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How Exiting PPE Business Weighed on Hanesbrands

Hanesbrands is refining its focus to its Champion brand, innerwear and e-commerce businesses.

In a Nutshell: Hanesbrands Inc., a global marketer of branded basic apparel, reported fourth-quarter results that reflected momentum across its business, with solid sales, adjusted operating profit and cash flow.

During the fourth quarter, the company completed a comprehensive business assessment and began implementing its “Full Potential” plan. The plan focuses the company on four pillars to drive growth and enhance long-term profitability.

They are to grow the Champion brand globally, drive growth in innerwear with brands and products that appeal to younger consumers, build e-commerce excellence across channels and streamline the global portfolio. The latter includes exiting PPE and exploring alternatives for European innerwear.

Hanesbrands has identified 20 strategic initiatives under these four key pillars to unlock growth and has launched a multiyear cost-savings program intended to substantially self-fund the investments necessary to achieve the plan’s objectives.

As part of the implementation of its Full Potential strategy, Hanesbrands said it determined that it no longer views personal protective equipment (PPE) as a long-term growth opportunity. In addition, as the result of a comprehensive strategic inventory review, the company is reducing its SKUs by 20 percent to enable greater focus on its highest-volume, fastest-growing and most profitable products.

Based on these decisions, during the fourth quarter Hanesbrands recorded $611 million in inventory charges consisting of a $400 million write-off of its entire PPE inventory-related balance and an inventory valuation write-down of approximately $211 million related to the company’s SKU reduction program.

In addition, the company said it was exploring strategic alternatives for its European innerwear business to simplify its operations and focus resources on its strategic growth opportunities.

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The company provided financial guidance for the first quarter of 2021 that it said reflects continued uncertainty related to the COVID-19 pandemic and its impact on the global consumer environment. Hanesbrands expects first-quarter net sales to be approximately $1.49 billion to $1.52 billion. The midpoint of guidance represents net sales growth of 14 percent over first-quarter 2020 and includes a projected benefit of $50 million from changes in foreign currency exchange rates and implies growth of 10 percent in constant currency.

Hanesbrands expects first-quarter operating profit to range from $140 million to $150 million. Adjusted operating profit is expected to range from $150 million to $160 million.

The midpoint of adjusted operating profit suggests an operating margin of 10.3 percent, compared with adjusted operating margin of 4.8 percent in the first quarter of 2020. The expected year-over-year margin expansion is due to higher sales, positive manufacturing variances and the anniversary of last year’s COVID-driven volume deleverage. Earnings per share is expected to range from 24 cents to 27 cents.

Sales: Net sales for the fourth quarter ended Jan. 2 inched up to $1.8 billion compared with $1.75 billion for the comparable period ended Dec. 28, 2019. The company recorded $28 million in revenue from PPE garments globally in the fourth quarter. Excluding net sales of $88 million from the exited C9 Champion mass program and DKNY intimate apparel license recorded in the prior-year period, and the effect of changes in foreign exchange rates, total constant-currency fourth-quarter net sales increased 6 percent.

In the period, Hanesbrands said revenue growth continued across all three business segments, as year-over-year trends improved sequentially, excluding PPE. The company gained share in U.S. innerwear and global Champion sales were up 11 percent. Excluding the sports and college licensing business, which has been heavily impacted by campus shutdowns and limits on sports attendance due to the pandemic, global Champion sales increased 18 percent.

U.S. innerwear sales, excluding PPE, increased 13 percent, driven by strong point-of-sale trends, space gains in kids’ underwear and continued inventory restocking by retailers. U.S. activewear marked its third consecutive quarter of sequential improvement, led by strong performance of the Champion brand. Revenue increased 7 percent, driven by growth in the online, wholesale and distributor channels.

Hanesbrands saw continued improvement in revenue trends in its international segment, with revenue up 2 percent. Australia continued its strong performance, with constant currency sales up 8 percent in the quarter, driven by growth in Bonds and Bras N Things. The company also saw growth in Canada and Latin America, while COVID-related disruptions continued to create challenges in Asia and Europe.

For the full year, net sales were $6.7 billion, including net sales of $959 million of PPE, compared to $6.97 billion in the prior year, which included net sales of $419 million from the C9 Champion mass program and DKNY intimate apparel license. Excluding the exited programs and the effect of changes in foreign exchange rates, total constant-currency net sales for full-year 2020 increased 2 percent year over year.

Earnings: Hanesbrands reported a fourth-quarter net loss of $332 million, or 95 cents per share, compared to net income of $185 million, or 51 cents per diluted share in the prior-year period. The loss per share includes $1.33 of charges primarily related to the PPE garment business and the 20 percent SKU reduction effort across company.

Adjusted net income, excluding after-tax charges of $467 million, or $1.33 per diluted share, totaled $135 million, or 38 cents per diluted share.

The fourth-quarter operating loss was $444 million, including the $611 million in inventory charges, as well as a $25 million non-cash impairment charge on its U.S. hosiery business due to impacts of Covid-19, a $17 million non-cash tax asset write-off and an $8 million charge primarily related to a previously disclosed supply chain restructuring. Excluding these charges, fourth quarter adjusted operating profit of $217 million decreased 10 percent as compared with the comparable year-earlier period.

For the year, the company posted a net loss of $75.58 million compared to net earnings of $600.72 million the previous year.

CEO’s Take: Steve Bratspies, CEO, said: “I’m extremely proud of the Hanesbrands team for all it accomplished in 2020 under very challenging conditions, and I thank our global associates for their hard work and dedication. We delivered solid sales growth in the fourth quarter, with continued revenue momentum in our largest businesses and strong market share performance in our Innerwear and activewear segments.

“We are implementing our Full Potential plan with the goal of creating a consumer-centric company that delivers long-term growth and higher profitability,” Bratspies added. “I’m encouraged by our rapid progress as we work to simplify our business and transform our organization to move faster, lower costs and focus on our highest-return growth opportunities.”