8-K: Hanesbrands Reports Solid Q2 Results, Announces Champion Sale, and Adjusts Full-Year Guidance

Hanesbrands announced solid second-quarter results, driven by better-than-expected performance in the U.S. innerwear business, and the agreement to sell its global Champion business.

Summary

• Hanesbrands reported its second-quarter 2024 financial results, which included the reclassification of the global Champion business and U.S. outlet stores to discontinued operations.
• Net sales from continuing operations decreased by 4% year-over-year to $995 million, but only decreased 1% on an organic constant currency basis.
• The company gained 40 basis points of innerwear market share in the U.S.
• GAAP operating loss from continuing operations was $(63) million, while adjusted operating profit increased 46% to $126 million.
• Adjusted earnings per share from continuing operations increased 650% to $0.15.
• Hanesbrands generated $78 million in cash flow from operations and reduced its debt for the seventh consecutive quarter.
• The company expects to pay down approximately $1 billion of debt in the second half of 2024.
• The sale of the global Champion business is expected to close in the second half of 2024, with net proceeds of approximately $900 million, including working capital adjustments and customary transaction costs, and excluding a potential additional $300 million contingent consideration.
• Full-year 2024 net sales from continuing operations are projected to be between $3.59 billion and $3.63 billion, a decrease of approximately 4% on a reported basis and 2% on an organic constant currency basis.
• Adjusted operating profit for the full year is expected to be between $395 million and $415 million.
• Adjusted earnings per share for the full year are projected to be between $0.31 and $0.37.
• Third-quarter 2024 net sales from continuing operations are expected to be between $920 million and $950 million, a decrease of approximately 3% on a reported basis and 1% on an organic constant currency basis.
• Adjusted earnings per share for the third quarter are projected to be between $0.09 and $0.14.

Sentiment

Score: 7

Explanation: The sentiment is positive due to the better-than-expected performance in the U.S. innerwear business, significant improvement in adjusted earnings, and the strategic sale of the Champion business. However, the negative impact of restructuring charges and the projected decrease in net sales temper the overall sentiment.

Positives

• The U.S. innerwear business showed strong performance, exceeding expectations and gaining market share.
• The company achieved significant improvement in adjusted operating profit and earnings per share.
• Hanesbrands is on track to reduce its debt by approximately $1 billion in the second half of 2024.
• The sale of the Champion business will provide substantial net proceeds to further reduce debt and strengthen the company's financial position.
• The company is seeing benefits from cost savings initiatives and lower input costs.
• The company's inventory management capabilities have led to a significant reduction in inventory levels.

Negatives

• Net sales from continuing operations decreased by 4% compared to the prior year.
• GAAP operating loss from continuing operations was $(63) million.
• The company incurred restructuring and other action-related charges, impacting GAAP results.
• The company is projecting a decrease in net sales for both the full year and the third quarter of 2024.
• The company's effective tax rate for 2024 and 2023 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets.

Risks

• The company faces challenges in a competitive and rapidly changing retail environment.
• Macroeconomic headwinds, particularly in Australia, are impacting sales.
• The company's ability to execute its strategic plans and realize the benefits of cost savings initiatives is subject to risks and uncertainties.
• The pending sale of the global Champion business is subject to regulatory approvals and closing conditions.
• The company's ability to deleverage on the anticipated timeframe is not guaranteed.
• Fluctuations in foreign exchange rates could negatively impact financial results.
• The company's future financial performance is subject to various risks and uncertainties.

Future Outlook

Hanesbrands expects to complete the sale of the global Champion business in the second half of 2024 and is focused on simplifying its business, reducing debt, and driving consistent revenue growth and higher margins. The company has provided full-year and third-quarter 2024 guidance, reflecting the reclassification of the Champion business and U.S. outlet stores to discontinued operations.

Management Comments

• We delivered solid second-quarter results in a challenging consumer and apparel market, including better-than-expected U.S. innerwear performance and margin expansion, said Steve Bratspies, CEO.
• We've taken several strategic actions that have fundamentally strengthened and simplified our business, better positioning the Company for consistent revenue growth, higher profit margins, and strong cash generation.
• We've also identified additional savings opportunities to drive a step-function change in our cost structure, which combined with our current margin improvement initiatives and lower interest expense gives us visibility to strong double-digit EPS growth over the next several years.
• We believe our earnings growth potential and continued debt pay down positions us to unlock significant shareholder value.

Industry Context

The announcement comes amid a challenging consumer and apparel market, where Hanesbrands is focusing on strategic actions to simplify its business and improve profitability. The divestiture of the Champion business aligns with a broader trend of companies focusing on core brands and streamlining operations. The company's focus on cost savings and margin improvement is also consistent with industry-wide efforts to navigate inflationary pressures and changing consumer preferences.

Comparison to Industry Standards

• Hanesbrands' adjusted gross margin of 39.8% shows improvement, but it is important to compare this to peers like Gildan Activewear, which has historically maintained gross margins in the low 30s, and Fruit of the Loom, which is a private company and does not disclose its financials.
• The company's debt reduction plan is a positive step, but its leverage ratio of 4.6 times net debt-to-adjusted EBITDA should be compared to industry benchmarks, which vary depending on the specific sector within apparel. Companies like PVH Corp and Levi Strauss & Co. typically operate with leverage ratios between 2 and 4.
• The 650% increase in adjusted EPS is significant, but it is important to note that this is from a low base of $0.02 in the prior year. It is important to compare this growth to the EPS growth of other apparel companies, which can vary widely based on their specific strategies and market conditions.
• The company's focus on cost savings and supply chain consolidation is a common strategy in the apparel industry, but the success of these initiatives will depend on the company's execution and the specific challenges it faces in its supply chain.

Stakeholder Impact

• Shareholders will benefit from the debt reduction and potential for increased shareholder value.
• Employees may be impacted by restructuring and consolidation actions.
• Customers will see a more focused and simplified business.
• Suppliers may be affected by changes in the company's supply chain.
• Creditors will benefit from the company's debt reduction efforts.

Next Steps

• The company will focus on completing the sale of the global Champion business in the second half of 2024.
• Hanesbrands will continue to implement its strategic plans, including supply chain restructuring and cost savings initiatives.
• The company will continue to pay down debt using proceeds from the Champion sale and internal cash generation.
• Hanesbrands will focus on driving consistent revenue growth and higher margins in its continuing operations.

Key Dates

Keywords

Hanesbrands, Innerwear, Champion, Divestiture, Restructuring, Debt Reduction, Financial Results, Earnings, Guidance, Apparel, Operating Profit, Net Sales, Cost Savings, Market Share