HanesBrands, the parent of Champion, reported that consistent with the company’s expectations, net sales in the second quarter decreased 3 percent to $1.47 billion.
The company said the decline was a result of comparisons with strong performance in the year-ago quarter that included expanded shelf space for product launches.
On a GAAP basis, operating profit of $221 million increased 59 percent and earnings per diluted share of 34 cents increased 48 percent. When excluding pretax charges related to acquisitions, integrations and other actions and debt refinancing, adjusted operating profit of $246 million decreased 7 percent, and adjusted EPS of 51 cents increased 2 percent.
All adjusted consolidated measures and comparisons exclude approximately $72 million of pretax charges in the second quarter of 2016 and $126 million of pretax charges in the second quarter of 2015 related to acquisitions and other actions.
The second-quarter and year-to-date results are in line with the company’s plans and consistent with the underlying assumptions for the company’s full-year 2016 guidance. The company has updated 2016 GAAP guidance for operating profit and EPS, and has reaffirmed 2016 guidance for net sales, adjusted operating profit and adjusted EPS and net cash from operations. The company’s 2016 guidance calls for net sales of $6.15 billion to $6.25 billion, GAAP operating profit of $760 million to $795 million, adjusted operating profit of $940 million to $975 million, GAAP EPS of $1.44 to $1.54, adjusted EPS of $1.89 to $1.95, and net cash from operations of $750 million to $850 million.
“We are confident in our plans for the year, with our sales, operating profit and EPS performance all tracking right in line with our expectations and consistent with our full-year guidance,” said Hanes Chief Operating Officer and CEO-Elect Gerald W. Evans Jr. “The second quarter, while having a tough comparison as expected to a strong year-ago quarter, came in on plan overall. Our growth initiatives for the second half are unfolding as planned and are tracking to our full-year guidance of 8 percent growth in net sales at the midpoint and double-digit growth in EPS.”
Key Call-Outs for First-Half and Second-Quarter 2016 Financial Results
Acquisition Contributions. Hanes continues to derive benefits and synergies from the Maidenform, Knights Apparel, Hanes Europe Innerwear and Champion Japan acquisitions and integration. Additionally, the company completed its acquisition of Champion Europe on June 30, 2016, during the second quarter, and completed its acquisition of Pacific Brands Limited of Australia on July 14, 2016.
Operating Cash Growth and Cash Deployment Benefits. Hanes generated a second-quarter record for net cash from operations, in part due to benefits from successful inventory-related actions. EPS is benefiting from the company’s cash deployment strategy, including repurchases of more than 25 million shares made in 2015 and early in 2016.
2016 Financial Guidance
Based on year-to-date results and expectations for the second half, Hanes has reaffirmed its full-year guidance for net sales and net cash from operations, updated its GAAP guidance for operating profit and EPS and reaffirmed its guidance for non-GAAP adjusted operating profit and EPS. The company has also decided to provide guidance for the cadence of net sales and earnings in the second half of 2016 because of the timing of the recent acquisitions of Champion Europe and Pacific Brands and their associated seasonality.
Hanes expects net sales of approximately $6.15 billion to $6.25 billion, representing growth of 8 percent over 2015 at the midpoint. The company continues to expect record net cash from operations of $750 million to $850 million for 2016.
On a GAAP basis, diluted EPS is expected to be in the range of $1.44 to $1.54, compared with the previous range of $1.51 to $1.57. GAAP operating profit is expected to be in the range of $760 million to $795 million, compared with previous guidance of $780 million to $815 million. At the midpoint of guidance, the company expects growth of 41 percent and 31 percent for EPS and operating profit, respectively.
On a non-GAAP basis, which excludes debt refinancing and acquisition-related actions, adjusted EPS guidance remains $1.89 to $1.95, and adjusted operating profit guidance remains $940 million to $975 million. The guidance represents growth of 16 percent and 11 percent, respectively, at the midpoint.
Guidance for adjusted operating profit and adjusted EPS excludes an estimated $180 million of pretax charges for debt refinancing and acquisition, integration and other actions related to Hanes Europe Innerwear, Knights Apparel, Champion Japan, Champion Europe and Pacific Brands. The pretax charge is $20 million higher than previous guidance.
The company expects capital expenditures of approximately $90 million, up $15 million from previous guidance, due to the acquisitions of Champion Europe and Pacific Brands. Hanes continues to expect interest expense and other expenses to be approximately $150 million combined. Expectations for the 2016 full-year tax rate percentage remain in the high single-digits.
Full-year guidance also reflects the tax-rate effect of the new FASB Accounting Standards Update related to accounting for stock compensation, and excludes non-core Pacific Brands businesses that are expected to be divested and reported on a discontinued-operations basis.
The company’s guidance incorporates expectations for the acquisitions of Champion Europe and Pacific Brands. The timing and seasonality of these acquisitions will favor the fourth quarter versus the third quarter. Approximately 55 percent of the net sales contributions from these acquisitions for 2016 will occur in the fourth quarter, as well as the entire EPS contribution.
Therefore, the company expects total company net sales for the remainder of the year to be slightly greater in the third quarter than the fourth quarter. GAAP EPS is expected to be in the range of 43 cents to 45 cents for the third quarter, and in the range of 47 cents to 55 cents for the fourth quarter. Adjusted EPS is expected to be in the range of 55 cents to 57 cents in the third quarter, and in the range of 57 cents to 61 cents in the fourth quarter, when excluding pretax charges related to acquisitions, integration and debt refinancing of approximately $50 million in the third quarter and approximately $33 million in the fourth quarter.
Hanes has updated its quarterly frequently asked questions document, which is available at www.Hanes.com/faq.
Change in Segment Reporting
As a result of a shift in management responsibilities, the company decided in the first quarter of 2016 to move its wholesale e-commerce business, which sells products directly to retailers, from the direct-to-consumer segment to the respective innerwear and activewear segments. In addition, revisions were made to the manner in which certain selling, general and administrative expenses are allocated. Prior-year segment sales and operating profit results have been revised to conform to the current-year presentation.
Note on Adjusted Measures and Reconciliation to GAAP Measures
To supplement its financial guidance prepared in accordance with generally accepted accounting principles, Hanes provides quarterly results and guidance concerning certain non-GAAP financial measures, including adjusted operating profit and adjusted EPS. Adjusted EPS is defined as diluted EPS excluding actions. Adjusted operating profit is defined as operating profit excluding actions.
Hanes expects to incur approximately $180 million in pretax charges for 2016 related to debt refinancing and the acquisitions and integration. Non-GAAP adjusted operating profit guidance reflects GAAP guidance adjusted by adding back the approximately $180 million of expected pretax charges for debt refinancing, as well as acquisition and integration expenses.
In the first and second quarters of 2016, Hanes incurred approximately $25 million and $72 million, respectively, in pretax charges related to financing and actions related to acquisitions and integration (Hanes Europe Innerwear, Knights Apparel and the company’s Champion Japan licensee in the first quarter as well as Hanes Europe Innerwear, Knights Apparel, Champion Japan, Champion Europe and pre-funding for Pacific Brands in the second quarter).
In the first and second quarters of 2015, the company incurred approximately $43 million and $126 million, respectively, in pretax charges related to acquisitions, primarily Hanes Europe Innerwear, and other actions. See Table 5 attached to this press release for more details on pretax charges for actions.
The company believes providing quarterly results and guidance for adjusted EPS and adjusted operating profit provides investors with an additional means of analyzing the company’s performance absent the effect of acquisition-related expenses and other actions. However, non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
The company’s brands include Hanes, Champion, Playtex, DIM, Bali, Maidenform, Bonds, JMS/Just My Size, L’eggs, Wonderbra, Nur Die/Nur Der, Lovable, Berlei and Gear for Sports.
