With sales and profits plummeting in the first quarter from the pandemic, Hanesbrands is pivoting deeply into non-core manufacturing.
In a Nutshell: Hanesbrands Inc. said Thursday that first-quarter results were significantly affected by the COVID-19 pandemic, estimating the late-quarter impact reduced revenue by approximately $181 million, operating profit by approximately $86 million, and earnings per share (EPS) by approximately 20 cents.
Due to disruptions to retailer operations and the unpredictability of consumer confidence, Hanesbrands’ pandemic response is focused on several initiatives. These include serving channels of trade that are generating sales, preserving cash and enhancing liquidity, and developing a product line of personal protective equipment (PPE), including face masks, to meet emerging commercial and consumer demand.
The company is making more than 320 million cloth face coverings and more than 20 million medical gowns for the U.S. government. In addition, Hanesbrands is ramping up production to launch a cotton face mask business for consumers and business-to-business customers, including large employers seeking to reopen business operations and in need of PPE
The company expects to create an ongoing product line of basic personal protective garments to serve the consumer, commercial and governmental markets. Sales in 2020 are expected to be more than $300 million and the company believes the business has the potential to expand further in future years.
To navigate the current economic environment, the company is limiting discretionary spending and capital expenditures, has temporarily reduced salaries and furloughed select employee groups, is managing inventory and supply chain production, and is adding liquidity to its balance sheet. The temporary pay reductions and furloughs, as well as reductions in discretionary spending such as media and marketing, are expected to save approximately $200 million in 2020. The company is operating production and distribution facilities on a demand-adjusted basis.
The company ended the first quarter with nearly $1.1 billion of cash on hand and is adding additional liquidity and flexibility to its balance sheet. To be prudent, the company intends to secure approximately $500 million in debt financing, subject to market conditions, with the proceeds used to repay its revolver and further enhance liquidity.
The company has stress tested its balance sheet under various scenarios and believes its liquidity plans provide significant operating flexibility during the pandemic, strengthens the company’s long-term business model, and positions the company to take advantage of opportunities as the world economy emerges from the crisis.
As an added precaution, the company proactively negotiated a 15-month covenant amendment to its senior secured credit facility, which includes the suspension of its leverage covenant until the end of the second-quarter 2021.
Due to the uncertainty and unpredictability of the COVID-19 pandemic, HanesBrands withdrew its first-quarter and full-year guidance on March 25. Until visibility of the pandemic’s effect on global economies improves, the company will not provide quarterly and full-year guidance and expectations.
Sales: Net sales for the first quarter ended March 28 fell 11.9 percent to $1.32 billion compared with $1.59 billion a year earlier.
The year-ago quarter included net sales of $94 million from the now-exited C9 Champion mass program and the DKNY intimate apparel license. Excluding the exited programs, the impact of COVID-19, and foreign exchange rates, total constant-currency net sales for the first-quarter 2020 would have increased 1.6 percent, the company said.
The company said it continues to generate sales through channels of trade that have remained open during the pandemic, including online, mass retail, dollar store, and food and drug. The company generates online sales through its own e-commerce websites, retailer websites, large internet pure-plays, and business-to-business customers. Total online sales increased 5 percent globally in the first quarter. Online growth rates accelerated in the last two weeks of the quarter and have continued to accelerate in April.
International segment sales declined 14 percent, with wholesale business declines and approximately 1,000 of the company’s 1,200 brand stores, which closed in March, located in international geographies.
U.S. activewear segment first-quarter sales decreased 29 percent, or $117 million, as a result of the COVID-19 impact and $85 million of C9 Champion sales in mass retail in the year-ago quarter. When the year-ago quarter is rebased for the C9 Champion program exit, net sales decreased 10 percent.
Earnings: The company reported a net loss of $7.87 million in the quarter compared to earnings of $81.09 million in the year-ago period.
First-quarter operating profit and adjusted operating profit were $34 million and $63 million, respectively, compared with $150 million and $171 million in the prior-year quarter, respectively.
CEO’s Take: Gerald W. Evans Jr., CEO of Hanesbrands, said: “We were on a pace to deliver a strong first quarter above our expectations until the late-quarter impact of the COVID-19 pandemic. Prior to the pandemic impact, sales for our U.S. innerwear business were significantly better than our expectations. Champion was a driver of better-than-planned U.S. activewear growth and our international businesses were in line with expectations.”
“The effects of the pandemic changed those trajectories,” Evans continued. “In response, we prioritized operational protocols for the safety of our employees, consumers and communities. I am proud of the terrific effort and achievements of our global teams. We quickly pivoted to preserve cash, create balance sheet flexibility, and build strong liquidity. We used our large-scale global supply chain to manage inventory, continue to serve key channels, including mass retail and online, and seize the opportunity to expand our manufacturing capability to include cotton face masks. The COVID-19 pandemic is proving to be a significant challenge for every aspect of society to navigate. As a 120-year-old business enterprise, we feel confident that we have the right plans, the consumer-trusted brands and products, and a superior workforce to not only overcome these short-term business challenges but to thrive over the long term.”