02 Aug Champion To Exit Target
Hanesbrands said Champion sales grew 18 percent in the second quarter to drive a 4 percent sales increase. But the company announced that Champion and Target Corporation will not renew their contract for an exclusive line of C9 by Champion activewear apparel when the current contract expires at the end of January 2020.
“The C9 by Champion program at Target is a mature program after 15 successful years,” said Hanesbrands CEO Gerald W. Evans Jr. in a statement. “Overall, Champion has significant momentum in all geographies globally, and we will continue to focus on growth across our Champion portfolio through expanded geographic penetration, product lines and distribution channels, including online and retail. Our core Champion sales in constant currency increased more than 30 percent globally in the first half of 2018.”
The C9 program is fully booked for 2018 and the conclusion of the contract is not expected to have a meaningful effect on the company’s outlook for 2019. In the past 12 months, the company generated approximately $380 million in C9 by Champion activewear sales.
With the brand’s forecasted growth rate, the company continues to expect to achieve global Champion sales of more than $2 billion by 2022. The company does not expect the end of the C9 by Champion program at Target to affect that projection.
“Target is a great retail partner, and we look forward to continuing to drive mutual growth with our leading national apparel brands across multiple product categories,” Evans said.
For the quarter ended June 30, 2018, the company reported net sales growth of 4 percent to $1.72 billion versus a guidance range of $1.7 billion to $1.725 billion. Organic sales in constant currency, which exclude acquisition contributions, increased slightly.
GAAP operating profit of $220 million and adjusted operating profit excluding actions of $245 million each decreased 6 percent, the midpoint of guidance for each.
GAAP diluted earnings per share for continuing operations was $0.39 compared with guidance of $0.38 to $0.40, and adjusted EPS excluding actions was $0.45, compared with guidance of $0.44 to $0.46. GAAP EPS and adjusted EPS decreased 17 percent and 15 percent, respectively, reflecting lower operating profit, a higher corporate tax rate for 2018 as a result of U.S. tax reform and higher interest expense.
Hanes has reiterated its full-year guidance and issued net sales, operating profit and EPS guidance for the third-quarter 2018.
“Our results for the second quarter were consistent with our guidance, and the year is unfolding as we expected,” said Evans. “We achieved organic growth for the fourth consecutive quarter with strong international and global Champion sales growth. We continue to address the challenging environment for intimate apparel and expect our turn-around plan to gain additional traction by the end of the year. Our cash flow from operations of $64 million in the second quarter was ahead of our expectations, and the outlook is strong. We continue to expect margin expansion in the second half, primarily driven by additional acquisition synergies and organic sales growth.”
Key Callouts for Second Quarter 2018 Financial Results
The diversification of Hanes’ global business model continued to support the company’s execution of its Sell More, Spend Less and Generate Cash strategies in the second quarter and is expected to contribute to second-half improvement. Key callouts follow.
Growth, Initiatives Drive 4 Percent Net Sales Increase. Contributors to net sales growth in the quarter included acquisition contributions, widespread global Champion strength and increased consumer-directed sales.
Net sales for Bras N Things, acquired in February 2018, and Alternative Apparel, acquired in October 2017, totaled nearly $52 million in the quarter.
Champion sales increased in all geographies. Global Champion sales increased 18 percent in the quarter and were up 16 percent in constant currency.
Global consumer-directed sales, consisting of company retail and online channel sales, increased 20 percent in the second quarter and represented 22 percent of total sales.
This is the fourth consecutive quarter of organic sales growth. Constant-currency organic sales, which exclude sales from acquisitions under a year old and the effects of changes in currency exchange rates, increased slightly, beating company projection of a slight decrease. In addition to global Champion growth, organic growth benefited from innerwear increases in U.S. basics, the Americas and Australia.
The company expects to deliver higher levels of organic growth in the second half as a result of continued execution of strategic growth initiatives, continued product innovation success, back-to-school alignment with key U.S. retailers and action plans to stabilize the Innerwear segment’s U.S. intimate apparel business.
First-Half Operating Profit Affected by Inflation and Inefficiencies, but Second-Half Margin Expansion Expected. Similar to the first quarter, second-quarter operating profit was affected by input-cost inflation and expected increased expenses for investment in brand building and temporary distribution inefficiencies. Those factors offset benefits from acquisition synergies and strong international segment operating profit growth.
The company expects a return to margin expansion in the second half as a result of additional acquisition synergies and accelerated organic sales growth.
Tax Reform Effect on EPS Comparisons. U.S. tax reform, which resulted in a higher corporate tax rate for Hanes beginning in 2018, affects the year-over-year comparisons for EPS. When applying the 2018 second-quarter tax rate to 2017 second-quarter results on a pro forma basis, GAAP EPS decreased 7 percent and adjusted EPS decreased 6 percent.
Business Segment Summaries
Innerwear segment’s mixed results were consistent with expectations. U.S. Innerwear segment sales decreased 3 percent, while operating profit decreased 10 percent as a result of raw material inflation and mix of products sold.
Sales of Innerwear basics increased slightly as point-of-sale trends improved, men’s underwear sales increased and women’s underwear returned to growth. Innovation continues to work, with strong performance of the newly launched Hanes Comfort Flex Fit men’s boxer briefs.
Innerwear Intimates sales decreased in the quarter, although progress was made on key aspects of the company’s plan to stabilize the business and then return to growth. As the company managed through retailer door closures and market trends, it successfully gained traction with bra space gains in the mass channel and new bra programs in the mid-tier channel. The company continues to prepare for a relaunch of its shape-wear programs late in the third quarter.
Activewear Segment Sales Increase on Acquisition Benefits and Organic Growth. U.S. Activewear segment sales increased 7 percent, including a 1.5 percent increase in organic sales fueled by growth of Champion and the licensed sports apparel business. Segment operating profit decreased 3 percent due to higher raw material costs, start-up manufacturing inefficiencies and temporary distribution costs.
The acquisition of Alternative Apparel contributed $20 million in sales. Champion sales increased more than 70 percent outside the mass channel. Growth was driven by strong consumer demand, specialty channel space gains and online penetration.
Strong International Segment Performance Drivers Include Acquisitions, Organic Growth and Synergies also contributed. International segment sales increased 15 percent and operating profit increased 27 percent. In constant currency, sales increased 12 percent and operating profit increased 24 percent.
Constant-currency organic sales increased 5 percent, primarily on the strength of Champion growth in Europe and Asia. The acquisition of Bras N Things in Australia contributed $31 million in sales.
The segment’s operating margin of 14 percent increased nearly 140 basis points over the year-ago quarter, benefitting from organic growth and integration synergies from past acquisitions.
2018 Financial Guidance
Hanes has reiterated full-year financial guidance for 2018, despite a strengthening U.S. dollar, and has issued third-quarter guidance for net sales, operating profit and EPS.
The company continues to expect full-year 2018 net sales of $6.72 billion to $6.82 billion, GAAP operating profit of $870 million to $905 million, adjusted operating profit excluding actions of $950 million to $985 million, GAAP EPS of $1.54 to $1.62, adjusted EPS excluding actions of $1.72 to $1.80 and net cash from operations of $675 million to $750 million.
Compared with the previous outlook for foreign exchange rates in the second half, the company now expects the strengthening dollar to reduce net sales growth by $30 million and operating profit growth by $5 million in the second half. Previously, the company expected a neutral impact on sales and profit from exchange rates in the second half.
With U.S. income tax reform, the company expects the 2018 full-year tax rate to be approximately 16 percent.
As far as third-quarter guidance the company expects a return to margin expansion in the second half and an increase in the organic growth rate.
Third-quarter net sales are expected to be in the range of $1.85 billion to $1.9 billion, representing approximately 4 percent growth at the midpoint. Constant-currency organic sales are expected to increase approximately 2 percent at the midpoint of guidance.
GAAP operating profit is expected to be $265 million to $280 million, while adjusted operating profit excluding actions is expected to be $285 million to $300 million. GAAP EPS is expected to be $0.49 to $0.52, and adjusted EPS excluding actions is expected to be $0.54 to $0.57.
The company expects pretax charges related to acquisition integration and other actions in the third quarter of approximately $20 million.