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Scoring Income Gains in Q4 and Year, Hanesbrands Sees ‘Inflection Point’ in 2020

Cleaning up its financial picture, Hanesbrands saw sales dip in the fourth quarter on soft innerwear sales even as its Champion brand stayed hot.

In a Nutshell: Hanesbrands reported record operating cash flow for the fourth-quarter and full-year 2019 on Friday and strong diluted earnings per share (EPS) growth.

The company, based in Winston-Salem, N.C., generated $803 million of net cash from operations in 2019, an increase of 25 percent and surpassing the high end of its guidance for operating cash flow expectations of $700 million to $800 million. Hanesbrands, which markets basic innerwear and activewear apparel in the Americas, Europe, Australia and Asia-Pacific, significantly reduced its debt leverage by paying down $609 million of debt in 2019.

While the company has exited its C9 Champion business in the mass retail channel and its DKNY license for intimate apparel, it expects continued growth in 2020 for its underlying business.

As a result of the program exits and negative currency exchange rates, Hanesbrands expects net sales at the midpoint of full-year 2020 guidance to decline approximately 3 percent, operating profit to decrease around 3 percent to 4 percent and EPS to be flat to a year ago. Net cash from operations is expected to be in the range of $700 million to $800 million for 2020.

When comparing the midpoint of 2020 guidance to 2019 results adjusted to account for the C9 Champion and DKNY program exits, net sales would increase approximately 3 percent, adjusted operating profit would increase 7 percent, and adjusted EPS would increase 15 percent.

Hanes also issued initial 2020 guidance for the fiscal year ending Jan. 2, which includes a 53rd week. The company now expects 2020 net sales of $6.68 billion to $6.78 billion, operating profit of $850 million to $880 million, EPS of $1.60 to $1.68 and net cash from operations of $700 million to $800 million.

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For the first quarter, net sales are expected to be approximately $1.47 billion to $1.5 billion. Operating profit is projected to be $118 million to $128 million and EPS is forecast to be 17 cents to 20 cents.

The company expects global Champion sales growth of approximately 10 percent for the year, with growth in Asia, Australia, Europe and the U.S. The fiscal year’s 53rd week occurs in the fourth quarter and is expected to contribute approximately $40 million in net sales.

U.S. innerwear net sales, which includes brands such as Maidenform, Bali, Playtex, Lovable, Bras N Things and Wonderbra, are expected to decrease by approximately 1.5 percent to 3.5 percent for the full year and approximately 5.5 percent to 7.5 percent for the first quarter as a result of the C9 Champion and DKNY program exits, retailer door closures and higher year-ago shipments for a new sock program.

The company expects an improving sales trend for U.S. innerwear through the year, as store resets in the mass channel for basics start to yield benefits and the intimates revitalization progresses, particularly in bras. The company believes that supply chain restructuring initiatives are stabilizing segment profitability, with operating profit margins expected to increase for the full year on a reported and rebased basis.

Sales: Net sales for the fourth quarter ended Dec. 28 decreased 1 percent to $1.75 billion. For the full year, net sales increased 2 percent to $6.97 billion and represented the second consecutive year of constant-currency organic sales growth.

Global Champion sales, excluding C9 Champion in the U.S. mass channel, increased 40 percent to $1.9 billion in 2019 as a result of expanded product offerings and increased distribution. With balanced growth in the fourth quarter, Champion sales increased 22 percent both domestically and internationally.

International sales advanced 10 percent in the fourth quarter and 12 percent for 2019. Sales rose in all regions, including the Americas, Asia, Australia and Europe.

Consumer-directed sales, defined as all sales to consumers online or through brand stores, continue to increase and account for a larger portion of total sales. Consumer-directed sales in constant currency gained 17 percent in the fourth quarter and 16 percent for the full year. Consumer-directed sales in constant currency represented 30 percent of total sales in the quarter and 25 percent for the full year.

Sales of innerwear basics decreased 5 percent as a result of earlier-than-planned disruption from ongoing store resets in the mass channel that are expected to generate increased space and share beginning in the second half of 2020. Sales of innerwear intimates fell 2 percent, which was sequentially better than the third quarter and consistent with expectations. Bra revenue increased slightly and contributed significantly to segment operating margin expansion. Successful market performance of the EasyLite and DreamWire bra innovations are contributing to revitalization efforts, the company said.

U.S. activewear segment, which in addition to Champion includes the Hanes, Bonds and Gear for Sports brands, saw fourth-quarter sales declined 7 percent, slightly better than expected.

Earnings: Net income for the fourth quarter rose 23.3 percent to $184.98 million compared to the year-ago period. For the year, net income increased 11.3 percent to $600.72 million compared to 2018.

Fourth-quarter EPS increased 24 percent to 51 cents. For the full year, EPS increased 11 percent $1.64.

Operating profit margin of 13.9 percent increased about 10 basis points, benefitting from price increases and strong improved profitability for innerwear intimates.

CEO’s Take: Gerald W. Evans Jr., CEO of Hanesbrands, said: “Hanesbrands delivered a solid fourth quarter right in line with our guidance and concluded a very successful year with record operating cash flow, significantly reduced debt, continued organic revenue growth and strong underlying business fundamentals. Looking forward, we expect to create meaningful shareholder value using our strong balance sheet, stabilized innerwear profitability, and Champion, international and consumer-directed growth. We view 2020 to be an inflection point for sales, profit and EPS growth rates that accelerate down the P&L.”