HanesBrands reported fourth quarter, earnings and sales growth were affected by an unexpected and substantial slowing of orders in December because of retailer inventory management. Net sales in the quarter decreased slightly to $1.15 billion, and earnings per diluted share were $0.41. Hanes also prepaid $200 million of floating-rate notes in the fourth quarter, reducing long-term debt to $1.8 billion.



For 2012, Hanes expects its core categories to deliver solid results despite inflation and expects to generate record free cash flow. The company expects the wholesale category of its Outerwear segment to lose money because of hypercompetitive pricing and reduce EPS by approximately $0.30, resulting in expected 2012 EPS of $2.50 to $2.60. Net sales in 2012 are expected to increase approximately 2 percent to 4 percent, and free cash flow is expected to total between $400 million and $500 million. The challenges of inflation and the Outerwear wholesale category will primarily be first-half issues, and the company expects to return to normalized profitability no later than the second half.


“We achieved record earnings and sales in 2011 with strong performance in several of our categories, including underwear and socks, although we were disappointed with late fourth-quarter softness that yielded results below our expectations,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “For 2012, we expect to get through the challenges of the inflation overhang and Outerwear wholesale issues while we focus on core growth and delivering strong free cash flow that will be used to reduce long-term debt.”


2012 Guidance and Macro Trend Discussion
Hanes expects net sales for 2012 to increase 2 percent to 4 percent over 2011. The company anticipates sales and profit growth in its Innerwear, International and Direct to Consumer segments, offset by declines in Outerwear, which includes the wholesale category of casualwear and activewear products sold to the screen-print industry that the company sometimes refers to as imagewear. Hanes expects 2012 EPS of $2.50 to $2.60, including the approximate $0.30 loss in imagewear. This compares to EPS of $2.69 in 2011.


Hanes expects growth in the majority of its business categories in 2012. Products are priced appropriately for inflation, the company has added net shelf-space gains for the year, and elasticity of retail unit sales has been consistent with company expectations. Guidance for 2012 is based on the following expectations:

The Innerwear segment is expected to be driven by continued strong performance of the socks and male underwear categories. Product innovation and brand strength have supported successful price increases and have driven increased sales and profitability. Unit elasticity has been consistent with expectations. For 2012, net sales growth from shelf-space gains, tight control of selling, general and administrative expenses, and product pricing are expected to exceed the negative effects of inflation for the year and lead to operating profit growth. 


The Outerwear segment’s retail activewear categories are performing well and are well positioned for continued growth in 2012, although total segment results will be negatively affected by imagewear issues and a reduction in a Just My Size plus-size retail casualwear program.


The company’s Gear For Sports category of licensed logo activewear continues to perform well and is on track to achieve planned synergies in 2012. The Champion retail activewear category remains healthy and has captured additional net shelf-space gains.

 

Hypercompetitive pricein in print-screen market

Outerwear’s imagewear category is being adversely affected by hypercompetitive pricing in the wholesale screen-print market. The company believes pricing in the market’s basic-product promotional sector may remain problematic, and in response Hanes will de-emphasize the promotional basic sector while maintaining its presence in the more profitable premium-product and core-product sectors where the company has a stronger position. Pricing, coupled with historically high cotton costs, will make imagewear unprofitable for the year, especially in the first quarter. As the company reduces its exposure to the promotional sector, imagewear is expected to become smaller but more profitable and less volatile.


First-quarter net sales are expected to be approximately $1 billion. Due to the impact of Outerwear issues and cotton inflation, the company’s gross margin percentage is expected to be in the mid-20s in the first quarter, resulting in a loss per share of up to $0.35. Beyond the first quarter, gross margin as a percent of sales is expected to reach the high 20s in the second quarter with an operating profit margin in the mid- to high single digits. In the second half, gross margins are expected to improve to the low 30s and operating profit margins to the low double digits.


Hanes expects free cash flow in 2012 of $400 million to $500 million, which includes expected pension contributions of $30 million to $35 million and approximately $45 million of net capital expenditures (with a maintenance run rate of $40 million expected for the next three to five years after 2012).


The company’s near-term priority for use of free cash flow is to reduce long-term debt and deleverage its balance sheet. After paying off $200 million in notes in the fourth quarter, Hanes ended 2011 with $1.8 billion of long-term debt. It expects to pay off approximately $300 million in floating-rate notes in 2012. In 2013, the company’s goal is to pay off its $500 million of 8 percent notes, reducing bond debt to approximately $1 billion.


Interest expense in 2012 is expected to be $15 million lower as a result of debt reduction. The full-year tax rate is expected to be in the low double digits, consistent with the average of the past three years.
2011 Financial Highlights and Business Segment Summary
Key business segment highlights include:

Retailers pulled back orders in December


Innerwear results in 2011 were led by strong performance of socks and male underwear. The two cotton-intensive categories had elasticity within expectations despite significant price gaps to competitors in the fourth quarter. A significant pull back in inventory by retailers in December negatively affected shipments and results.

Innerwear sales increased 2 percent with strong single-digit percentage increases for socks and male underwear that were partially offset by declines in intimate apparel. Operating profit increased 5 percent.


In the fourth quarter, segment sales decreased 1 percent, although sock sales increased nearly double-digits with strong growth in both Hanes and Champion branded socks. Operating profit increased 20 percent in the quarter as a result of strong expense control. 


The Outerwear segment had significant sales and profit growth in 2011 with record performance by the company’s Gear For Sports licensed logo apparel operation, strong Champion activewear performance, solid Hanes casualwear performance and three quarters of profitability in the wholesale category.

Outerwear operating profit increased 54 percent for the year on sales growth of 16 percent. In the fourth quarter, operating profit decreased 35 percent on flat sales as a result of lower profitability in the retail casualwear category, which lost a key program, and the wholesale category, which was impacted by competitive pricing.


International segment net sales for the fourth quarter increased 1 percent and operating profit decreased 45 percent, while for the full year net sales increased 14 percent and operating profit increased 6 percent.

 

The Direct-to-Consumer segment net sales decreased 2 percent in the fourth quarter and decreased 1 percent for the full year, while operating profit decreased 6 percent in the fourth quarter and increased 10 percent for the year. The Hosiery segment’s sales increased 1 percent in the fourth quarter and decreased 2 percent in 2011; operating profit decreased 16 percent in the fourth quarter and decreased 13 percent for the year. 

Regarding working capital, cash from operations increased 26 percent to $168 million, which included $28 million in pension contributions. After net capital expenditures, free cash flow of $91 million also increased 26 percent. Year-end inventories increased 22 percent to $1.6 billion as a result of inflation and additional units to support International segment growth.

The company deleveraged its balance sheet by paying off $200 million of floating-rate notes in the fourth quarter. In the year-ago fourth quarter, the company incurred expenses to refinance debt that reduced EPS by $0.14.
 


























































































































































































































































































































































































HANESBRANDS INC.


Condensed Consolidated Statements of Income


(Amounts in thousands, except per-share amounts)


(Unaudited)

Quarter Ended Year Ended
December 31, 2011 January 1, 2011 % Change December 31, 2011 January 1, 2011 % Change
Net sales $ 1,145,315 $ 1,149,659 -0.4 % $ 4,637,143 $ 4,326,713 7.2 %
Cost of sales 812,152 801,001 3,096,772 2,911,944
Gross profit 333,163 348,658 -4.4 % 1,540,371 1,414,769 8.9 %
As a % of net sales 29.1 % 30.3 % 33.2 % 32.7 %
Selling, general and
administrative expenses 257,875 267,047 1,062,090 1,010,581
As a % of net sales 22.5 % 23.2 % 22.9 % 23.4 %
Operating profit 75,288 81,611 -7.7 % 478,281 404,188 18.3 %
As a % of net sales 6.6 % 7.1 % 10.3 % 9.3 %
Other expenses 4,082 15,093 6,377 20,221
Interest expense, net 37,752 39,842
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