HanesBrands, Inc. reported sales and earnings for the second quarter were negatively impacted by a ransomware attack as well as softer-than-expected point-of-sale trends. Global Champion brand sales decreased 20 percent over the prior year in constant currency. The parent of Champion and Hanes significantly reduced its guidance for the year.

“Our second quarter results fell below our expectations as a result of unexpected events and the difficult global operating environment,” said Steve Bratspies, CEO, HanesBrands. “Despite the challenges, we continue to make progress on our Full Potential plan. We are in the early stages of our strategic supply chain initiatives. Our innovation pipeline is more robust than it has been in years, and we continue to invest in building our global brands. I want to thank our associates around the globe for their ongoing commitment to serving our consumers and customers.”

Second-Quarter Highlights

  • The rollout of new innerwear products and innovation is driving positive consumer and retailer response in addition to retail space gains. New products were launched across men’s and women’s, including Hanes Total Support Pouch with X-Temp and HanesRetro Rib. The company is also building global innovation platforms around absorbency, which represents an opportunity for the Bonds and Hanes brands across multiple new usage occasions.
  • The company purchased the Champion trademark for footwear in North America, representing an expanded opportunity for the brand. The purchase gives the company greater control of the global Champion brand and products. In addition, the company will be able to deliver head-to-toe offerings across geographies through greater global coordination of design, product development and merchandising. The company also continued to simplify its Champion distribution network in the U.S. to generate efficiencies and cost savings, improve service to its retail partners and support future growth.
  • Early stages of executing its Full Potential supply chain strategies to build on its advantaged position and to balance speed, cost and flexibility for faster top-line growth and higher margins. These efforts involve segmenting its supply chain and previously mentioned plans to optimize its U.S. distribution network. In addition to consolidation in the Champion distribution network in the U.S., the company began direct shipping innerwear product from its Central American manufacturing facilities to certain wholesale customers. The company’s West Coast distribution center, which will support its DTC business, is on-track to open this month. The company is also adding automation to several distribution centers to improve picking and sorting speeds while lowering costs.

Second-Quarter 2022 Results

  • Net sales from continuing operations of $1.51 billion decreased $238 million, or 14 percent, over the prior year. The lower-than-expected sales performance was driven by the impact from the previously announced ransomware attack as well as softer-than-expected POS trends. Adjusting for the $38 million unfavorable impact from foreign exchange rates, net sales decreased 11 percent on a constant currency basis.
    • Net sales, excluding PPE, increased 75 percent on a two-year stack basis.
    • Global Champion brand sales decreased 20 percent over the prior year in constant-currency, or 23 percent on a reported basis with similar declines in both the U.S. and internationally. On a two-year stack basis, constant-currency Champion brand sales increased 96 percent globally.
  • Gross Profit of $572 million declined 16 percent as compared to the prior year. Gross margin was 37.8 percent, down from 38.9 percent in the prior year. Adjusted Gross Profit, which excludes certain costs related to the company’s Full Potential plan, was $573 million compared to $684 million last year. Adjusted Gross Margin of 37.8 percent declined approximately 120 basis points compared to prior year. The margin decline was driven by impact from lower sales volume, input cost inflation, the incremental costs associated with the cyber event and foreign currency exchange rates. These headwinds more than offset the benefits from the business mix, the first-quarter price increase in its Innerwear business, cost savings and less air freight.
  • SG&A expenses were $425 million as compared to $464 million in the second quarter of last year. Adjusted SG&A expenses, which exclude certain costs related to its Full Potential plan, were $419 million compared to $447 million last year. As a percent of net sales, adjusted SG&A expense of 27.7 percent increased approximately 215 basis points compared to prior year. The year-over-year deleverage in SG&A was driven by lower sales volume and planned increased investments in brand marketing and technology, which more than offset cost controls and expense efficiencies from Full Potential initiatives in the quarter.
  • Operating Profit and Operating Margin in the second quarter of 2022 were $147 million and 9.7 percent, respectively, which compared to $217 million and 12.4 percent, respectively, in the prior year. Adjusted Operating Profit of $154 million declined $82 million as compared to the second quarter 2021. Adjusted Operating Margin of 10.2 percent declined approximately 335 basis points over prior year.
  • The GAAP and Adjusted Effective Tax Rates for second-quarter 2022 were both 17.0 percent. For the second quarter of 2021, GAAP and adjusted effective tax rates were 14.6 percent and 14.2 percent, respectively.
  • Income from continuing operations totaled $93 million, or $0.26 per diluted share. This compares to income from continuing operations of $148 million, or $0.42 per diluted share, last year. Adjusted income from continuing operations totaled $98 million, or $0.28 per diluted share. This compares to adjusted income from continuing operations of $165 million, or $0.47 per diluted share, in second-quarter 2021.

Sales in the quarter of $1.51 billion were well below guidance in the range of $1.68 billion to $1.73 billion. Adjusted earnings per share of 28 cents compared with guidance in the range of 32 cents to 36 cents.

Second-Quarter 2022 Business Segment Summary

  • Innerwear sales decreased 12 percent compared to last year as the impact of the cyber event and softer-than-expected POS trends more than offset the benefits from the first-quarter price increase and retail space gains. On a two-year stack basis, Innerwear sales increased 50 percent in the quarter. Operating margin of 20.7 percent decreased by approximately 320 basis points compared to the prior year. The impact from input cost inflation, lower sales volume and an unfavorable product mix more than offset the benefit from higher prices and SG&A cost controls.
  • Activewear sales declined 18 percent over the prior year. The company experienced continued growth in the collegiate channel in the quarter, which was more than offset by declines in its other channels due to headwinds from POS trends, retailer inventory levels and the impact from the cyber event. By brand, Champion sales within the Activewear reporting segment decreased 25 percent as compared to the prior year and increased more than 115 percent on a two-year stack basis. Sales of other activewear brands within the Activewear reporting segment decreased 8 percent over prior year in the quarter and increased approximately 130 percent on a two-year stack basis.
  • Operating margin for the segment of 6.9 percent decreased approximately 325 basis points compared to prior period as lower volume, increased brand investments and an unfavorable product mix more than offset the benefits from SG&A cost controls.
  • International sales, on a constant currency basis, decreased 3 percent compared to prior year. Sales declined at a low-single-digit rate in Europe and Australia, which more than offset growth in the Americas. Constant-currency sales in Asia were consistent with prior year. Including the $38 million impact from unfavorable foreign exchange rates, International sales decreased 11 percent on a reported basis.
  • Operating margin for the segment of 13.2 percent increased approximately 25 basis points over prior year driven by SG&A cost controls.

Cash Flow, Balance Sheet and Stockholder Capital Returns

  • Total liquidity position at the end of second-quarter 2022 was nearly $1.0 billion, consisting of $248 million of cash and equivalents and approximately $720 million of available capacity under its credit facilities.
  • Based on the calculation as defined in the company’s senior secured credit facility, the Consolidated Net Total Leverage Ratio at the end of second-quarter 2022 was 3.5 times on a net debt-to-adjusted EBITDA basis as compared to 2.9 times at the end of second-quarter 2021.
  • Inventory at the end of second-quarter 2022 was $2.09 billion, an increase of 37 percent over prior year. The increase was driven predominantly by higher inflation on input and transportation costs, lower sales, and the early arrival of product related to third-quarter commitments. Inflation alone represented essentially half of the year-over-year increase. The company is confident in the quality of its inventory as approximately 80 percent of the year-over-year increase is in replenishment innerwear categories. On a unit basis, inventory increased 19 percent over the prior year. Through various mitigation initiatives that have been put in place, the company expects to end 2022 with lower units in inventory as compared to year-end 2021.
  • Cash flow from operations was a use of $210 million in the second-quarter 2022 driven primarily by the working capital impact from higher inventory.
  • The company’s Board of Directors declared a regular cash dividend of $0.15 per share to be paid on September 14, 2022 to stockholders of record on the close of business August 24, 2022. The declared dividend represents the company’s 38th consecutive quarterly return of cash to stockholders. The company did not repurchase any shares in the second quarter and has approximately $575 million remaining under its current repurchase authorization.

Update On Cyber Event In Late May
Second quarter results were impacted by the previously disclosed cyber event, which temporarily affected the company’s global supply chain network and limited its ability to fulfill customer orders for approximately three weeks. Despite the disruption, the company shipped all Innerwear back-to-school seasonal commitments on time and in full.

At this time, the company believes the cyber event has been contained. There is no ongoing operational impact on the company’s ability to provide its products and services. The company estimates the cyber event negatively impacted the second-quarter 2022 results by approximately $100 million in net sales, $35 million dollars in adjusted operating profit, and $0.08 in adjusted earnings per share.

Third Quarter And Full-Year 2022 Financial Outlook
The company has taken a more prudent view of its second-half net sales and profit outlook to reflect the changes in foreign currency exchange rates, short-term costs associated with actions to reduce inventory by year-end and an assumption that slow consumer demand continues and the retail environment remains challenging.

For third-quarter 2022, which ends on October 1, 2022, the company currently expects:

  • Net sales from continuing operations of approximately $1.73 billion to $1.78 billion, which includes a projected headwind of approximately $58 million from changes in foreign currency exchange rates. At the midpoint, this represents 1 percent growth over the prior year on a constant-currency basis or a 2 percent decline on a reported basis;
  • GAAP operating profit from continuing operations to range from approximately $129 million to $149 million;
  • Adjusted operating profit from continuing operations ranges from approximately $160 million to $180 million and includes a projected headwind of approximately $8 million from changes in foreign currency exchange rates;
  • Charges for actions related to Full Potential of approximately $31 million;
  • Interest and other expenses of approximately $44 million;
  • An effective tax rate of approximately 17 percent on both a GAAP and adjusted basis;
  • GAAP earnings per share from continuing operations to range from approximately $0.20 to $0.25;
  • Adjusted earnings per share from continuing operations to range from approximately $0.27 to $0.32;
  • Fully diluted shares outstanding of approximately 350 million; and
  • Earnings per share and fully diluted share count guidance exclude any potential impact from future share repurchases.

For fiscal-year 2022, which ends on December 31, 2022, the company currently expects:

  • Net sales from continuing operations of approximately $6.45 billion to $6.55 billion, which includes a projected headwind of approximately $165 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 2 percent decline as compared to prior year on a constant currency basis and a 4 percent decline on a reported basis;
  • GAAP operating profit from continuing operations to range from approximately $570 million to $620 million;
  • Adjusted operating profit from continuing operations ranges from approximately $630 million to $680 million, which includes a projected headwind of approximately $22 million from changes in foreign currency exchange rates;
  • Charges for actions related to Full Potential of approximately $60 million;
  • Interest and other expenses of approximately $161 million;
  • An effective tax rate of approximately 17 percent on both a GAAP and adjusted basis;
  • GAAP earnings per share from continuing operations to range from approximately $0.97 to $1.09;
  • Adjusted earnings per share from continuing operations to range from approximately $1.11 to $1.23;
  • Cash flow from operations to essentially break even;
  • Capital expenditures of approximately $150 million to $175 million;
  • Fully diluted shares outstanding of approximately 351 million; and
  • Earnings per share and fully diluted share count guidance exclude any potential impact from future share repurchases.

Previously, sales were expected between $7.0 billion to $7.15 billion. Adjusted EPS was projected to arrive between $1.64 to $1.81.

Photo courtesy HanesBrands/Champion