HanesBrands Sees 19 Percent Fall in Champion Sales

HanesBrands, Inc. reported sales fell 9.5 percent in the third quarter, dragged down by a 19 percent decline at the Champion brand.

HanesBrands’ sales were slightly below guidance, while EPS aligned with targets on improving margins and cost reductions.

Sales of $1.51 billion in the third quarter ended September 30 were below HanesBrands’ guidance in the range of $1.52 billion to $1.57 billion. Adjusted earnings of 10 cents compared to guidance in the range of 7 cents to 13 cents.

“We’ve continued to drive improvement in core fundamentals while simultaneously assessing our business and options to unlock shareholder value,” said Steve Bratspies, CEO. “Despite the difficult global macroeconomic environment, which continues to pressure sales, we delivered meaningful improvement across key performance metrics and initiated an evaluation of strategic alternatives for our global Champion business. Our innerwear innovation is hitting the market, and we’re gaining market share.

“Adjusted margins continue to improve as input cost inflation eases, and we see the benefits of cost savings and efficiency initiatives. We’re reducing inventory, generating operating cash flow in line with historical levels, and paying down debt as planned. We expect further improvement in these key performance metrics in the fourth quarter.”

Highlights

• Input cost inflation continued to ease. The headwinds from commodity and ocean freight inflation continued to ease and represented approximately 135 net basis points of year-over-year gross margin headwind in the quarter, which compares to approximately 245 basis points of year-over-year gross margin headwind in second-quarter 2023 and approximately 310 basis points of year-over-year gross margin headwind in first-quarter 2023. Third quarter GAAP gross margin of 31.1 percent decreased 260 basis points as compared to prior year. Third quarter adjusted gross margin of 35.5 percent increased 100 basis points over prior year. The company remains on track to exit the year with GAAP and Adjusted gross margin in the high 30 percent range.
• Further improved inventory position and generated positive operating cash flow. For the quarter, inventory decreased 17 percent sequentially and 29 percent year-over-year driven predominantly by the benefits of the company’s inventory management capabilities, including SKU discipline and lifecycle management, and the continued sell-through of higher-cost inventory. The improvement in inventory helped generate $155 million of operating cash flow in the quarter and $287 million year-to-date. The company remains on track to generate approximately $500 million of operating cash flow for the full year and exit the year with inventory below $1.5 billion.
• Strengthened balance sheet, including an additional $144 million debt paydown and an increased liquidity position. Through continued positive cash generation, the company paid down $144 million of debt in the third quarter. Year-to-date, the company has paid down approximately $270 million of debt and remains on track to reduce debt by more than $400 million in 2023. In addition, the company proactively amended its credit agreement to provide greater strategic financial flexibility. The company further strengthened its liquidity position to approximately $1.2 billion as of the end of the third quarter.
• Innovation helping drive market share gains in U.S. Innerwear. Revenue from new product innovation is up 40 percent over the prior year in both the third quarter and year-to-date. The company’s Hanes Originals product line, launched earlier this year and supported by a national media campaign, is attracting new and younger consumers to the Hanes franchise. M by Maidenform, a collection of extremely soft-on-the-skin intimate apparel products focused on younger consumers, launched across channels in the quarter with a strong initial consumer response. The company is successfully leveraging its global scale, launching its innovation across geographies: Total Support Pouch in seven countries; Hanes Originals in five countries; and M by Maidenform already in four countries. The company’s robust innovation pipeline provides visibility to new product offerings through 2025.
• Initiated evaluation of strategic alternatives for the global Champion business. On September 19, 2023, the company announced it initiated an evaluation of strategic alternatives for its global Champion business, including, among others, a potential sale as well as continuing to operate the business as part of HanesBrands.

Third-Quarter 2023 Results

• Net sales from continuing operations of $1.51 billion decreased 9.5 percent compared to last year as the challenging global macroeconomic environment continued to pressure the topline. Excluding the $4 million unfavorable impact from foreign exchange rates, net sales on a constant currency basis decreased 9.3 percent. On a constant currency basis, growth in Latin America and Japan as well as consistent performance in U.S. Innerwear was more than offset by a decrease in U.S. Activewear, the continued macroeconomic-driven slowdown in consumer spending impacting Australia, as well as decreases in Europe and parts of Asia.
• Global Champion brand sales decreased 19 percent on a reported basis and 20 percent on a constant currency basis as compared to the prior year. U.S. sales decreased 16 percent driven by the continued challenging activewear market dynamics. The U.S. performance also reflects the expected short-term impact from the company’s continued strategic actions taken to strengthen the brand and position Champion for long-term profitable growth, including disciplined product and channel segmentation, shifting its mix, and assortment changes. Internationally, sales decreased 22 percent on a reported basis and 24 percent on a constant currency basis. Constant currency sales increased in Japan, which was more than offset by decreases in Europe, due to the expected cautious ordering from wholesale partners, as well as the macroeconomic headwinds impacting demand in parts of Asia and Australia.
• Gross profit of $470 million decreased 16 percent and gross margin decreased 260 basis points to 31.1 percent as compared to the prior year. Adjusted Gross Profit, which excludes certain costs related to the company’s Full Potential transformation plan and its global Champion performance plan, was $536 million. Adjusted Gross Margin of 35.5 percent increased 100 basis points as compared to third-quarter 2022, ahead of the company’s outlook. The improvement was driven by a combination of factors, including the overlap of last year’s manufacturing timeout costs and the benefits from select price increases and cost savings initiatives, which more than offset the impact from product mix as well as continued but diminishing headwinds from input cost inflation. As expected, headwinds from commodity and ocean freight inflation continued to ease and represented approximately 135 net basis points of year-over-year margin headwind in the quarter as the company continued to sell through its higher-cost inventory.
• SG&A expenses decreased 4 percent to $404 million as compared to last year. Adjusted SG&A expenses, which exclude certain costs related to the company’s Full Potential transformation plan and its global Champion performance plan, decreased 4 percent, or more than $15 million, year-over-year to $393 million. The year-over-year decrease in adjusted SG&A was driven by benefits from cost savings initiatives, particularly in distribution, disciplined expense management, as well as lower variable expenses, including selling and marketing. As a percent of net sales, adjusted SG&A expense of 26.0 percent increased 160 basis points over the prior year as cost controls and expense efficiencies were more than offset by the overlap of last year’s variable compensation benefit and fixed cost deleverage from lower sales.
• Operating profit and operating margin in third-quarter 2023 were $66 million and 4.4 percent, respectively, compared to $141 million and 8.5 percent, respectively, in the prior year. Adjusted Operating Profit of $143 million decreased from $168 million in third quarter 2022. Adjusted Operating Margin of 9.5 percent decreased by approximately 60 basis points from the prior year.
• Interest and Other Expenses for third quarter 2023 were approximately $82 million as compared to approximately $45 million in the prior year. The increase was driven primarily by higher average interest rates.
• Tax expense for third-quarter 2023 was $23 million. Adjusted Tax Expense, which excluded an approximate $4 million discrete tax benefit in the quarter, was approximately $27 million. For third quarter 2022, the tax expense and adjusted tax expense were $16 million and $21 million, respectively. Effective and Adjusted Tax Rates for third-quarter 2023 were (146.2) percent and 44.5 percent, respectively. For third quarter 2022, the effective tax rate and the adjusted effective tax rate were 17.0 percent. The company’s effective tax rate for third-quarter 2023 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets.
• Loss from continuing operations totaled approximately $(39) million, or $(0.11) per diluted share in third-quarter 2023. This compares to income from continuing operations of $80 million, or $0.23 per diluted share, last year. Adjusted income from continuing operations totaled $34 million, or $0.10 per diluted share. This compares to adjusted income from continuing operations of $102 million, or $0.29 per diluted share, in third quarter 2022.

Third-Quarter 2023 Business Segment Summary

• Innerwear sales were consistent with the prior year, in line with the company’s expectations, as it gained market share despite a low single-digit decrease in the market. Market share gains across its Men’s, Women’s and Socks categories were driven by a combination of retail space gains, a successful back-to-school campaign, improved on-shelf availability and consumer-focused innovation. For the quarter, the company delivered strong sales growth in Women’s led by the continued positive consumer response to its Hanes Originals innovation as well as the launch of its M by Maidenform innovation. This year-over-year sales growth was offset by a decrease in its Men’s business, which experienced a larger part of its seasonal back-to-school shipment in the second quarter of this year as opposed to a larger part of those seasonal shipments occurring in the third quarter of last year.Operating margin of 17.5 percent increased approximately 150 basis points over the prior year driven primarily by the overlap of last year’s manufacturing timeout costs, which more than offset input cost inflation as the company sold through the remainder of its high-cost innerwear inventory.
• Activewear sales decreased 17 percent compared to the prior year. The segment experienced decreases across most channels and brands driven by ongoing headwinds within the activewear category, including soft consumer demand and excess channel inventory. In addition to the category headwinds, Champion sales performance in the U.S. also reflects the expected short-term impact from the company’s continued strategic actions taken to strengthen the brand and position Champion for long-term profitable growth, including a more disciplined product and channel segmentation approach, a shift in mix, and assortment changes.Operating margin for the segment of 6.5 percent increased 770 basis points sequentially. Compared to the third quarter of last year, segment operating margin decreased approximately 510 basis points. The year-over-year decrease was driven by the impact from unfavorable product mix, input cost inflation as the company continues to sell through its higher-cost activewear inventory and lower sales volume. These headwinds more than offset the benefits from the overlap of last year’s manufacturing timeout costs and disciplined expense management.
• International sales decreased 12 percent on a reported basis, including $4 million from unfavorable foreign exchange rates. International sales decreased 11 percent on a constant currency basis compared to the prior year. In constant currency, Innerwear growth in the Americas and Champion growth in Japan were more than offset by a decrease in Australia, which was driven by a very challenging macroeconomic environment, as well as Champion decreases in Europe and parts of Asia.Operating margin for the segment of 12.7 percent decreased approximately 120 basis points compared to the prior year driven primarily by the impact from lower sales volume and input cost inflation, which was partially offset by the benefits from cost savings and efficiency initiatives.

Cash Flow, Balance Sheet and Liquidity

• Total liquidity position at the end of third-quarter 2023 was approximately $1.2 billion, consisting of $191 million of cash and equivalents and approximately $1 billion of available capacity under the company’s credit facilities.
• Based on the calculation as defined in the company’s senior secured credit facility, the Leverage Ratio at the end of third-quarter 2023 was 5.5 times on a net debt-to-adjusted EBITDA basis, which was below its third-quarter 2023 covenant of 6.75 times and compared to 3.9 times at the end of third-quarter 2022.
• Inventory at the end of third-quarter 2023 of $1.52 billion decreased 17 percent sequentially and decreased 29 percent, or $620 million, year-over-year. The year-over-year decrease was driven predominantly by the benefits of its inventory management capabilities, including SKU discipline and lifecycle management, and the continued sell-through of higher-cost inventory.
• Cash flow from operations was $155 million in third quarter 2023 as compared to a use of cash of approximately $(51) million last year. The $206 million year-over-year increase in operating cash flow was driven by improved working capital. Free cash flow was $153 million in third quarter 2023, a $237 million increase from last year’s $(84) million use of cash.

Fourth-Quarter and Full-Year 2023 Financial Outlook
With respect to its 2023 guidance, the company’s outlook reflects, but is not limited to, the following assumptions: a muted global consumer demand environment given the continued macroeconomic uncertainty, and year-over-year improvement in fourth-quarter margins, as lower-cost inventory currently being produced is sold and it anniversaries last year’s manufacturing time-out costs related to its inventory reduction initiative in 2022.

The company is providing guidance on tax expense due to the expected fluctuation of its quarterly tax rate, stemming from the deferred tax reserve matter previously disclosed in the fourth quarter of 2022. Importantly, the reserve does not impact cash taxes. Some portion of the reserve may reverse in future periods.

For fiscal year 2023, which ends on December 30, 2023, the company currently expects, exclusive of any deferred tax reserve reversal:

• Net sales from continuing operations of approximately $5.70 billion, which includes a projected headwind of approximately $65 million from changes in foreign currency exchange rates. This represents an approximate 9 percent decrease as compared to the prior year on a reported basis and an approximate 8 percent decrease on a constant currency basis.
• GAAP operating profit from continuing operations of approximately $309 million.
• Adjusted operating profit from continuing operations of approximately $425 million, which includes a projected headwind of approximately $10 million from changes in foreign currency exchange rates.
• Pretax charges for actions totaling approximately $123 million. These charges include: Full Potential transformation plan-related charges of approximately $31 million and global Champion performance plan-related charges of approximately $85 million, both included in operating profit; as well as refinancing-related charges of approximately $7 million included in interest and other expenses in first-quarter 2023.
• GAAP and Adjusted Interest and Other expenses of approximately $317 million and $310 million, respectively.
• GAAP Tax expense of approximately $71 million. Adjusted Tax expense of approximately $75 million, which excludes a $4 million discrete tax benefit in third-quarter 2023.
• GAAP loss per share from continuing operations of approximately $(0.22).
• Adjusted earnings per share from continuing operations of approximately $0.12.
• Cash flow from operations of approximately $500 million.
• Capital investments of approximately $100 million, consisting of approximately $50 million of capital expenditures and approximately $50 million of cloud computing arrangements. Per GAAP, capital expenditures are reflected in cash from investing activities and certain cloud computing arrangements are reflected in Other Assets within cash flow from operating activities. The approximate $50 million of cloud computing arrangements is factored into the full-year cash flow from operations guidance of approximately $500 million.
• Free cash flow of approximately $450 million.
• Fully diluted shares outstanding of approximately 351 million.

For fourth-quarter 2023, which ends on December 30, 2023, the company expects, exclusive of any deferred tax reserve reversal:

• Net sales from continuing operations of approximately $1.36 billion, which includes a projected headwind of approximately $12 million from changes in foreign currency exchange rates. This represents a decrease of approximately 8 percent as compared to the prior year on a reported basis and approximately 7 percent on a constant-currency basis.
• GAAP operating profit from continuing operations of approximately $116 million.
• Adjusted operating profit from continuing operations of approximately $131 million, which includes a projected headwind of approximately $2 million from changes in foreign currency exchange rates.
• Pretax charges for actions related to the Full Potential transformation plan and the global Champion performance plan of approximately $15 million.
• GAAP and Adjusted Interest and Other expenses of approximately $80 million.
• GAAP and Adjusted Tax expense of approximately $18 million.
• GAAP earnings per share from continuing operations of approximately $0.05.
• Adjusted earnings per share from continuing operations of approximately $0.09.
• Fully diluted shares outstanding of approximately 352 million.

Photo courtesy Champion