its domestic distribution center network to better serve the online channel, gaining procurement and product development savings, utilizing global fabric platforms and silhouettes, and continuing to internalize production.

In the first quarter, the company offered headquarters employees a voluntary separation program and in the second quarter is making additional corporate headcount reductions. In total, approximately 220 corporate employees are being separated, with the majority through the voluntary program. Project Booster initiatives in 2017, including the headcount reductions, are expected to be cost-neutral for full-year 2017.

2017 Financial Guidance
Hanes issued initial full-year guidance for 2017 in February and reaffirmed guidance in April. The company has issued second-quarter guidance for select performance measures.

For 2017, the company continues to expect net sales of $6.45 billion to $6.55 billion, GAAP operating profit of $845 million to $895 million, adjusted operating profit excluding actions of $935 million to $975 million, GAAP EPS for continuing operations of $1.70 to $1.82, adjusted EPS excluding actions for continuing operations of $1.93 to $2.03, and record net cash from operations of $625 million to $725 million.

Compared with 2016 results, the midpoint of 2017 guidance represents net sales growth of 8 percent, GAAP operating profit growth of 12 percent, adjusted operating profit growth of 5 percent, GAAP EPS growth from continuing operations of 26 percent, adjusted EPS growth from continuing operations of 7 percent, and operating cash flow growth of 11 percent.

Factors Affecting Cadence Of Guidance
Full-year net sales guidance includes expected incremental sales from acquisitions of approximately $420 million to $430 million, primarily in the first half. Organic sales growth is expected to range from flat to up 2 percent, with Innerwear sales trends expected to normalize in the third quarter and full-year segment sales comparable to 2016.

Second-Quarter Guidance
The company expects total net sales of approximately $1.65 billion in the second quarter. Acquisitions are expected to contribute approximately $200 million in net sales, while organic sales are expected to decline as a result of the retail sales environment and a timing shift of back-to-school shipments. More back-to-school shipments are expected to fall in the third quarter than a year ago as retailers time orders closer to sales events.

Second-quarter GAAP EPS for continuing operations is expected to be 45 cents to 49 cents, and adjusted EPS is expected to be 51 cents to 54 cents. The company expects approximately 370 million weighted average diluted shares outstanding.

As part of Project Booster, the company expects to incur Project Booster expense of approximately $8 million in the second quarter. In total, with savings being realized by the end of the year, the Project Booster efforts are expected to be cost neutral for 2017.

Additional Full-Year Guidance 
The company expects approximately $15 million in synergy cost benefits in 2017, primarily from the acquisitions of Hanes Europe Innerwear and Knights Apparel. The company realized approximately $5 million of synergies in the first quarter. Synergies from the Hanes Australasia (Pacific Brands) and Champion Europe acquisitions are expected to substantially begin in 2018.

In conjunction with acquisition integration in 2017, the company continues to expect to incur an estimated $80 million to $90 million of pretax charges for actions related primarily to Hanes Europe Innerwear, Knights Apparel, Hanes Australasia, Champion Europe, and supply chain rebalancing as a result of the acquisition integrations.

Guidance for operating cash flow growth in 2017 includes the expected benefits from net income growth and lower pretax cash charges related to acquisitions.

The company continues to expect capital expenditures of approximately $90 million to $100 million in 2017. The company is not required to make a pension contribution in 2017 and does not anticipate making a voluntary contribution, compared with a $40 million voluntary contribution in 2016.

Hanes continues to expect interest expense and other expenses to be approximately $175 million combined, an increase of $18 million as a result of acquisition-related borrowing in 2016. The 2017 full-year tax rate is expected to be comparable to 2016, assuming no changes to U.S. tax law and policy. The company made share repurchases of approximately $300 million in the first quarter and expects approximately 370 million weighted average diluted shares outstanding for the full year and second, third and fourth quarters.

Hanes has updated its quarterly frequently-asked-questions document, which is available at Hanes.com/faq.

The company’s brands include Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei, and Gear for Sports.

Photo courtesy Champion