HanesBrands, the parent of Champion, Hanes and Gear For Sports, reported net sales for the second quarter ended July 1 of $1.65 billion increased 12 percent, primarily from acquisition contributions. Organic sales trends improved sequentially for the second consecutive quarter, and the company continues to expect organic sales to turn positive and contribute to growth in the second half.
On a GAAP basis, second-quarter operating profit of $229 million increased 3 percent and diluted EPS of 47 cents increased 38 percent. When excluding pretax acquisition-related and integration charges, adjusted operating profit of $255 million and adjusted EPS of 53 cents each increased 4 percent.
Year-to-date net cash from operations was $34 million, a $163 million improvement versus a year ago as a result of working capital improvement initiatives that are expected to drive record cash flow for the year.
“We continued our strong start to 2017 in the second quarter, consistent with our guidance,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “Organic sales trends continued to improve sequentially, acquisitions are contributing value as expected, and our cash-flow efforts, including disciplined inventory management, are generating strong results.
“Our team is doing a great job executing our Sell More, Spend Less, Generate Cash strategies and laying the foundation for taking our performance to the next level in the years to come through our Project Booster initiative. We are planning for the future while executing in the present.”
Key Callouts for Second-Quarter 2017 Results
Acquisitions Deliver Growth. Acquisitions completed in 2016, primarily Champion Europe and Hanes Australasia, contributed approximately $220 million in net sales in the second quarter. Organic sales decreased 3 percent, primarily as a result of the expected lower sales in Innerwear and domestic manage-for-cash businesses as well as an unexpected timing shift of sports apparel sales to the third quarter. However, organic sales trends continued to improve from previous sequential quarters in which organic sales decreased 4 percent in the first quarter of 2017 and 5 percent in the fourth quarter of 2016. Positive organic growth is expected in the third and fourth quarters of 2017.
Continued Growth for Online Sales and Global Champion Activewear. Second-quarter sales in the online channel globally increased approximately 25 percent and represented approximately 9 percent of total sales. Global Champion sales increased 7 percent in the second quarter on a pro forma basis.
Project Booster Progress. Hanes continues to execute its multiyear Project Booster program to generate investment for sales growth, reduce costs and increase cash flow. As expected, the company incurred Project Booster-related expense in the second quarter of approximately $8 million, including funding an employee separation program. For the full year, Project Booster is expected to be cost-neutral with cost savings realized in the second half. By the end of 2019, Project Booster is expected to generate approximately $150 million in annualized cost savings, with annualized reinvestment of approximately $50 million of the savings for targeted growth opportunities.
Business Segment Highlights
Sequential Improvement for Innerwear Sales Trends. Year-over-year segment sales decreased less than 3 percent in the second quarter, compared with lower sales of 6 percent in the first quarter 2017 and 8 percent in the fourth quarter 2016. There was sequential improvement for both the basics and intimates businesses. Operating profit declined 8 percent as a result of lower sales and Project Booster expenses.
Activewear Results Mixed. Activewear sales increased 1 percent. Acquisition benefits and sales growth for Hanes retail and the online channel were partially offset by the later-than-expected licensed sports apparel shipments and the effect of retailer bankruptcies. Operating profit decreased 10 percent, primarily as a result of the impact of retailer bankruptcies and Project Booster expense.
International Segment Growth. Second-quarter segment sales increased 76 percent as a result of acquisitions and strong results in Asia, while operating profit increased 152 percent, benefiting from European acquisition synergies.
2017 Financial Guidance
Hanes has reaffirmed its full-year guidance for 2017 and issued third-quarter guidance for select performance measures.
For 2017, the company expects net sales of $6.45 billion to $6.55 billion, GAAP operating profit of $845 million to $895 million, adjusted operating profit excluding actions of $935 million to $975 million, GAAP EPS for continuing operations of $1.70 to $1.82, adjusted EPS for continuing operations excluding actions of $1.93 to $2.03, and record net cash from operations of $625 million to $725 million.
Compared with 2016 results, the midpoint of 2017 guidance represents net sales growth of 8 percent, GAAP operating profit growth of 12 percent, adjusted operating profit growth of 5 percent, GAAP EPS growth from continuing operations of 26 percent, adjusted EPS growth from continuing operations of 7 percent, and operating cash flow growth of 11 percent.
Third-Quarter Guidance. The company expects total net sales of approximately $1.80 billion in the third quarter, an increase of approximately 2.5 percent compared with the third quarter 2016. More back-to-school shipments are expected to fall in the third quarter than a year ago as retailers time orders closer to sales events.
Third-quarter GAAP EPS is expected to be 54 to 57 cents, and adjusted EPS is expected to be 59 cents to 61 cents. The company expects approximately 368 million weighted average diluted shares outstanding.
Additional Full-Year Guidance. Incremental sales from acquisitions for the year are expected to be approximately $440 million. Full-year organic sales growth is expected to range from flat to up 2 percent, and full-year Innerwear segment sales are expected to be comparable to 2016. In the second half, the company expects organic growth in each of the Innerwear, Activewear and International segments.
Project Booster initiatives are expected to be cost neutral for 2017, with cost savings in the second half split between the third and fourth quarters.
The company expects approximately $15 million in synergy cost benefits in 2017.
In conjunction with continued acquisition integrations in 2017, the company continues to expect to incur an estimated $80 million to $90 million of pretax charges for actions related primarily to Hanes Europe Innerwear, Knights Apparel, Hanes Australasia, Champion Europe, and integration-related supply chain rebalancing.
Guidance for operating cash flow growth in 2017 includes the expected benefits from net income growth and lower pretax cash charges related to acquisitions.
The company continues to expect capital expenditures of approximately $90 million to $100 million in 2017. The company is not required to make a pension contribution in 2017 and does not anticipate making a voluntary contribution, compared with a $40 million voluntary contribution in 2016.
Hanes continues to expect interest expense and other expenses to be approximately $175 million combined. The 2017 full-year tax rate is expected to be comparable to 2016, assuming no changes to U.S. tax law and policy. The company made share repurchases of approximately $300 million in the first quarter and expects approximately 370 million weighted average diluted shares outstanding for the full year.
The company’s brands include Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei, and Gear for Sports.