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Hanesbrands Nicked by Sears Bankruptcy and Currency Woes

Taking a hit from the Sears bankruptcy that brought it into the red in the quarter, Hanesbrands still saw sales rise on the strength of Champion and international units.

In a Nutshell: Hanesbrands said it took a bad-debt reserve charge of $14 million related to the bankruptcy filing of Sears Holdings Corp. that “masks underlying performance,” and contributed to a decline in operating profit. With Sears set to shutter a majority of its stores in a last-ditch attempt to stay in business, Hanesbrands is preparing to lose about 1 percent of overall sales, or about $15 million in the fourth quarter, from lost Sears business.

The company updated full-year financial guidance for 2018 to reflect year-to-date results, the Sears Holdings bankruptcy, the strengthening dollar and other factors. It now expects full-year 2018 net sales of $6.74 billion to $6.78 billion, operating profit of $860 million to $875 million and adjusted operating profit excluding actions of $940 million to $955 million.

The updated guidance assumes no sales or profit contribution in the fourth quarter from Sears, which accounted for roughly 1 percent of total year-to-date company sales. Prior to the bankruptcy filing, Hanes had expected fourth-quarter sales of around $15 million and operating profit of about $5 million from Sears.

Compared with the company’s previous outlook for foreign exchange rates, Hanesbrands now expects the strengthening dollar to have a greater negative currency effect on net sales. For the fourth quarter, the company expects currency exchange rates to reduce sales by $29 million year over year, up from the previous outlook of a $12 million headwind.

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On a positive note, the maker of basic apparel and innerwear, based in Winston-Salem, N.C., said a 30 percent sales gain in the Champion brand was driven by strong double-digit percentage growth in the U.S., Asia and Europe following similar gains in the year-ago quarter. Also contributing to a net sales gain was a 15 percent increase in the consumer-directed channels of online and company-owned retail stores, which accounted for 21 percent of total company sales in the quarter.

Sales: Net sales for the third quarter ended Sept. 29 increased 2.7 percent to $1.85 billion from $1.8 billion in the year-ago period. Activewear sales rose 6.8 percent to $554.95 million, while international sales grew 11.3 percent to $619.44 million, with both divisions benefiting from strong Champion growth. Innerwear sales decreased 6.9 percent to $599.73 million, primarily from slower replenishment orders and higher raw material costs.

Earnings: As a result of the $14 million charge from the Sears bankruptcy filing, operating profit fell 0.6 percent to $256.89 million. When excluding the bankruptcy charge, pro forma adjusted operating profit increased 6 percent to $292 million. Net income fell 15.7 percent to $171.42 million compared to income of $202.36 million in the third quarter of 2017.

CEO’s Take: Gerald W. Evans Jr., CEO, said: “We made progress on our long-term goals of continued organic sales growth, higher profit margins and reduced debt leverage. We are diligently focused on delivering the fourth quarter and we are off to a strong start in October with solid order bookings across our segments. Global Champion growth outside the mass channel, which was up 40 percent in constant currency in the quarter, is expected to remain strong. And while we were disappointed that innerwear sales were lower than expected in the third quarter, consumer demand was strong and we believe that continued underlying strength supports our outlook for improvement.”