Hanesbrands Inc.'s third quarter net sales were $1.12 billion were down by 1.7% from $1.14 billion in the year-ago quarter ended Oct. 1, 2005. Discontinuance of low-margin product lines and lower sales of sheer hosiery primarily accounted for the decrease.
Hanesbrands began operating as an independent publicly traded company on Sept. 5, 2006. During the 13-week quarter, Hanesbrands operated for approximately 9 1/2 weeks as Sara Lee Corporation's branded apparel business in the Americas and Asia.
“We are pleased to have successfully completed our spinoff in the quarter and are focused on driving results, executing our strategies and establishing the base from which to achieve our long-term growth goals,” Hanesbrands Chief Executive Officer Richard A. Noll said. “The results for our September quarter and comparisons to a year ago are influenced by the spinoff from Sara Lee and the resulting capital structure of the company that took place in the quarter.”
“Our year-over-year sales decline was expected due to the exit from low-margin sales and as a result of continued sheer hosiery sales declines that are following a decade-long downward trend,” Noll said. “Core sales were generally consistent with last year.”
Operating profit decreased by 9.6% to $93.9 million from $103.8 million a year ago. The operating profit decline in the current quarter primarily reflected expenses associated with operating as an independent company, nonrecurring spinoff and related costs, and restructuring and related charges for plant closures.
Excluding costs for the spinoff and restructuring in the current and year-ago quarters (details in Table 4), operating profit increased by 15.7% to $124.6 million from $107.7 million a year ago. The increase in adjusted operating profit was a result of reduced corporate allocations associated with Sara Lee ownership, the benefits of previous cost-reduction actions and beneficial timing of certain costs between the September and December quarters.
Net income was $50.3 million, down 39.1% from $82.6 million a year ago. The decrease in net income primarily reflects increased interest expense, reduced operating profit and a higher income tax rate.
Interest expense increased in the September quarter to $17.6 million from $4.1 million a year ago. The increase is a result of higher debt incurred 3 1/2 weeks before the end of the quarter as a result of the spinoff from Sara Lee Corporation. Long-term debt at the end of the quarter was $2.6 billion.
The income tax rate for the quarter was 34.0 percent, up from 17.2 percent a year ago as a result of Hanesbrands' independent tax structure.
“We are making good progress in the execution of our long-term growth strategies,” Noll said. “In the past year, we have continued to invest in our brands and innovate with our product lines, particularly in the area of comfort for consumers. We have had success with Hanes products featuring ComfortSoft waistbands, continued strong growth of our C-9 by Champion products, and a very strong launch of a front-close Playtex 18-Hour bra, which has quickly become one of the best-selling bras in the country.
“We also are fully engaged in creating a lower-cost global supply chain. In September, we announced plans to close three manufacturing facilities and relocate work to lower-cost facilities in the Western Hemisphere. Two weeks ago, we announced plans to consolidate three distribution centers in the United States in order to generate increased efficiency.
“And last week we announced that we have entered into a definitive agreement to purchase a sewing operation in Thailand, our first owned sewing operation in Asia. Our strategy is to have a low-cost supply chain, and in today's environment, that requires that we operate on a global basis, with a balance in the long run between the Western and Eastern hemispheres. We are making excellent progress and creating significant momentum in the execution of our global supply chain strategy.”
Long-Term Growth Goals
After establishing its first-year base performance in fiscal year 2007, which is discussed later in this press release, Hanesbrands has growth goals that include:
Long-term annual revenue growth of 1 percent to 3 percent, excluding acquisitions.
Long-term annual operating profit growth of 6 percent to 8 percent, excluding the effect of restructuring charges.
Long-term annual double-digit growth in diluted EPS, excluding the effect of restructuring charges.
The company expects to incur approximately $250 million in restructuring and related charges over the next three years to implement its cost-savings plan. About half of these charges are expected to be noncash. The total includes the $27 million associated with the plant closures announced in September 2006 and approximately $8 million associated with the distribution center consolidation announced in October 2006.
“Combining our revenue growth with the significant cost-savings initiatives we have planned via consolidation opportunities and supply chain improvements, we will be able to generate even greater growth for operating income, excluding restructuring costs,” Noll said. “And with our anticipated ability to reduce debt and interest expense, we believe we can achieve sustainable double-digit diluted EPS growth.”
Fiscal 2007 – Establishing a Solid Base for Long-Term Growth
The Hanesbrands board of directors has approved changing the company's fiscal year end from the Saturday closest to June 30 to the Saturday closest to Dec. 31. The 52-week fiscal 2007 will begin on Sunday, Dec. 31, 2006, and end on Saturday, Dec. 29, 2007. Results for quarter ended Sept. 30, 2006, and the quarter ending Dec. 30, 2006, will be reported as a transition, or stub, period.
In fiscal 2007, Hanesbrands has a goal of establishing a solid base on which to execute long-term growth. The company will have overlapped the net sales effect of exiting low-margin sales in fiscal 2006, and therefore, its current annual sales run rate of approximately $4.5 billion reflects a good baseline from which to build.
While Hanesbrands will incur increased costs as a stand-alone company and plans to increase investment behind its strategies, the company has a goal to substantially offset these increases with cost reductions as well as the elimination of corporate allocations associated with previous Sara Lee ownership. Hanesbrands believes that achieving this goal could allow its operating profit margin in the next fiscal year, excluding restructuring, to approach 9 1/2 percent, similar to the operating margin in its most recently completed fiscal year ended July 1, 2006.
Interest expense will increase significantly in fiscal 2007 due to the capital structure implemented for the spinoff. Based on the current London Interbank Offered Rate, Hanesbrands' weighted average interest rate is expected to be approximately 8.25 percent with the rate fixed on more than half of the debt. The company's effective tax rate may fluctuate but is expected to average approximately 30 percent to 35 percent. Both interest expense and the tax rate will significantly decrease net income and EPS when compared with historical financial results as reported under ownership of Sara Lee Corporation.
“We believe that the ending balance sheet for the September quarter is a reasonable baseline for the business,” said Hanesbrands Chief Financial Officer E. Lee Wyatt. “We are focused on the opportunity to improve the balance sheet by $100 million between now and the end of fiscal 2007 by improving payables, receivables, inventory and our cash balance.
“Financially, we are committed to funding business growth and our supply chain strategy, and the remaining cash flow will be used primarily for debt reduction over the next couple of years. We are comfortable that our cash flow will allow the company to service its initially above-average level of leverage.”
Hanesbrands does not envision any significant commercial acquisitions, although tactical acquisition opportunities may be considered to accelerate the company's global supply chain and cost-reduction strategy. Hanesbrands does not currently plan to pay a dividend.
Noll added, “We have the competitive strengths and strategic potential to generate long-term annual increases in sales and income. We are investing in our strongest brands, such as Hanes, Champion, Playtex and Bali, that have leading market shares in high-volume apparel categories. We are also investing in cost-reduction actions and a global supply chain to gain competitive advantage. The combination of these brand-building and cost-savings efforts, supported by strong cash flow, is a very powerful model for creating value.”
HANESBRANDS INC. Condensed Combined and Consolidated Statements of Income (Unaudited) (In thousands, except per-share amounts) Quarter Ended ------------------------- September 30, October 1, 2006 2005 % Change ------------- --------------------- Net sales Innerwear $ 651,183 $ 662,387 Outerwear 318,320 305,117 Hosiery 56,707 67,361 International 93,126 92,153 Other 10,796 22,585 ------------- ----------- 1,130,132 1,149,603 Less: Intersegment 11,164 11,642 ------------- ----------- 1,118,968 1,137,961 -1.7% Cost of sales 753,337 768,442 ------------- ----------- Gross profit 365,631 369,519 -1.1% As a % of net sales 32.7% 32.5% Selling, general, and administrative expenses 262,426 265,927 As a % of net sales 23.5% 23.4% Restructuring 9,313 (228) ------------- ----------- Operating profit 93,892 103,820 -9.6% As a % of net sales 8.4% 9.1% Interest expense, net 17,569 4,083 ------------- ----------- Income before income taxes 76,323 99,737 Income tax expense 25,978 17,133 ------------- ----------- Net income $ 50,345 $ 82,604 -39.1% ============= =========== Earnings per share (1): Basic $ 0.52 $ 0.86 Diluted $ 0.52 $ 0.86 Weighted average shares outstanding (1): Basic 96,306 96,306 Diluted 96,319 96,306