HanesBrands reported first-quarter earnings that topped Wall Street’s targets but the bigger news was its roll out of a new multi-year program to drive earnings and growth.

While the initiative is expected to drive incremental growth efforts by focusing on leveraging the company’s global Champion activewear business, increasing online and omnichannel sales, and investing in brand building, about 220 corporate jobs will be cut.

The growth initiative, called Project Booster, is expected to drive the company’s ongoing “Sell More, Spend Less, Generate Cash” business strategy. By 2020, the effort is expected to generate approximately $300 million of incremental annual net cash from operations and $100 million in annualized net cost savings after annualized growth reinvestment of $50 million.

In the first quarter ended April 1, Hanes incurred Project Booster-related expense of approximately $7 million to execute a voluntary separation program for corporate employees. The project launched in the first quarter and is expected to be neutral to full-year operating results in 2017, while providing significant benefits in coming years.

“You should really think of the past decade as the construction phase, where we built the engine of our business model,” said Gerald W. Evans Jr., Hanesbrands’s CEO, on a conference call with analysts. “Now it’s time to fine tune the model to extract its full revenue and cash flow potential. And this is exactly what Project Booster is designed to do.”

In the first quarter, earnings declined 12.0 percent to $70.6 million, or 19 cents a share. The bottom line was impacted by an increase in interest expense to $42.1 million from $31.6 million due to a number of acquisitions. The latest quarter also included a charge of $2.5 million from loss from discontinued operations.

When excluding pretax charges related to acquisition integrations, adjusted earnings improved 6.8 percent to $109.1 million, or 29 cents share. The company guided earnings to a range of 27 to 29 cents a share and Wall Street’s consensus target was 28 cents.

Net sales of $1.38 billion increased 13.2 percent. Sales from acquisitions more than offset the decline in organic sales, which was expected. Acquisitions completed in 2016 contributed approximately $210 million in net sales in the quarter. Organic sales decreased 4 percent, primarily as a result of the expected lower sales in Innerwear, which are anticipated to normalize in the second half, and domestic manage-for-cash businesses. Categories and businesses that posted organic sales growth included Champion in the U.S. and Asia, U.S. men’s underwear, and the U.S. online channel. The online sales channel in the United States accounted for 10 percent of domestic sales, compared with 9 percent in the year-ago quarter.

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.

Among its segments, activewear returned to organic growth, while the Asia activewear business continued to grow at double-digit rates. Overall revenues improved 3.4 percent to $327.3 million, driven by low single-digit organic growth and a modest contribution from the September-2016 acquisition of GTM Sportswear, which specializes in team warm-ups and uniforms

Champion sales in the U.S. were up double-digits “as we continued to benefit from our refreshed product offering and increased space within the mass channel,” said Rick Moss, CFO. The company’s C9 By Champion line is sold exclusively at Target. Champion’s U.S. gains helped offset weak retailer store traffic and inventory management that affected the overall segment. The Hanes Activewear business saw a decline.

Operating earnings in the activewear segment increased 4.1 percent to $33.4 million with an operating margin of 10.2 percent essentially flat relative to last year.

In the innerwear segment, sales declined 5.9 percent to $505.2 million while operating income slid 6.4 percent to $102.7 million. Declines traced to reduced consumer traffic at retailers, store closings, and cautious retailer inventory management was only partially offset by growth of online sales and men’s underwear.

In the international segment, sales jumped 71.1 percent to $477.4 million due to acquisitions and Champion Asia space gains. Operating earnings reached $50.5 million against $24.7 million the prior year as a result of new acquisitions and synergies from prior acquisitions.

HanesBrands said that in the first quarter, it began executing its multiyear Project Booster program. The Booster initiative is expected to generate approximately $150 million in annualized cost savings is expected to be

The Booster initiative is expected to generate approximately $150 million in annualized cost savings. Of that, approximately $50 million is expected to be reinvested in targeted growth opportunities. That would result in a run rate of net annualized savings of approximately $100 million starting by the end of 2019. The goal of the cost savings and working capital initiatives is to generate an incremental annual run rate of $300 million of cash from operations starting by the end of 2019.

“Our core Sell More, Spend Less, Generate Cash strategy is effective and creating value, but we feel we have the opportunity to energize these efforts to drive additional benefits, particularly by taking advantage of the strong global commercial and supply chain scale we have created through acquisitions,” Evans said. “Project Booster will unlock value beyond our ongoing growth efforts and the synergies we are reaping from acquisition integrations.”

The grow the top-line, one focus will be on bolstering its organizational alignment and capabilities to take advantage of additional growth potential in the online channel in the U.S. and its international company retail and online operations. Online sales, through its own and other websites, are increasing at double-digit rates and represented 8 percent of U.S. sales in 2016, up from 7 percent the year before. Internationally, the company has more than 650 stores and other retail locations, particularly in Europe and Australia, and is ramping up online capabilities.

Regarding Champion, the acquisition of Champion Europe “has unified the Champion brand globally across the Americas, Europe and Asia-Pacific.”  The company will invest to take advantage of its global brand platform, product development and design, to continue drive increased market penetration for Champion worldwide.

The company will also increase its investment in brand building for the rest of its brands, which include multinational brands and regional brands. The company holds the No. 1 or No. 2 market position in either underwear, intimates, hosiery or activewear in 12 countries. Investment will include brand building and marketing support.

To fund growth initiatives, reduce costs and increase cash flow, the company expects to reduce overhead, including headcount to reflect market trends and needs; drive additional supply chain optimization beyond integration synergies; and focus on inventory and inventory turns and other working capital improvements. The company intends to use its size and scale to drive supply chain optimization, including investing in its domestic distribution center network to better serve the online channel, gaining procurement and product development savings, utilizing global fabric platforms and silhouettes, and continuing to internalize production.

In the first quarter, a voluntary separation program was offered to its headquarters employees and additional corporate headcount reductions are expected in the second quarter, with the majority through the voluntary program. Project Booster initiatives in 2017, including the headcount reductions, are expected to be cost-neutral for full-year 2017.

HanesBrands maintained its guidance for the year. Sales are expected to come in within the range of $6.45 billion to $6.55 billion and adjusted EPS excluding actions for continuing operations between $1.93 to $2.03. Compared with 2016 results, the midpoint of 2017 guidance represents net sales growth of 8 percent and adjusted EPS growth from continuing operations of 7 percent.

The company expects total net sales of approximately $1.65 billion in the second quarter. Organic sales are expected to decline as a result of the retail sales environment and a timing shift of back-to-school shipments. 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.

Second-quarter GAAP EPS for continuing operations is expected to be 45 cents to 49 cents, and adjusted EPS is expected to be 51 cents to 54 cents. That compares to 51 cents in the 2016 second quarter.

“We had a strong first quarter,” Evans concluded in his remarks. “The year is unfolding just as we expected, and we feel good about our outlook for the full year. Looking forward over the next several years, as we realize synergies from our prior acquisitions and unlock our potential through Project Booster, we believe we’re very well positioned to deliver more consistent levels of organic growth, higher levels of sustainable profitability and over $1 billion of annual cash flow from operations.”

Photo courtesy Champion