HanesBrands announced second-quarter results with double-digit growth in diluted earnings per share despite market disruption from COVID-19. The earnings growth resulted from the company’s ability to pivot to production and sales of personal protective equipment (PPE) combined with relatively strong apparel performance in pandemic conditions, including 68 percent sales growth in the online channel.
HanesBrands said it is focused on serving channels of trade that remain open; reopening production, distribution and selling operations in a safe and prudent manner; generating and preserving cash; and developing a product line of personal protective garments to meet emerging government, commercial and consumer demand.
Net sales for the second quarter ended June 27, 2020, were $1.74 billion, compared with $1.76 billion a year ago. The company sold $752 million in protective garments globally. The year-ago quarter included net sales of $119 million from the now exited C9 Champion mass program and the DKNY intimate apparel license. Excluding the exited programs and foreign exchange rates, total constant-currency net sales for second-quarter 2020 increased 7 percent.
Second-quarter GAAP operating profit increased 5 percent to $242 million, and the quarter’s adjusted operating profit excluding actions increased 41 percent to $305 million.
Second-quarter GAAP EPS increased 12 percent to $0.46, and adjusted EPS excluding actions increased 58 percent to $0.60. (See the Note on Reconciliation of Select GAAP Measures to Non-GAAP Measures later in this news release for additional discussion and details of actions, which include pandemic-related charges.)
“The HanesBrands organization did a phenomenal job overcoming significant challenges in order to mitigate the effects of the global pandemic,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “The professionalism, ingenuity and dedication of our worldwide employees was on display in generating double-digit EPS growth, establishing a new protective garments business line from scratch, and starting the reopening of manufacturing, distribution and selling in the most safe and effective manner possible.
“Despite the effects of pandemic-caused disruptions to global economies, our business is in great shape. We performed significantly better than our base-case scenario in both our apparel business and our new protective garment business. Point-of-sale trends are improving for apparel, and in the case of U.S. Innerwear basics and U.S. Champion, point-of-sale trends in May and June were higher than pre-COVID levels.
“Our brands are strong, and we are gaining market share and building momentum. Our liquidity remains strong allowing us to maintain our quarterly cash dividend and have ample operating flexibility. While there is still near-term uncertainty concerning the ongoing economic impact of the COVID-19 pandemic, we believe we are positioned to drive growth and seize opportunities over the next several years.”
As a result of the COVID-19 pandemic and the lack of visibility to business conditions, Hanes withdrew its quarterly and full-year performance guidance on March 25, 2020. The company then modeled several different financial scenarios based on assumptions of when retailer stores and economies would begin to reopen. Under the company’s base-case scenario, stores were assumed to gradually reopen beginning in late May.
Callouts for results and ongoing operations during the pandemic.
Apparel Sales and Protective Garments Contribute to Results
Apparel sales and protective garment sales both exceeded the company’s base-case scenario for the quarter. The company continues to generate significant sales growth through channels of trade that have remained open during the pandemic, including online, mass retail, dollar store, and food and drug.
On a rebased comparison to a year ago, second-quarter global online sales increased more than 70 percent through company e-commerce websites, retailer websites, large internet pure-plays, and business-to-business customers. Excluding sales of protective garments, approximately 30 percent of total sales in the quarter were through the online channel.
The company sold $752 million in personal protection garments globally to governments, large organizations, consumers and business-to-business customers. The sales of the face masks and medical gowns significantly exceeded initial expectations for the new business lines. As part of the protective-garment sales in the quarter, the company delivered more than 450 million cloth face coverings and more than 20 million medical gowns to the U.S. government.
The company is selling face masks to consumers under its leading brands globally, including Hanes, Champion, Bonds, and Dim, and protective garments represent an ongoing business opportunity. Excluding the potential for additional government contracts, the company estimates that it could sell more than $150 million of protective garments in the second half of 2020.
First-Half Operating Cash Flow Improves Despite COVID-19 Impact
The operating cash flow of $65 million in the second quarter resulted in a first-half operating cash improvement of approximately $40 million versus a year ago. Working capital discipline, temporary cost reductions, and inventory control and production timeouts contributed to cash generation. Inventory declined 12 percent versus a year ago.
Second-Quarter Restructuring Charges Related To Planned Actions And Additional COVID-Related Costs
The company incurred approximately $63 million in both planned restructuring actions and additional COVID-related costs in the second quarter. The previously disclosed planned supply chain restructuring actions accounted for $11 million of second-quarter charges. The remaining $52 million of noncash pandemic-related charges incurred in the second quarter consisted of a $20 million write-down of intangible assets, $11 million of bad debt expense, and approximately $21 million related to canceled orders of specialized seasonal inventory.
Second-Quarter 2020 Business Segment Summaries
As reported, the second-quarter International segment total sales declined 20 percent while operating profit decreased 2 percent. On a constant-currency basis, net sales decreased 17 percent and operating profit decreased by 3 percent.
Apparel performance, excluding protective garments, exceeded the company’s base-case scenario with strong online sales growth and strong point-of-sale trends after closed company and retailer stores began to reopen. Excluding protective garment sales, segment revenue declined 44 percent.
U.S. Innerwear segment results benefited from better-than-expected apparel performance and significant sales of protective garments. The second-quarter segment revenue increased 61 percent and operating profit increased 104 percent. Operating-margin enhancement resulted from fixed-cost leverage and SG&A expense control, including temporary cost reductions.
Apparel performance, excluding protective garments, significantly exceeded the company’s pandemic base-case scenario with revenue decreasing 29 percent. When year-ago results are rebased to reflect the exit of the C9 Champion mass retail program and DKNY intimates license, segment revenue decreased 27 percent.
Innerwear point-of-sale trends excluding protective garments accelerated through the quarter, turning significantly positive in May and June. Innerwear basics gained more than 300 basis points of market share in the quarter, and Innerwear intimate apparel point-of-sale trends returned to pre-COVID levels entering July.
U.S. Activewear second-quarter performance exceeded the company’s base-case pandemic scenario. Segment sales decreased 62 percent as a result of the pandemic-related demand impacts and $98 million of C9 Champion sales in mass retail in the year-ago quarter. The segment recorded an operating loss in the quarter.
When the year-ago quarter is rebased for the C9 Champion program exit, sales decreased 52 percent and operating profit decreased 113 percent. The company maintained Champion marketing investment consistent with the year-ago quarter.
The COVID pandemic resulted in retailer door closures and lower demand for the segment’s printwear and sports apparel businesses. Point-of-sale trends for Champion accelerated as the quarter progressed, and strong positive trends continued in July. Sales through the enhanced Champion.com website increased by nearly 200 percent in the quarter.
2020 Financial Guidance
Due to the continued uncertainty and unpredictability of the COVID-19 pandemic, HanesBrands will not provide quarterly and full-year performance guidance until the visibility of the pandemic’s effect on global economies improves.
The decline in apparel sales in the second quarter was better than the company’s base-case scenario. Absent a slowdown of store reopenings or recurrence of store closures, the company anticipates sequential improvement of sales declines in the third and fourth quarters. U.S. Innerwear sales on the strength of basics could return to rebased year-ago levels by the end of the year.
The company is selling face masks to consumers under its leading brands globally. Excluding the potential for additional government contracts, the company estimates that it could sell more than $150 million of protective garments in the second half of 2020, primarily in the third quarter.
The company expects to generate positive cash flow in the second half.
The fiscal year ending Jan. 2, 2021, includes a 53rd week in the fourth quarter. The company has exited the C9 Champion mass program and DKNY license for intimate apparel. The company expects foreign currency exchange rates to reduce net sales and operating profit in 2020.
The company’s tax rate for the second quarter was 17.3 percent. The company expects its second-half tax rate to be approximately 17.5 percent.
The company repurchased approximately 14.5 million shares in the first quarter and has suspended share repurchases for the remainder of the year. The weighted average of diluted shares outstanding for the second quarter was 351 million.
Photo courtesy Hanes Brands/Champion