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Higher Input Costs Cut Into Hanesbrands Profits, But Champion Lifts Sales

It was a mixed quarter for Hanesbrands, as sales gains couldn’t outweigh higher raw material and operating costs enough to stop a decline in profits.

In a Nutshell: Hit by inflated raw materials costs and investments to prop up its brands, Hanesbrands saw its net income fall in the second quarter, even as its Champion brand led an increase in net sales.

The company, based in Winston-Salem, N.C., said the diversification of its global business model continued to support the execution of its “Sell More, Spend Less and Generate Cash” strategies in the period and is expected to contribute to second-half improvement. As the company managed through retailer door closures and market trends, Hanesbrands said it successfully gained traction with bra space gains in the mass channel and new bra programs in the mid-tier channel. The company continues to prepare for a relaunch of its shapewear programs late in the third quarter.

Contributors to net sales growth in the quarter included acquisition contributions, widespread global Champion strength and increased consumer-directed sales. Hanesbrands also announced the contract with Target Corp. for an exclusive line of C9 by Champion activewear apparel will not be renewed when the current contract expires at the end of January 2020. The C9 program is fully booked for 2018 and the conclusion of the contract is not expected to have a meaningful effect on the company’s outlook for 2019. In the past 12 months, the company generated roughly $380 million in C9 by Champion activewear sales.

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Hanesbrands said it expects to achieve global Champion sales of more than $2 billion by 2022, and that the end of the C9 by Champion program at Target should not affect that projection.

Compared with the previous neutral outlook for foreign exchange rates in the second half, the company now expects the strengthening dollar to reduce net sales growth by $30 million and operating profit growth by $5 million in the second half.

Sales: Net sales for the second quarter ended June 30 increased 4.2% to $1.72 billion from $1.65 billion in the year-ago period. Global Champion sales increased 18 percent in the quarter, with strength in all regions. Overall Activewear segment sales rose 6.9% to $405.79 million.

Innerwear sales fell 3.4% to $694.69 million, as a decline in intimates couldn’t offset gains in basics and men’s and women’s underwear. The company said innovation continues to work, with strong performance of the newly launched Hanes Comfort Flex Fit men’s boxer briefs. Hanesbrands said progress was made on key aspects of the company’s plan to stabilize the intimates business and return it to growth. Net sales for Bras N Things, acquired in February, and Alternative Apparel, acquired in October, totaled nearly $52 million in the quarter.

International segment sales increased 15 percent to $545.86 million. Global consumer-directed sales, consisting of company retail and online channel sales, increased 20 percent in the second quarter and represented 22 percent of total sales.

Earnings: Net income fell 18.5% in the quarter to $140.63 million from $172.53 million a year earlier. Operating profit declined 5.8% to $220.1 million compared to $233.7 million in the prior-year quarter.

The company said that similar to the first quarter, second-quarter operating profit was affected by input-cost inflation and expected increased expenses for investment in brand building and temporary distribution inefficiencies. Those factors offset benefits from acquisition synergies and strong international segment operating profit growth.

U.S. Innerwear segment operating profit decreased 10 percent as a result of raw material inflation and mix of products sold. Overall, the Innerwear segment operating profit declined 10.4% to $159.13 million.

Activewear segment operating profit decreased 2.5% to $57.5 million due to higher raw material costs, start-up manufacturing inefficiencies and temporary distribution costs. International operating profit rose 27.3% to $76.56 million.

CEO’s Take: Gerald W. Evans Jr., CEO, said: “Our results for the second-quarter were consistent with our guidance and the year is unfolding as we expected. We achieved organic growth for the fourth consecutive quarter, with strong International and global Champion sales growth. We continue to address the challenging environment for intimate apparel and expect our turn-around plan to gain additional traction by the end of the year. Our cash flow from operations of $64 million in the second quarter was ahead of our expectations and the outlook is strong. We continue to expect margin expansion in the second half, primarily driven by additional acquisition synergies and organic sales growth.”