With the majority of cotton inflation behind the company, Hanes expects solid results in the second half of 2012. The company’s full-year guidance is for diluted EPS of $2.50 to $2.60; net sales of $4.52 billion to $4.57 billion, an increase of approximately 2 percent to 3 percent over last year; and free cash flow of $400 million to $500 million.
“Our business had a solid quarter, and we are performing slightly ahead of our plans for the year, especially in the Innerwear segment,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “While we still have a long way to go, we are well positioned for the second half of the year.”
Second-Quarter Business Highlights
Innerwear segment net sales increased 2 percent in the quarter over last year, following a 1 percent sales gain in the first quarter. Excluding sales declines to a major mid-tier retail customer that is undergoing a major strategic shift, year-over-year Innerwear sales would have increased 4.4 percent in the second quarter and 2.7 percent in the first quarter. Operating profit in the quarter increased 18 percent over last year, and the segment operating profit margin increased 2.4 percentage points.
Outerwear segment net sales increased 1 percent while the segment had an operating loss. Sales increased for Champion activewear and Hanes casualwear, but as expected, sales declined in branded printwear. Higher cotton costs and lower prices in branded printwear reduced margins and profitability.
International segment net sales declined 2 percent, and operating profit was comparable to a year ago. On a constant currency basis, International net sales increased 5 percent and operating profit increased 10 percent. With the sale of the company’s European imagewear operations, the company has no exposure to the European market.
The company’s overall operating profit margin was 10.2 percent in the quarter, and its gross margin was 31.1 percent despite cotton costs of more than double those of the prior-year quarter.
Additional Guidance
Hanes 2012 full-year guidance for continuing operations is diluted EPS of $2.50 to $2.60 and net sales of $4.52 billion to $4.57 billion.
The company’s guidance for continuing operations is based on the following facts. Product pricing, shelf space, and promotion plans for the remainder of 2012 have been finalized with major retail accounts. Virtually all commodity costs have been fixed for the remainder of the year, with the company incurring significantly lower cotton and other inflation impacts in the second half of the year. The majority of sales trends have been substantially tracking to expectations, with the notable exception of a major mid-tier retail account that is undergoing a major strategic shift. Approximately $8 million of company costs, primarily from supply chain restructuring, that had been expected in the second quarter are now expected to occur in the second half.
For margins, Hanes expects continued sequential quarter improvement in gross and operating margins in the third and fourth quarters as the company overlaps last year’s progressively higher cotton costs with this year’s declining cotton costs. Gross margin percentages in the second half are expected to average in the low to mid-30s, while operating margins are expected to average approximately 12.5 percent to 13 percent.
Interest expense in 2012 is expected to be approximately $17 million lower than 2011 as a result of debt reduction. The company completed an amendment in July to reduce its revolving credit facility’s borrowing rate by 100 basis points.
The company’s full-year tax rate now is expected to be in the mid-teens, an increase from previous guidance of a low double-digit rate. However, the company expects increased operating profit to offset the tax rate increase. As is typical for the company, the net tax rate will fluctuate by quarter, with the third-quarter’s rate expected to be slightly less than 10 percent and the fourth-quarter rate being in the mid- to high teens.
The company continues to expect full-year free cash flow of $400 million to $500 million after net capital expenditures of approximately $45 million. Free cash flow will primarily be used in 2012 to retire all of the company’s $300 million of floating rate notes, including approximately $150 million of these notes retired on July 12.
For 2013, the company remains committed to prepaying all of its $500 million of 8 percent fixed rate notes and still believes that a reasonable estimate of EPS potential is in the low $3 range.
Discontinued Operations
On May 30, Hanes sold its European imagewear business, and the company is completing the discontinuation of its private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. In accordance with GAAP requirements, the company reported results for the second quarter on a continuing-operations basis and revised prior-period results to reflect continuing operations. The company’s branded printwear operations will continue to operate and serve the branded domestic screen-print market.
For the first half, discontinued operations had a loss per diluted share of $0.69 – a loss of $0.03 in the first quarter and a loss of $0.66 in the second quarter.
In February when the company issued financial guidance for 2012, the company’s expectations for what are now discontinued operations were net sales of approximately $190 million, an operating loss of less than $1 million, and cash flow from operations of approximately $15 million.
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