HanesBrands (NYSE: HBI), reported double-digit earnings growth in the third-quarter 2013 on strong margin performance.

Hanes Activewear posts a 2 percent decrease in net sales yet achieved a double-digit operating margin for the quarter.

Operating profit in the quarter ended Sept. 28, 2013, increased 13 percent to $177 million and diluted earnings per share increased 11 percent to $1.23, up from $1.11 a year ago.

The company delivered strong profitability despite general retail weakness in the back-to-school selling period. Net sales in the quarter decreased 2 percent to $1.2 billion, although on a constant currency basis net sales declined less than 1 percent.
 
The company’s Innovate-to-Elevate strategy, which combines brand power, supply chain savings and product innovation, helped drive both core-product and new-product success, resulting in share gains in the quarter. Gross margin expanded to 35.2 percent, up 240 basis points compared with last year’s quarter, and operating margin improved to 14.8 percent, a 200-basis-point expansion even with the company increasing its media investment by $8 million in the quarter. All three components of the Innovate-to-Elevate strategy combined to drive the majority of the operating margin improvement.

Hanes has increased its full-year 2013 guidance for the second consecutive quarter, with the entire new EPS range above the high end of the previous range. The company’s new full-year guidance anticipates net sales of slightly more than $4.6 billion; adjusted operating profit of $580 million to $590 million; adjusted EPS of $3.75 to $3.85; and free cash flow of $475 million to $525 million. The guidance includes performance expectations for Maidenform Brands, which was acquired Oct. 7, 2013, but adjusted operating profit and earnings expectations exclude one-time acquisition-related expenses.

The company is also raising its 2014 adjusted EPS target range to $4.25 to $4.50 excluding actions, up from the low $4 range provided on its second-quarter earnings call.

“We had a great quarter with record earnings and strong margins,” said Hanes Chairman and Chief Executive Officer Richard A. Noll. “Our brands are gaining share, our supply chain is generating savings, and our product innovations are creating value. Given our strong earnings momentum, we are raising our earnings guidance for both 2013 and 2014 despite a soft retail environment.”
Third-Quarter 2013 Financial Highlights and Business Segment Summary
Key accomplishments for the third quarter and year to date include:

•    Innovate-to-Elevate Success. The company’s business model is built around its brand power, world-class supply chain and consumer-centric product innovation. The company’s brands are gaining market share in core categories. New products, including Hanes X-Temp underwear and socks, ComfortBlend underwear and Smart Size bras are performing well. And the company’s predominately self-owned supply chain is creating savings that are driving margins across business segments.
•    Strong Operating Margin. All four of the company’s business segments earned double-digit operating margins in the quarter. The year-to-date operating margin of 13.3 percent is 480 basis points higher than the comparable year-ago period.

Key segment highlights include:

Innerwear Segment. Innerwear operating profit in the quarter was comparable to last year in spite of the increased investment in media as planned and a net sales decrease of 3 percent.
•    Operating Margin Improvement. Segment operating margin of 17.8 percent improved 40 basis points over the prior-year quarter. Through the first three quarters, operating margin was 19.6 percent.
 
•    Sales Muted Across Retail Channels. Sales decreased 3 percent in the quarter as a result of a negative retail back-to-school selling period, but net sales were comparable to a year ago for the year-to-date period.

The company’s brands gained market share during the back-to-school selling period and retail sell-through turned slightly positive for September after declines in the key August period. The August sell-through declines impacted company sales as retailers reduced orders to adjust inventories, leading to low single-digit declines in most Hanes Innerwear categories. The exceptions were bras and socks. Sales in the quarter increased for Hanes socks, Bali bras and panties, Polo underwear, and Hanes, Playtex and Just My Size bras.

Activewear Segment. The Activewear segment, previously known as Outerwear, achieved another quarter of strong profitability on a 2 percent decrease in net sales.

•    Strong Profitability. The segment delivered record profitability with an operating margin of 16.9 percent for the third quarter and 13.1 percent year to date. Retail activewear and Gear for Sports achieved double-digit operating margins in the quarter.

•    Higher Quality of Sales. Activewear net sales decreased 2 percent in both the quarter and year-to- date period. The lower sales are primarily a result of planned declines in sales of lower-margin branded printwear products to screen-print wholesalers, which has totaled $24 million year to date. Year-to-date sales for Gear for Sports and Champion retail activewear have increased in the low single digits.

International Segment. On a constant-currency basis, International segment net sales increased 10 percent and operating profit increased 1 percent in the third quarter. As reported, segment net sales were comparable to the year-ago quarter, while operating profit decreased 6 percent. Operating margin in the quarter was 12.6 percent.

Direct to Consumer Segment. Direct to Consumer sales for the quarter increased 1 percent, while operating profit increased 29 percent. The segment’s operating margin for the quarter was 16.2 percent.

Maidenform Integration

Hanes closed its acquisition of Maidenform Brands, Inc., on Oct. 7, 2013, for approximately $583 million. The company has announced plans to retain more than half of Maidenform’s worldwide employees, primarily in outlet store, international, sourcing, and sales, design and merchandising operations.

Hanes will integrate Maidenform’s front-end, supply chain, and distribution/logistics operations into its existing organization. The company anticipates closing the Maidenform New Jersey headquarters and Fayetteville, N.C., distribution center by the end of 2014.

Hanes expects the acquisition to annually add more than $500 million to sales, $80 million to operating profit, $0.60 EPS, and $65 million to free cash flow within three years once full synergies are achieved. Synergies are expected from selling, general and administrative savings as a result of the elimination of duplicative corporate and operational costs; cost of goods sold savings as a result of the integration of Maidenform’s 100 percent sourced production model into Hanes’ predominately self-owned manufacturing operations, supplemented by sourcing; and complementary revenue, driven by the application of Hanes’ Innovate-to-Elevate strategy to Maidenform’s products and brands.
The majority of the corporate SG&A savings are anticipated to begin by mid-2014. Benefits of supply chain actions to cost of goods sold are expected to start in 2015 and be fully realized in 2016. Complementary revenue opportunities are expected to deliver benefits in late 2015, with the majority of the benefits coming in 2016.

Hanes funded the acquisition with cash on hand and borrowings on its revolving credit facility, which will be retired through free cash flow.

Hanes expects to incur one-time acquisition- and integration-related expenses of $120 million to $140 million, with $50 million to $60 million of the charges occurring in the fourth quarter 2013 and the remainder in 2014. Approximately half of the total charges will be noncash.
2013 Guidance

Hanes has significantly increased its full-year guidance for operating profit and EPS in spite of a prudently cautious outlook for the holiday sales period. The company now expects net sales of slightly more than $4.6 billion, including Maidenform, compared with previous guidance of approximately $4.55 billion; adjusted operating profit (excluding actions) of $580 million to $590 million versus previous guidance of $550 million to $575 million; and adjusted EPS (excluding actions) of $3.75 to $3.85, up from previous guidance of $3.50 to $3.65.

Based on the full-year guidance, expectations for the fourth quarter are net sales of slightly more than $1.2 billion, adjusted operating profit of $137 million to $147 million, and adjusted EPS of $0.82 to $0.92.

Guidance includes expected Maidenform contributions in the fourth quarter since Oct. 7 but excludes the effect of an estimated $50 million to $60 million in one-time acquisition-related charges on operating profit and EPS and the tax effect of the charges on EPS. In the fourth quarter, Maidenform is expected to contribute approximately $120 million of net sales, $6 million to $8 million of operating profit, and approximately $0.02 to $0.03 of EPS after approximately $3 million in interest expense and a tax rate percentage in the high 30s.

The company narrowed its free cash flow range to $475 million to $525 million but retained the same midpoint of guidance despite a negative impact to cash flow of approximately $30 million to $40 million in the fourth quarter from cash expenses related to the Maidenform acquisition. Free cash flow guidance includes expected pension contributions of approximately $38 million and net capital expenditures of approximately $50 million.

The company expects to increase its media investment in the fourth quarter by $18 million versus last year for a total increase of $34 million in incremental media investment for the year.

Hanes continues to expect to retire in the fourth quarter of 2013 all $250 million of the remaining of 8 percent senior notes due 2016, while increasing the borrowings on its revolving credit facility as a result of the purchase of Maidenform. Full-year interest expense and other expense are expected to total approximately $118 million, including approximately $3 million in Maidenform-related revolver interest and approximately $15 million in prepayment expenses to retire the 8 percent senior notes. The full-year tax rate is expected to be approximately 17 percent, implying a low double-digit tax rate for the fourth quarter.

The company expects to end the year with long-term debt between $1.4 billion and $1.5 billion, which implies a ratio of long-term debt to EBITDA within the company’s previously disclosed target range of 1.5 to 2.5 times.

“Our strong business model continues to create value, and we are eager to start delivering the benefits of the Maidenform acquisition,” Noll said. “We are confident in our guidance for 2013 and believe a reasonable EPS goal excluding actions for 2014 is $4.25 to $4.50.”