Hanesbrands saw net sales in the second quarter fall 14 percent to $1.51 billion, impacted by inflated costs and a cyber event.
In a Nutshell: Hanesbrands Inc., in reporting second quarter financial results “below expectations,” said it has taken a more prudent view of its second-half net sales and profit outlook to reflect the changes in foreign currency exchange rates, short-term costs associated with actions to reduce inventory by year-end, an assumption of continued slow consumer demand and a retail environment that remains challenging.
The company said sales were impacted by a cyber event that temporarily affected its global supply chain network and limited its ability to fulfill customer orders for approximately three weeks. Despite the disruption, the company shipped all Innerwear back-to-school seasonal commitments on time and in full.
At this time, Hanesbrands believes the cyber event has been contained and there is no ongoing operational impact on its ability to provide its products and services. The company estimates the cyber event negatively impacted the second-quarter 2022 results by approximately $100 million in net sales.
For third quarter that ends Oct. 1, the company expects net sales of approximately $1.73 billion to $1.78 billion, which includes a projected headwind of approximately $58 million from changes in foreign currency exchange rates. At the midpoint, this represents a 2 percent decline on a reported basis.
Operating profit from continuing operations is expected to range from about $129 million to $149 million. Earnings per share (EPS) is seen in the range of 20 cents to 25 cents.
For the fiscal year ending on Dec. 31, Hanesbrands expects net sales of around $6.45 billion to $6.55 billion, which includes a projected headwind of about $165 million from changes in foreign currency exchange rates. At the midpoint, this represents an approximate 2 percent decline compared to the prior year on a constant currency basis and a 4 percent decline on a reported basis.
Operating profit is forecast to come in at $570 million to $620 million. EPS if forecast to range from approximately 97 cents to $1.09.
The company said it has a “robust pipeline” of new products and innovations that extends beyond 2023. The rollout of new innerwear products and innovation is driving positive consumer and retailer response, as well as additional retail space gains.
New products have launched across men’s and women’s, including Hanes Total Support Pouch with X-Temp and HanesRetro Rib. The company is also building global innovation platforms around absorbency, which represents a meaningful opportunity for the Bonds and Hanes brands across multiple new usage occasions.
Champion brand investments continued in the quarter. The company purchased the Champion trademark for footwear in North America, representing an expanded opportunity for the brand and offers greater control of the global Champion brand and products. In addition, Champion will be able to deliver head-to-toe offerings across geographies through greater global coordination of design, product development and merchandising.
Hanesbrands said it is in the early stages of executing its “Full Potential’ supply chain strategies to build on its advantaged market position, as well as to balance speed, cost and flexibility, enabling faster top-line growth and higher margins. These efforts involve segmenting its supply chain and optimizing its U.S. distribution network.
Champion also began direct shipping innerwear product from its Central American manufacturing facilities to certain wholesale customers. The company’s West Coast distribution center, which will support its direct-to-consumer (DTC) business, is on-track to open this month. Hanesbrands is also adding automation to several distribution centers to improve picking and sorting speeds while lowering costs.
Selling, general and administrative (SG&A) expenses were $425 million as compared to $464 million in the second quarter last year. As a percent of net sales, adjusted SG&A expense of 27.7 percent increased approximately 215 basis points compared to prior year.
Total liquidity position at the end of quarter was nearly $1 billion, consisting of $248 million of cash and equivalents and approximately $720 million of available capacity under its credit facilities.
Inventory at the end of tree-month period was $2.09 billion, an increase of 37 percent over last year. Hanesbrands said the increase was mainly caused by higher inflation on input and transportation costs, lower sales and the early arrival of product related to third-quarter commitments–inflation alone represented essentially half of the year-over-year increase.
The company said it was confident in the quality of its inventory, as approximately 80 percent of the year-over-year increase is in replenishment innerwear categories. Through various mitigation initiatives that have been put in place, the company expects to end 2022 with lower units in inventory compared to year-end 2021.
Cash flow from operations was a use of $210 million in the second-quarter 2022 driven primarily by the working capital impact from higher inventory.
Sales: Net sales in the second quarter ended July 2 fell 14 percent year over year to $1.51 billion.
Global Champion brand sales decreased 20 percent over the prior-year period. Innerwear sales decreased 12 percent compared to last year as the impact from the cyber event and softer-than-expected point-of-sale trends more than offset the benefits from the first-quarter price increase and retail space gains.
Activewear sales declined 18 percent year over year. The company experienced continued growth in the collegiate channel in the quarter, which was more than offset by declines in its other channels due to headwinds from point-of-sales trends, retailer inventory levels and the impact from the cyber event.
Champion sales within the activewear segment decreased 25 percent, while sales of other activewear brands fell 8 percent. International sales declined 3 percent, with a falloff at a low-single digit rate in Europe and Australia, which more than offset growth in the Americas.
Earnings: Income in the quarter declined 37.2 percent to $93 million, or 26 cents per diluted share, from $148 million, or 42 cents, last year.
Gross profit declined 16 percent to $572 million in the period. Gross margin was 37.8 percent, down from 38.9 percent in the prior year. The margin decline was attributed to the impact from lower volume, input cost inflation, the incremental costs associated with the cyber event that negatively impacted second quarter results by approximately $35 million in adjusted operating profit and 8 cents in adjusted EPS and foreign currency exchange rates.
These headwinds more than offset the benefits from business mix, the first-quarter price increase in its Innerwear business, cost savings and less air freight.
Operating profit and operating margin in the quarter were $147 million and 9.7 percent, respectively, which compared to $217 million and 12.4 percent, respectively, in the 2021 period.
CEO’s Take: Steve Bratspies, CEO of Hanesbrands, said: “Our second quarter results fell below our expectations as a result of unexpected events and the difficult global operating environment. Despite the challenges, we continue to make progress on our Full Potential plan. We are in the early stages of our strategic supply chain initiatives. Our innovation pipeline is more robust than it has been in years, and we continue to invest in building our global brands.”