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Contrary to COVID Era, Hanesbrands Sees Double-Digit Q2 Gains

Swimming against the tide of dismal second quarter results, Hanesbrands scored net income and EPS gains in the period.

In a Nutshell: Hanesbrands, a global marketer of branded basic apparel, reported second-quarter results Thursday that saw double-digit growth in diluted earnings per share despite market disruption from the COVID-19 pandemic.

The company said the earnings growth was a result of its ability to pivot to production and sales of personal protective garments, such as face masks and medical gowns, combined with relatively strong apparel performance in pandemic conditions, including 68 percent online sales growth.

In the midst of the virus, Hanesbrands said it is focused on serving channels of trade that remain open; reopening production, distribution and selling operations safely; generating and preserving cash, and developing a product line of personal protective garments to meet emerging government, commercial and consumer demand.

Apparel sales and protective garment sales both exceeded the company’s base-case scenario for the quarter. The company continues to generate significant sales growth through channels of trade that have remained open during the pandemic, including online, mass retail, dollar store, and food and drug.

Due to the continued uncertainty and unpredictability of the COVID-19 pandemic, Hanesbrands said it will not provide quarterly and full-year performance guidance until visibility of the pandemic’s effect on global economies improves.

The decline in apparel sales in the second quarter was better than the company’s base-case scenario. Absent a slowdown of store re-openings or recurrence of store closures, the company anticipates sequential improvement of sales declines in the third and fourth quarters. U.S. innerwear sales on the strength of basics could return to rebased year-ago levels by the end of the year.

Excluding the potential for additional government contracts, the company estimates that it could sell more than $150 million of protective garments in the second half of 2020, primarily in the third quarter. The company expects to generate positive cash flow in the second half.

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Sales: Net sales for the second quarter ended June 27 fell 1.1 percent to $1.74 billion compared with $1.76 billion a year ago.

The prior-year quarter included net sales of $119 million from the now-exited C9 Champion mass program and the DKNY intimate apparel license. Excluding the exited programs and foreign exchange rates, net sales for second-quarter 2020 increased 7 percent.

The company sold $752 million in personal protection garments globally to governments, large organizations, consumers and business-to-business customers. The sales of the face masks and medical gowns significantly exceeded initial expectations for the new business lines. As part of the protective-garment sales in the quarter, the company delivered more than 450 million cloth face coverings and more than 20 million medical gowns to the U.S. government. It’s selling face masks to consumers globally under its Hanes, Champion, Bonds and Dim brands. Excluding the potential for additional government contracts, the company estimates it could sell more than $150 million of protective garments in the second half of 2020.

Excluding sales of protective garments, roughly 30 percent of total sales in the quarter were through the online channel through company e-commerce websites, retailer websites, large internet pure-plays and business-to-business customers.

International segment sales declined 20 percent. The company said apparel performance, excluding protective garments, exceeded its base-case scenario, with strong online sales growth and strong point-of-sale trends after closed company and retailer stores began to reopen.

U.S. Innerwear segment results benefited from better-than-expected apparel performance and significant sales of protective garments. Second-quarter segment revenue increased 61 percent, as apparel performance, excluding protective garments, significantly exceeded the company’s pandemic base-case scenario with revenue decreasing 29 percent.

Innerwear point-of-sale trends accelerated through the quarter, turning significantly positive in May and June. Innerwear basics gained more than 300 basis points of market share in the quarter, and innerwear intimate apparel point-of-sale trends returned to pre-COVID levels entering July.

U.S. Activewear second-quarter performance exceeded the company’s base-case pandemic scenario, decreasing 62 percent as a result of the pandemic-related demand impacts and $98 million of C9 Champion sales in mass retail in the year-ago quarter.

The pandemic resulted in retail door closures and lower demand for the segment’s printwear and sports apparel businesses, Hanesbrands said. Point-of-sale trends for Champion accelerated as the quarter progressed, and strong positive trends continued in July. Sales through the enhanced website increased nearly 200 percent in the quarter.

Earnings: Net income in the quarter rose 7.8 percent to $161.18 million from $149.56 million a year earlier.

Second-quarter operating profit increased 5 percent to $242 million and the quarter’s adjusted operating profit, excluding actions increased 41 percent to $305 million.

The company incurred roughly $63 million in planned restructuring actions and additional COVID-related costs in the quarter. Planned supply chain restructuring actions accounted for $11 million of the charges. The remaining $52 million of non-cash pandemic-related charges consisted of a $20 million write down of intangible assets, $11 million of bad debt expense and approximately $21 million related to canceled orders of specialized seasonal inventory.

Second-quarter earnings per share (EPS) increased 12 percent to 46 cents, and adjusted EPS excluding actions increased 58 percent to 60 cents.

CEO’s Take: Hanesbrands CEO Gerald W. Evans Jr. said, “Despite the effects of pandemic-caused disruptions to global economies, our business is in great shape. We performed significantly better than our base-case scenario in both our apparel business and our new protective garment business. Point-of-sale trends are improving for apparel, and in the case of U.S. innerwear basics and U.S. Champion, point-of-sale trends in May and June were higher than pre-COVID levels.”

“Our brands are strong, and we are gaining market share and building momentum,” Evans added. “Our liquidity remains strong, allowing us to maintain our quarterly cash dividend and have ample operating flexibility. While there is still near-term uncertainty concerning the ongoing economic impact of the COVID-19 pandemic, we believe we are positioned to drive growth and seize opportunities over the next several years.”