Hanesbrands Q1 Earnings, Margins Rise Despite Soaring Cotton Costs

HanesBrands raised its full-year guidance on strong growth in net sales and diluted earnings per share in the first quarter of 2011 that it attributed to acquisitions, organic growth and operational efficiency.

“We significantly beat our expectations in the quarter and are off to a strong start in 2011,” Hanes' Chairman and Chief Executive Officer Richard A. Noll said. “Our brands are strong and are performing well. We are raising prices appropriately to deal with input-cost inflation, and as we leverage our scale and infrastructure, the benefits of increased sales and acquisitions are dropping through to the bottom line.”

Diluted EPS for the quarter increased 32 percent to 49 cents, compared with 37 cents in the year-ago quarter. Net sales for the quarter increased 12 percent to $1.04 billion, driven by strong performance of the acquired Gear For Sports business, organic Outerwear segment growth and International growth. The quarter's sales increase followed 8 percent sales growth in last year's first quarter.

As a result of the strong quarter, the company has raised its full-year 2011 diluted EPS guidance to a range of $2.70 to $2.90, up from previous guidance of $2.60 to $2.80. Hanes' new net sales range is $4.9 billion to $5 billion, with the low end of the range increased from $4.85 billion.

Financial Highlights and Business Segment Summary

Growth in the quarter was driven by strong Outerwear and International segment results. The Outerwear segment's Gear For Sports business, which was acquired in November 2010, contributed 5 percentage points of the company's 12 percent sales gain and 3 of the 12 cent increase in EPS.

The company's operating margin in the quarter improved to 9.8 percent of sales, up 60 basis points from the year-ago quarter, despite higher cotton and commodity costs of $35 million. Cotton costs for the first quarter were 83 per pound, up from 52 a year ago.

“We had a good quarter and have a positive outlook for our largest segments,” Noll said. “Our International and Outerwear segments continue to contribute strong growth. Gear For Sports is outperforming expectations, helping to drive sales, leverage our infrastructure and expand our Outerwear profitability and margins. Innerwear segment sales were flat and profitability was reduced, but our price increases in the segment were in place for only a portion of the quarter, and we expect profitability to return to historical levels as we continue to increase prices commensurate with input costs.”

Key business segment and brand highlights include:

• Innerwear segment sales were comparable to last year, increasing slightly, although last year's quarter had the benefit of more than $30 million of new program shipments. Increases in sock and male underwear sales were offset by a decline in women's intimate apparel sales. The fact that price increases were only in place for two months in the quarter contributed to a 23 percent decrease in operating profit.
• Hanes, the No. 1 apparel brand in America, continues to air its men's underwear advertising featuring Michael Jordan. New Hanes women's advertising for bras and panties debuted April 11. Playtex launched two additional ads under its Playtex Girl Talk campaign supporting the 18-Hour bra line and the new Playtex Secrets line. Bali”s new One Smooth U bra is selling well, and L'eggs introduced TV advertising in April for the first time in 14 years.
• Outerwear segment sales increased 37 percent with across-the-board strength in Gear For Sports, wholesale casualwear (Hanes), retail casualwear (Just My Size and Hanes), and retail activewear (Champion). The segment's operating profit increased substantially as a result of overall segment strength and the higher margins of Gear For Sports.

Gear For Sports, a leading seller of licensed logo apparel in collegiate bookstores and the leisure/golf channels, had record sales for the NCAA Final Four basketball tournament and increased golf apparel sales in the quarter. Gear's order position is up high single digits for the second and third quarters.

New-product successes for Champion, the fastest growing major brand in activewear, include women's fitness bottoms and men's double dry activewear.

• International segment sales increased 24 percent in the quarter (17 percent excluding currency exchange rates), with strength in all geographies – Canada, Latin America, Asia and Europe. Operating profit increased 86 percent (75 percent excluding currency).
• In the company's smaller segments – Hosiery and Direct to Consumer – net sales and operating profit declined.

2011 Guidance and Macro Trend Discussion

Following strong performance in the first quarter, Hanes increased its full-year guidance for net sales and diluted EPS. Unless otherwise noted, the company's 2011 guidance issued in January remains the same.

The company's new guidance for net sales is $4.9 billion to $5 billion, up from previous guidance of $4.85 billion to $5 billion. Net sales in 2010 were $4.33 billion. The company has raised its EPS guidance to $2.70 to $2.90, up from previous guidance of $2.60 to $2.80. EPS in 2010 was $2.16.

The company expects quarterly double-digit net sales growth for the remainder of the year. The primary contributors are expected to be price increases partially offset by demand elasticity, the Gear For Sports acquisition (5 points of growth), and net shelf-space and consumer spending increases (1 to 2 points each).

The cadence of EPS growth will vary by quarter. In the second quarter, operating profit is expected to increase by double-digits with an operating margin similar to a year ago; EPS may decrease slightly in the quarter because EPS in last year's quarter benefited from a $0.20 tax-rate adjustment.

Earnings expectations reflect multiple price increases put in place through late summer and the expectation of further price increases in the fourth quarter. The company has locked in its cotton requirements for the full year. EPS projections also assume efficiency savings from supply chain optimization and the expectation that added costs in 2010 to service strong growth will not recur in 2011; continued investment in trade and media spending consistent with the company's historical rate; slightly higher interest expense; and a higher full-year tax rate that could range from a percentage in the teens to the low 20s.

Hanes' working capital needs and year-to-date debt levels are unfolding as planned with the company's seasonal inventory build, and the full-year impact of inflation on inventory value is expected to be mitigated by inventory turn improvements. Therefore, Hanes continues to expect free cash flow in 2011 in the range of $100 million to $200 million. The company continues to expect its year-ending debt level to decrease over 2010 by the amount of free cash flow generated in 2011 and expects its year-ending leverage ratio to improve to between 3.0 to 3.5 times EBITDA.

Note on Proprietary Information

As previously communicated, Hanes believes that it has a competitive advantage in managing its business during an inflationary environment as a result of both its supply chain visibility and its extensive knowledge of consumer purchasing behavior. Therefore, the company plans to continue treating certain data, such as future cotton cost positions and price increase details, as proprietary information until actual results are reported.