Hanesbrands Inc. (NYSE:HBI) Q1 2024 Earnings Call Transcript May 9, 2024

Hanesbrands Inc. beats earnings expectations. Reported EPS is $-0.02, expectations were $-0.06. HBI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And thank you for standing by. Welcome to the HanesBrands’ First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your T.C. Robillard, Vice President of Investor Relations. Please go ahead.

T.C. Robillard: Good day, everyone, and welcome to the HanesBrands’ quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2024. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and the replay of this call can be found in the Investors section of our hanes.com website. On the call today, we may make forward-looking statements either in our prepared remarks on the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks include those related to current macroeconomic conditions, consumer demand dynamics, our ability to successfully execute our strategic initiatives, including our Full Potential transformation plan, the Champion performance plan and our evaluation of strategic alternatives for our global Champion business, our ability to deleverage on the anticipated time frame and the inflationary environment. These risks also include those detailed in our various filings with the SEC, which may be found on our Website as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today’s references to our consolidated financial results and guidance exclude all restructuring and other action-related charges.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today’s news release. With me on the call today are Steve Bratspies, our Chief Executive Officer; and Scott Lewis, our Chief Financial Officer. For today’s call, Steve and Scott will provide some brief remarks, and then we’ll open it up to your questions. I will now turn the call over to Steve.

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Stephen Bratspies: Thank you, T.C. Good morning, everyone, and welcome to our call. Hanesbrands delivered solid first-quarter results with sales at the midpoint of our outlook, better-than-expected operating profit, positive cash flow generation, and further reduction of our leverage. The year is unfolding as anticipated, and given our strong visibility to our operating profit and cash flow guidance, we reiterated our full-year outlook. In addition, we further strengthened our market leadership position in Innerwear. We continued our progress on Champion, and with a positive inflection in margins and our lower fixed-cost structure, we believe we’re well-positioned to accelerate earnings growth and further reduce debt, putting in place a flywheel for shareholder value creation over the next several years.

For today’s call, I’ll briefly touch on our Innerwear and Champion businesses. Then I’ll discuss the value creation opportunity we see ahead of us. Looking at our global Innerwear business, as expected, apparel sales globally remain under pressure as stretched consumers limit their spending. However, despite the headwind, we focused on strengthening our market-leading Innerwear businesses, and our strategy of consumer centricity is working as we gain share and outperform the market. We’re launching new consumer-led innovation, including Maidenform M, Bonds Shape Of and the second phase of our successful Hanes Originals platform called SuperSoft. With our robust product pipeline, we expect 2024 to be another record year of innovation. We’re increasing brand marketing investments to support our current and future innovation launches, build greater brand relevance with younger consumers, gain incremental shelf space and seasonal programming, and further solidify the leadership position of our brand portfolio.

In parallel, we continue to improve our operating model, including better inventory management capabilities and skewed discipline, improved service and on-shelf availability, as well as a lower fixed-cost structure. As a result of our strategic work over the last three years, our brands are healthier, our product pipeline is full and is resonating with consumers, our gross margin is back to historical levels. We’re investing more in marketing than we have in over a decade, and we’re seeing all of this reflected in our market share, particularly with younger consumers, as we gained another 50 basis points of market share during the quarter across both men’s and women’s in the U.S. We’re widening the gap against our competitors, and we’re well-positioned for growth as the category returns to its historical trend of steady growth.

Turning to Champion, we’re aggressively implementing our performance enhancement plan designed to strengthen the brand and position Champion for long-term profitable growth. We also continued our focus on building brand heat, particularly with younger consumers, including strategic collaborations as well as targeted new product offerings in key channels. We moved our kids’ business to a license model, which is part of our strategic plan to optimize the portfolio. And as we highlighted last quarter, we’re increasing marketing investments to build on the momentum of our “Champion What Moves You” campaign ahead of our new fall-winter product offering. It’s early, but we’ve seen some initial green shoots that our marketplace segmentation strategy is working.

As we’ve previously stated, it will take time for our strategic actions to fully translate to the P&L. Global Champion sales in the first quarter decreased 25% on a constant currency basis. During the quarter, we began the planned strategic move of our kids’ business to a license model. This move accounted for approximately 500 basis points of the decline. Normalizing for this, we saw a sequential improvement in Champion’s year-over-year trends. We expect the sales decline to continue to moderate in the second quarter. And we continue to expect Champion sales to trough in the first half as we move past our channel cleanup actions, our collegiate business returns to its normal seasonal cadence, and we build on our momentum in Asia. With respect to our review of strategic alternatives for the Global Champion business, the process is progressing as expected.

We continue to evaluate the right path forward, as we’ve seen strong interest from our broad and diverse group of global parties. And while there’s nothing specific to add at this time, we remain committed to updating you as appropriate when there’s news to share. Now I’d like to turn to the significant value creation opportunity we see over the next several years. The underlying financial model of this company has always been strong, with healthy margins and consistent cash generation. While inflation, market disruption, and the challenging consumer demand environment have masked this for some time, the strength is once again visible. And over the past three years, we’ve taken necessary actions across the business to further enhance our operating and financial models.

We’ve built new capabilities around brand building, data analytics, as well as inventory management and SKU discipline. We’ve added talent. We’ve streamlined our supply chain and extended our advantages. And we’ve taken out more than $200 million of fixed costs, nearly half of which were in SG&A. With our leading brand positions, lower fixed cost structure, reestablished gross margin, consistent cash generation, and a commitment to reduce debt, we’ve created a flywheel for shareholder value creation, one that we believe positions us over the next several years to accelerate earnings growth, drive faster de-leverage of our balance sheet, as well as free up incremental capital to invest in growth initiatives. As I close, I’d like to take a moment and thank the entire Hanesbrands team.

A factory worker using modern technology to assemble a garment.

Your dedication, teamwork, and commitment to our transformation journey is beginning to show in our results. We delivered a solid first quarter in a difficult consumer and apparel market. We have strong visibility to achieving our outlook for the year. We’ve strengthened the long-term operating and financial models of the company, and we believe we’re well positioned to unlock shareholder value over the next several years. And with that, I’ll turn the call over to Scott.

Scott Lewis: Thanks, Steve. At a high level, we delivered solid first quarter results as we’ve met or exceeded guidance across all of our key metrics. And as I look at our results, I’m reminded of where we were a year ago and the progress we’ve made delivering on the core financial objectives we laid out. Gross margins are back to historical levels. We’re taking costs out of the business. We’re generating consistent cash flow, and we’re paying down debt and reducing leverage. We’re also continuing to strengthen our operating model. We’re increasing brand investment. We’re rolling out even greater levels of product innovation, all of which is expected to generate strong earnings growth this year, as well as position us for more consistent top and bottom line growth over time.

For today’s call, I’ll touch on the highlights from the quarter, our improved financial position, and then I’ll provide some thoughts on our outlook. For additional details on the quarter’s results and our guidance, I’ll port you to our news release and FAQ document. Looking at the details of the quarter, net sales of $1.16 billion was at the midpoint of our guidance range. This represents a decrease of $233 million, or nearly 17% versus prior year. Of this decrease, approximately $15 million was from FX, $20 million was from the U.S. Hosiery divestiture last year, and $65 million was from discrete timing related items within the Activewear segment that we discussed on last quarter’s call. These include the strategic shift of the Champion kids business to a license model, accelerated orders from customers ahead of our SAP implementation, and shipment timing within our collegiate business, all of which benefited last year’s first quarter.

Adjusting for these, the comparable sales base of our business decreased approximately 10% year-over-year in the first quarter. Looking at sales by segment within U.S. Innerwear, as expected, the category remained challenging in the quarter. Sales decreased 8% as compared to prior year. This was roughly 200 basis points below our outlook, driven by a higher than anticipated level of inventory management actions by select retailers. However, we are seeing that our strategy is working. We are winning in the marketplace. Our point of sale trends outperformed the market as we gained another 50 basis points of share in the quarter. In our U.S. Activewear business, sales decreased approximately 31%, or $97 million as compared to prior year, which was in line with our outlook.

Approximately $65 million, or two-thirds of the decline, was driven by the previously mentioned timing related items in the prior year quarter. Adjusting for this, Activewear sales decreased nearly 14%, which represents a sequential improvement in the underlying year-over-year trends in both the Champion brand and the Activewear segment. And in our international business, constant currency sales decreased 9% compared to last year, which was in line with our outlook. For the quarter, growth in Latin America, Japan, and China were more than offset by decreases in Europe and Australia as macroeconomic headwinds continue to impact demand in these regions. According to margins, gross margin of 39.9% was strong, coming in 140 basis points above our outlook.

As compared to last year, gross margin increased 720 basis points, driven primarily by the benefits from lower input costs, cost savings initiatives, as well as the impact from business mix. With respect to SG&A, we decreased expenses $13 million as compared to last year, in line with our outlook. The lower expense was driven primarily by the benefits from cost savings initiatives and disciplined expense management. These savings helped fund a 50% increase in brand marketing investments, which was focused on our US Innerwear and Global Champion businesses in the quarter. This resulted in an operating margin of 7.3% for the quarter, an increase of 270 basis points over last year and ahead of our expectation, driven by the strong gross margin performance.

Looking at the remainder of the P&L, interest and other expenses were $76 million. Tax expense was $15 million, and earnings per share for the quarter was a loss of $0.02, which was ahead of our outlook. Turning to cash flow and the balance sheet, we continue to strengthen our balance sheet and our financial flexibility in the quarter. We generated cash flow from operations of $26 million. This was driven by better than expected profit performance and disciplined working capital management. Leverage at the end of the quarter was five times on a net debt to adjusted EBITDA basis, which was nearly a half a turn lower than last year. The improvement in our leverage was driven by lower debt, reflected in the $500 million of debt we paid down last year.

All of this has led to a strong liquidity position of more than $1.2 billion at the end of the first quarter. And now, turning to guidance. All of my comments were referred to adjusted results and will be based on the midpoint of our guidance ranges. We reiterated our full year guidance for sales, operating profit, earnings per share, and operating cash flow. Our view for the year is unchanged since our previous call. As a reminder, we highlighted that we expect the macro consumer environment to remain challenging for our categories in 2024, with progression in the year-over-year sales trends as we move through the year. We continue to remain highly confident in our operating profit guide, which implies 26% growth over the last year, as we believe we have appropriately de-risked in this uncertain consumer environment.

Our confidence in delivering $500 million to $520 million of operating profit is based on our visibility to input costs on our balance sheet for the rest of the year, and our proven cost savings programs that continue to exceed our expectations. With respect to our second quarter outlook, we expect net sales on a reported basis to decrease approximately 6% as compared to last year. Adjusting for the impact from the U.S. Hosiery divestiture and FX headwinds, organic constant currency sales are expected to decrease approximately 3%. That said, we expect second quarter operating profit to increase approximately 40% over prior year, and operating margin to expand nearly 300 basis points to 9%, driven by the benefits from lower input costs and our cost savings initiatives.

Given the lower debt balances, we expect interest expense to decrease year-over-year, resulting in earnings per share of $0.09 as compared to a loss of $0.01 last year. So, in closing, the year has unfolded as anticipated. We have confidence and visibility in our full year outlook. We’re paying down debt and lowering interest expense, and we’re increasing investments to drive growth. This has created a multi-year flywheel to generate meaningfully higher earnings and significantly reduce debt, which we believe will drive strong shareholder returns over the next several years. And with that, I’ll turn the call over to TC.

T.C. Robillard: Thanks, Scott. That concludes our prepared remarks. We’ll now begin taking your questions and we’ll continue as time allows. I’ll turn the call back over to the operator to begin the question-and-answer session. Operator?

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