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Hanesbrands ‘Successfully Managing Macro Challenges,’ CEO Says

Hanesbrands was able to navigate sourcing and inflation hurdles in the third quarter to post solid sales and earnings gains.

In a Nutshell: Apparel manufacturer Hanesbrands Inc., with brands such as Hanes, Champion and Bonds, on Thursday reported increases in sales, operating profit, earnings per share (EPS) and operating cash flow for the third quarter driven by strong point-of-sale performance and market share gains in its innerwear and activewear businesses.

CEO Steve Bratspies told analysts on a conference call that the company operates with a strong owned manufacturing base and with long-term sourcing partners that are spread across 29 countries.

“This advantaged approach has given us the resilience, flexibility and visibility to successfully manage through the macro challenges over the past 18 months,” Bratspies said. “Production across all 32 of our owned-manufacturing facilities was up and running throughout the quarter. As strong consumer demand for our brands has continued throughout the year, we have been able to increase production to keep up.”

He said by the end of the year, Hanesbrands expect to have made nearly 25 percent more units than its initial 2021 plan. Bratspies said making product has not been a significant challenge, but that the company is not immune to the other macro challenges.

“Like the vast majority of companies around the world, we’re facing worldwide transportation bottlenecks, as well as higher levels of inflation,” he said. “This is lengthening the time it takes to get product from our manufacturing facilities to our customers. It’s also increasing costs. Our team has done an amazing job managing through the various macro challenges all year.”

Hanesbrands said strong revenue and profit performance was in-line with or exceeded the high-end of the company’s increased guidance ranges despite the unexpected lockdown in Australia that forced the closure of two-thirds of its stores for nearly the entire quarter. Stores in Australia are re-opening as the lockdowns are lifted.

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Consistent with the company’s “Full Potential” plan to build its brands, global media and marketing investment increased $25 million, helping drive higher point-of-sale trends and increased market share. These investments have improved Champion’s global brand awareness and consideration of the company’s U.S. brands.

Full Potential plan improvements in core e-commerce capabilities delivered higher conversion rates and average order values. Total online sales grew 62 percent, including 50 percent growth on company-owned websites. The strong online performance–domestic and international–was fueled by consumer demand for the company’s brands across its owned websites, pure-plays and retailer-owned websites.

Offering guidance for the fourth quarter and full year, Hanesbrands said it expects net sales for the fourth quarter that ends on Jan. 1 of approximately $1.71 billion to $1.78 billion, which represents about 3 percent growth over the prior year at the midpoint and includes a projected benefit of approximately $6 million from changes in foreign currency exchange rates.

This compares to net sales of $1.69 billion in fourth-quarter 2020, which included $28 million in PPE sales and approximately $45 million from a 53rd week. Adjusting for PPE and the 53rd week in 2020, net sales at the midpoint of the guidance range are expected to increase 8 percent over the prior-year period.

Operating profit from continuing operations is forecast to range from approximately $182 million to $202 million, while adjusted operating profit is expected to range from around $200 million to $220 million. The midpoint of adjusted operating profit represents an operating margin of approximately 12 percent0% and reflects the impact of cost inflation, as well as increased brand investment.

“With the ongoing disruptions in the global transportation environment, we’re seeing incremental pressure from higher freight costs, particularly ocean freight as well as higher labor costs in our distribution centers,” chief financial officer Michael Dastugue told analysts. “Despite the incremental pressure in freight and transportation costs, we’re comfortable maintaining our adjusted profit and margin outlook. We’ve identified additional efficiencies and savings opportunities in the quarter to be able to offset these higher costs.”

Earnings per share (EPS) is forecast to range from 24 cents to 29 cents. Adjusted EPS is expected to range from 40 cents to 45 cents.

For the full year, net sales are expected to total approximately $6.76 billion to $6.83 billion, which represents about 11 percent growth over the prior year at the midpoint and includes a projected benefit of approximately $108 million from changes in foreign currency exchange rates. This compares to net sales of $6.13 billion in 2020, which included $820 million in sales of PPE and approximately $45 million from the 53rd week.

Adjusting for PPE and the 53rd week in 2020, net sales at the midpoint of the guidance range are expected to increase 29 percent over the prior-year period. As compared to rebased 2019, net sales at the midpoint are expected to increase 13%.

Operating profit is forecast to range from an estimated $825 million to $845 million. The company said the full-year outlook reflects higher levels of cost inflation as compared to 2020 and 2019.

EPS is expected to range from approximately $1.53 to $1.58, with adjusted EPS of $1.79 to $1.84.

“Looking into 2022, we expect the broad-based inflation pressures to continue,” Bratspies said. “This isn’t anything that’s unique to us. Inflation is impacting everyone globally. We’re aware of the pressures and we’re working to mitigate the impact. This includes raising prices globally as we know our brands have pricing power. We’re being thoughtful in our approach and keeping the consumer at the center of our decisions. Plus, we’re continuing to work on additional cost savings and efficiency initiatives.”

Sales: Net sales for the third quarter ended Oct. 2 increased 6 percent to $1.79 billion compared with $1.69 billion for the quarter ended Sept. 26, 2020, which included $179 million in sales of personal protective equipment (PPE) in response to the Covid-19 pandemic. Excluding PPE, net sales increased 18 percent to $276 million year over year.

Growth was driven by strong consumer demand and point-of-sale trends in the U.S., Europe, Americas and certain Asia markets, including China, which more than offset headwinds from the extended government Covid-related lockdowns in Australia and Japan.

Global Champion brand sales increased 33 percent with balanced growth between the U.S. and international. Performance was driven by strong consumer demand across channels in the U.S., continued growth in Europe and the ramp-up of partners in China.

Innerwear sales decreased 11 percent compared to the 2020 quarter due to the overlap of last year’s $166 million of PPE sales. Men’s, kids and socks revenue increased mid-to-high single digits, while women’s revenue rose approximately 20 percent. Excluding PPE, Innerwear sales increased 12% over last year with strong point-of-sale growth across channels.

U.S. innerwear sales increased 25 percent due to the combination of strong consumer demand across the company’s brand portfolio, which drove point-of-sale growth and increased market share gains, as well as the impact from pent-up consumer demand that is fueling category growth rates above historical levels. Performance in the quarter was driven by momentum in shapewear and innovation in bras and men’s underwear.

Activewear sales grew 42 percent over the prior year, driven by strong double-digit growth in Champion and Hanes brands. The company experienced strong point-of- sale trends across several channels in the quarter. The segment continued to benefit from pent-up consumer demand and the overlap of last year’s Covid-related headwinds.

Earnings: Income in the quarter totaled $177 million, or 50 cents per diluted share, compared to income of $118 million, or 34 cents per diluted share in the prior year period, and income from continuing operations of $189 million, or 52 cents per diluted share in third-quarter 2019.

Operating profit increased 24 percent to $235 million compared to prior year and decreased 10 percent compared to third-quarter 2019. Operating margin of 13.1 percent increased 190 basis points compared to prior year and decreased 200 basis points compared to third quarter 2019.

Gross margin of 39.1 percent increased 530 basis points compared to prior year and 170 basis points compared the third-quarter 2019. The margin expansion was propelled by cost savings programs in the supply chain and the benefits from business mix, which more than offset higher transportation and inflation costs.

CEO’s Take: Bratspies said: “I want to thank our associates for delivering strong results in the quarter, particularly our manufacturing team, which has put us in position to meet consumer demand. We are maintaining our fourth-quarter outlook for net sales and adjusted operating profit, driven by continued demand for our brands, our strong inventory position and our global team’s proven ability to manage ongoing macro challenges. We continue to make progress on our ‘Full Potential’ plan as we invest in our iconic brands, build talent, enhance e-commerce capabilities and modernize our technology.”