HanesBrands Sees 25 Percent Q3 Growth For Champion

HanesBrands announced inline third-quarter 2019 results, significant net debt reduction, and increased the midpoint guidance for full-year 2019 net sales and diluted earnings per share. Quarter results included growth for net sales, operating profit and EPS.

For the quarter ended Sept. 28, 2019, net sales increased 1 percent to $1.87 billion as reported and increased 2 percent in constant currency. International sales growth of 7 percent as reported and 11 percent in constant currency exceeded expectations with growth in both activewear and innerwear. Global sales of Champion activewear and innerwear increased 25 percent as reported and increased 26 percent in constant currency, both excluding the U.S. mass channel.

Third-quarter GAAP operating profit increased 5 percent to $270 million, while adjusted operating profit increased 1 percent to $280 million. GAAP diluted earnings per share of $0.51 increased 9 percent, and adjusted EPS of $0.54 increased 4 percent. (See the Note on Adjusted Measures and Reconciliation to GAAP Measures section later in this news release for additional discussion and details.)

“We are proud to have met or exceeded our financial guidance for each of the first three quarters of the year, and we have now raised the midpoint of 2019 guidance for net sales and EPS,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “We have a strong diversified business model across geographies and product segments. Our International businesses are outperforming, global Champion growth continues, we are thriving in the consumer-direct channels, and we are charting a path back to growth for our U.S. Innerwear businesses through innovation and brand investment. We are driving significant operating cash flow growth, which was up approximately $100 million in the quarter, and we have reduced our net debt by nearly a half-billion dollars since a year ago at this time. Our long-term outlook is strong.”

Callouts for Financial Results and Outlook

Third-Quarter Results Include Strong Net Sales and EPS Performance. Performance for all measures in the third quarter were in line with company guidance, with net sales and EPS toward the higher end of guidance. Company guidance for the third quarter were net sales of $1.84 billion to $1.875 billion ($1.87 billion actual); GAAP operating profit of $264 million to $274 million ($270 million actual), with adjusted operating profit of $276 million to $286 million ($280 million actual); and GAAP EPS of $0.49 to $0.52 ($0.51 actual), with adjusted EPS of $0.52 to $0.55 ($0.54 actual).

Global Champion Constant-Currency Sales Increased 26 percent in the Third Quarter. Champion achieved its ninth consecutive quarter of strong double-digit global sales growth in constant currency, excluding the U.S. mass channel. The growth was broad-based by geography, by product segment and by channel. Domestic Champion sales increased 29 percent, and international Champion sales increased 24 percent, with double-digit gains in Europe, Asia, and Australia. Sales also increased by double-digits in the activewear and innerwear product segments. For the year, Champion constant-currency sales have increased by approximately $470 million in just the first three quarters versus full-year 2018 growth of approximately $360 million.

In the third quarter, the company also entered an agreement to add a distribution partner for Champion in South Korea. The company had previously announced the addition of a second distribution partner in China. Combined, the new distribution partners are expected to nearly double the number of Champion branded stores in China and Korea to more than 200 by the end of 2020.

Double-Digit Growth for Domestic and International Consumer-Directed Sales. Global consumer-directed sales, consisting of company-owned or brand retail stores and all online channel sales, increased 10 percent on a reported basis in the third quarter, representing 23 percent of total sales. On a constant-currency basis, consumer-directed sales increased 13 percent, up double-digits both domestically and internationally.

Third-Quarter Operating Cash Flow Increases Significantly, Debt Leverage Decreases Significantly. Cash flow from operations of $302 million in the third quarter increased $96 million, or 47 percent, versus last year. Year-to-date operating cash flow of $245 million is more than $100 million higher than the same period last year.

The company reduced net debt at the end of the third quarter by approximately $250 million compared with the end of the second quarter. Compared with the end of the third quarter a year ago, net debt has been reduced by $470 million. The company’s leverage at the end of the quarter was 3.3 times net debt to adjusted EBITDA. The company expects to further reduce leverage to 2.9 times by the end of the year, in line with the company’s preferred net debt range over time.

Third-Quarter Business Segment Summaries

International Segment Sales Increase 7 percent Despite Currency Pressure. International segment sales increased a stronger-than-expected 7 percent as reported and 11 percent in constant currency as sales for both activewear and innerwear increased. Operating profit increased 8 percent as reported and 10 percent in constant currency.

The segment, which is now the company’s largest, had an operating margin of 16.2 percent, the fifth consecutive quarter of margins above the company average.

In addition to double-digit Champion activewear growth in Europe, Asia and Australia, the segment’s innerwear sales increased across multiple brands in Australia, Germany, the United Kingdom, Mexico, and Canada, among others.

Innerwear Segment Innovation Focus Continues, but Sales Affected by Softer-than-Expected Retail Traffic Trends and Prior Retailer Bankruptcies. U.S. Innerwear segment net sales decreased 3.5 percent in the third quarter, while operating profit decreased 8 percent.

Segment sales of $578 million were modestly below company expectations, primarily as a result of a softer-than-expected back-to-school retail environment affecting Innerwear basics replenishment. Innerwear intimates sales were in line with company expectations.

Innovation continues to perform well in the segment. In basics, expansion of Comfort Flex Fit and X-Temp products continues. In intimates, shapewear sales increased for the fifth consecutive quarter, and new innovation introduced in bras, including EasyLight lightweight products, are succeeding as expected.

Activewear Segment Profit Increases on Champion Growth, Remixing Efforts. U.S. Activewear segment third-quarter net sales decreased 1 percent and operating profit increased 4 percent.

Outside the mass channel, Champion activewear sales increased 18 percent. At mass, a slight increase in C9 by Champion sales was better than an expected decrease due to continued strong sell-through.

For the non-Champion portion of the segment, the company continues to focus on remixing to branded products to drive improving segment margins. The sales decline in this portion of the segment was a result of the previously disclosed exit of commodity programs in the mass channel and softer industry demand trends across the printwear channel of trade.

The segment’s operating margin increased 90 basis points to 17.8 percent in the quarter despite higher growth investment. Driving margin growth were improved Champion profitability, benefits of remixing to branded products, and the benefit of pricing.

2019 Financial Guidance

Hanes has updated full-year financial guidance for 2019, including effectively raising the midpoint of the guidance ranges for net sales and EPS and tightening the high end of the range for operating profit.

The company expects 2019 net sales of $6.935 billion to $6.985 billion, GAAP operating profit of $900 million to $925 million, adjusted operating profit of $955 million to $980 million, GAAP EPS of $1.61 to $1.67, adjusted EPS of $1.74 to $1.80, and net cash from operations of $700 million to $800 million.

Prior guidance for the updated ranges were net sales of $6.885 billion to $6.985 billion; GAAP operating profit of $900 million to $930 million and adjusted operating profit of $955 million to $985 million; and GAAP EPS of $1.59 to $1.67 and adjusted EPS of $1.72 to $1.80.

At the midpoint, the updated 2019 guidance versus 2018 results represents net sales growth of more than 2 percent; GAAP and adjusted operating profit growth of 5 percent and 2 percent, respectively; GAAP and adjusted EPS growth of 8 percent and 4 percent, respectively; and operating cash flow growth of 17 percent.

For the fourth quarter, net sales are expected to be in the range of $1.719 billion to $1.769 billion. GAAP operating profit is expected to be $248 million to $273 million, and adjusted operating profit is expected to be $259 million to $284 million. GAAP EPS is expected to be $0.46 to $0.52, and adjusted EPS is expected to be $0.48 to $0.54.