HanesBrands announced strong second-quarter 2019 results with net sales, operating profit and earnings per diluted share achieving the high end of company guidance.
For the second quarter ended June 29, 2019, net sales increased 3 percent to $1.76 billion. In constant currency, net sales increased 5 percent, the eighth consecutive quarter of organic constant-currency sales growth. Innerwear segment sales met expectations, Activewear segment sales increased more than 10 percent, as expected, and International sales growth of 4 percent exceeded expectations. Global sales of Champion brand activewear and innerwear increased more than 50 percent, excluding the U.S. mass channel.
Second-quarter GAAP operating profit increased 6 percent to $234 million, while adjusted operating profit increased 1 percent to $247 million. GAAP diluted earnings per share of $0.42 increased 8 percent, and adjusted EPS of $0.45 was the same as a year ago.
When reporting first-quarter results on May 7, the company issued second-quarter guidance that called for sales between $1.735 billion and $1.765 billion, GAAP operating profit between $223 million and $233 million, and adjusted operating profit between $238 million and $248 million. GAAP EPS was expected to be $0.40 to $0.42, and adjusted EPS was expected to be $0.43 to $0.45.
“Our successful growth strategies drove strong second-quarter results and first-half momentum, including outstanding Champion brand growth, very effective product innovation, international growth, and continued consumer-direct sales growth,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “This momentum combined with our second-half plans and visibility gives us confidence in our ability to achieve full-year guidance at the midpoint or higher. Champion bookings remain strong, additional product innovation is planned, the outlook for International contributions remains positive, and our operating margin is expanding. We are solidly on track to meet our cash flow and debt leverage goals.”
Callouts for Financial Results and Outlook
Strong Second-Quarter Results Achieved the High End of Company Guidance. The expectations contained in company guidance for the second quarter were net sales of $1.735 billion to $1.765 billion; GAAP operating profit of $223 million to $233 million, with adjusted operating profit of $238 million to $248 million; and GAAP EPS of $0.40 to $0.42, with adjusted EPS of $0.43 to $0.45.
Global Champion Sales Growth Exceeded Expectations, Increasing More Than 50 percent Outside the Mass Channel. Sell-through strength at existing accounts, expanded wholesale distribution, increased consumer-direct sales, successful product offerings, and channel segmentation drove the eighth consecutive quarter of strong double-digit growth for global Champion outside the mass channel.
Champion growth in the second quarter was widespread across geographies, including North America, Europe, Asia and Australia. In China, the company’s retail partner is adding Champion branded stores, and the company has added a second retail partner to accelerate expansion of stores and online sales in 2020.
Worldwide Innovate-to-Elevate Initiatives are Increasing. The company is expanding existing innovation platforms into new product categories and geographies and is introducing new product innovation.
Innerwear initiatives are underway or planned for the Hanes, Maidenform, Bali, DIM and Bonds brands. They include new product launches in bras, cooling innovation in shapewear, compression innovation in hosiery, and the second-generation X-Temp cooling fabric. The bra launches include the EasyLight lightweight bra that uses innovation for barely there comfort without compromising support and the Dream Wire bra that utilizes uniquely padded underwire innovation for comfort.
Champion is taking advantage of new graphic embellishment techniques and leveraging its heritage reverse-weave fabric innovation for new products, including the introduction of sports bras made with comfortable sweatshirt fabric. The Hanes, Alternative, Champion, Bonds and DIM brands have introduced innerwear or activewear products utilizing recycled yarns, recycled polyester, organic cotton, or cellulose-based fabrics.
Double-Digit Growth for Domestic and International Consumer-Directed Sales. Global consumer-directed sales, consisting of company-owned retail stores and all online channel sales, increased 8 percent on a reported basis in the second quarter and represented 23 percent of total sales.
Second-Quarter Cash Flow More Than Doubled and Debt Leverage Declined. Cash flow from operations more than doubled to $137 million in the quarter as a result of improved working capital and net income growth. The company’s debt leverage at the end of the quarter was 3.5 times adjusted EBITDA, down from 3.9 times at the end of the year-ago quarter. The company remains on track to reduce leverage to 2.9 times adjusted EBITDA by the end of the year.
Second-Quarter Business Segment Summaries
Innerwear Segment Results Consistent with Expectations. U.S. Innerwear segment net sales decreased 2 percent in the second quarter, while operating profit decreased 6 percent.
Sales of Innerwear basics decreased 2 percent in the quarter as expected. Sales of Innerwear intimates declined less than 3 percent in the quarter, improving sequentially from the first quarter. Intimates performance reflected continued double-digit growth for shapewear and progress in the company’s bra revitalization initiative.
Activewear Segment Sales and Profits Increased Double-Digits on Strong Champion Growth. U.S. Activewear segment second-quarter net sales increased more than 10 percent and operating profit increased nearly 20 percent. Operating margin increased 120 basis points to 15.3 percent.
Sales for Champion outperformed expectations. Outside the mass channel, Champion sales increased more than 50 percent as a result of strong sell-through, space expansion, new distribution and growth in the consumer-directed, bookstore and distributor channels. The brand’s mass business, C9 by Champion, increased 8 percent on strong sell-through.
For the non-Champion portion of the segment, second-quarter sales declined, as expected, as the company exited commodity-oriented business in the mass channel and continues to focus on remixing sales to improve profitability.
International Segment Growth Continues to be Broad-Based. International segment net sales increased 4 percent as reported and more than 10 percent in constant currency. Operating profit increased 6 percent as reported and 12 percent in constant currency. The segment’s operating margin increased 20 basis points to 14.3 percent on the strength of increased volume and integration synergies.
The innerwear and activewear categories delivered growth internationally. Geographically, constant-currency sales increased by double-digits in Europe and Asia and high-single-digits in Australia.
2019 Financial Guidance
In reiterating its full-year 2019 financial guidance issued Feb. 7, 2019, the company expressed confidence in its ability to achieve net sales at the midpoint or higher and operating profit and EPS at the midpoint. The company has also issued guidance for the third quarter.
The company expects 2019 net sales of $6.885 billion to $6.985 billion, GAAP operating profit of $900 million to $930 million, adjusted operating profit of $955 million to $985 million, GAAP EPS of $1.59 to $1.67, adjusted EPS of $1.72 to $1.80, and net cash from operations of $700 million to $800 million.
At the midpoint, the 2019 guidance versus 2018 results represents net sales growth of approximately 2 percent; GAAP and adjusted operating profit growth of 5 percent and 2 percent, respectively; GAAP and adjusted EPS growth of 7 percent and 3 percent, respectively; and operating cash flow growth of 17 percent.
For the third quarter, net sales are expected to be in the range of $1.84 billion to $1.875 billion, up slightly at the midpoint versus a year ago. GAAP operating profit is expected to be $264 million to $274 million, and adjusted operating profit is expected to be $276 million to $286 million. GAAP EPS is expected to be $0.49 to $0.52, and adjusted EPS is expected to be $0.52 to $0.55.
Guidance Assumptions. Key assumptions in the company’s guidance include: a cautious outlook for the U.S. brick-and-mortar retail market, including the effect of door closures; continued progress in U.S. Innerwear revitalization initiatives; price increases; negative effects of currency exchange rates; and increased marketing investment to support brand plans.
Organic sales in constant currency for 2019 are expected to increase more than 3 percent at the midpoint of full-year guidance and 1.5 percent at the midpoint of third-quarter guidance. Adverse foreign currency exchange rates are expected to reduce net sales as reported by approximately $115 million for the full year and $20 million in the third quarter. For operating profit, adverse foreign currency exchange rates are expected to reduce full-year results as reported by $17 million compared with last year. The company has increased its plans for added brand-building and growth-related investment versus last year by $7 million. The company now expects increased investment this year of $32 million versus prior guidance of $25 million.
Segment Guidance. At the midpoint of full-year guidance, International segment net sales are expected to increase approximately 6 percent and constant-currency organic sales are expected to increase more than 10 percent. Growth drivers are expected to be Champion sales growth in Asia and Europe and increased innerwear sales in Asia, Australia and the Americas, including the Hanes and Bonds brands. For the third quarter, International segment net sales on a reported basis are expected to increase approximately 3.5 percent and nearly 7 percent on a constant-currency basis.
U.S. Innerwear net sales at the midpoint of guidance for both the full year and third quarter are expected to decrease approximately 2 percent, reflecting a cautious outlook for the impact from retail door closings and benefits from price increases taken in the first quarter.
U.S. Activewear net sales growth at the midpoint of 2019 guidance is expected to approach 4 percent. Champion sales outside of the mass channel are expected to increase at double-digit rates each quarter, while the Champion mass business is expected to decrease approximately 10 percent to 11 percent. Full-year sales for the remainder of the Activewear segment are expected to decrease as the company focuses on higher-margin products. The company expects margin expansion for the Activewear segment for the year. For the third quarter, Activewear segment sales are expected to be comparable to the prior year.
Additional Guidance. The midpoint of 2019 guidance implies adjusted operating profit margin consistent year over year.
GAAP operating profit in 2019 is expected to reflect approximately $55 million in pretax charges, including $21 million taken in the first quarter and $13 million in the second quarter, related to acquisition integration and other supply chain actions. Approximately $20 million of the full-year charges are expected to be noncash. The charges reflect the completion of all outstanding acquisition integrations as well as Western Hemisphere supply chain realignment that includes speed-to-market initiatives that are part of the revitalization strategy for U.S. Innerwear.
Hanes expects interest expense and other expenses to be approximately $224 million combined, with an estimated $54 million expected in the third quarter. The company expects capital expenditure investment of approximately $90 million to $100 million. A pension contribution of approximately $26 million made in the first quarter is reflected in operating cash flow guidance.
The company’s priority for use of excess operating cash flow is to pay down debt. The company’s debt leverage on a net-debt-to-adjusted-EBITDA basis is expected to be 2.9 times at year end. Consistent with the company’s seasonality, net cash from operations was a use of $57 million in the first half.
The company expects an annual effective tax rate of approximately 14 percent and slightly less than 366 million shares outstanding for both the third quarter and full year.