For the quarter ended March 30, 2013, operating profit increased substantially to $85 million, and EPS improved to 51 cents a share from a 25 cents loss a year ago.
While net sales for the first quarter were hampered by a sluggish retail environment, the company’s operating profit margin expanded 790 basis points over the year-ago quarter, benefitting from an improved cotton-cost and product-pricing environment and the company’s Innovate-to-Elevate margin-enhancement initiatives.
Based on first-quarter results, Hanes reaffirms its 2013 guidance for net sales of approximately $4.6 billion; operating profit of $500 million to $550 million; EPS of $3.25 to $3.40; and free cash flow of approximately $350 million to $450 million.
The company also recently announced the initiation of a regular quarterly dividend. The company’s Board of Directors has authorized a dividend of $0.20 per share to be paid June 3, 2013, to stockholders of record at the close of business on May 20, 2013. The quarterly dividend is the first for Hanes since its spinoff as an independent public company in 2006.
“We are pleased with our ongoing strategic execution, which resulted in improved profitability in the first quarter and bolsters our outlook for the rest of the year,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “Our operating profit margin was strong, our brands are commanding more retail shelf space, and our product innovation is working. We have more margin improvement potential ahead of us.”
First-Quarter 2013 Financial Highlights and Business Segment Summary
Key accomplishments for the first quarter include:
Space Gains Driven by Innovate-to-Elevate Platforms. The company continues to secure net space gains at retailers through its Innovate-to-Elevate platforms, which integrate the strengths of the company’s iconic brands, low-cost supply chain and product innovation. These platforms include ComfortBlend fabric underwear, socks and T-shirts, Smart Sizes seamless bras, and Tagless apparel.
Strong First-Quarter Operating Margin. The company achieved a first-quarter operating margin of 9 percent. Innovate-to-Elevate initiatives, which support higher unit selling prices and lower unit costs, and lower cotton costs drove a nearly 800-basis-point improvement in operating margin over the first quarter a year-ago.
Reduced Quarter-End Inventory Versus a Year Ago. Hanes continues to focus on inventory management, with its quarter-ending inventory level 17 percent lower than a year ago.
Key segment highlights for the first quarter include:
Innerwear Segment. Net sales were affected by the soft retail environment, but operating margin improved significantly over a year ago. New products continued to perform well.
Innerwear operating profit increased 69 percent, and operating margin increased 760 basis points to 18 percent.
Net sales for the segment declined 2 percent overall in the quarter, but bra and sock sales increased mid-single digits and men’s underwear was up slightly. Hanes ComfortBlend men’s underwear, panties and socks continue to perform well, as do Bali and barely there Smart Size seamless bras.
Activewear Segment. The Activewear segment, formerly named Outerwear, had a strong first quarter, with increased margins and a return to operating profitability.
Activewear sales declined 2 percent, but excluding the $15 million planned reduction of commodity-oriented branded printwear sales to the screen-print industry, segment sales increased 4 percent. Retail Hanes sales increased by double digits, and retail Champion and C9 by Champion sales increased by low single digits.
The segment returned to profitability, with an operating margin of 8 percent compared with an operating loss a year ago.
International Segment. International segment net sales declined 5 percent and operating profit declined by 53 percent. On a constant currency basis, net sales increased 1 percent and operating profit declined 42 percent.
Direct to Consumer Segment. Direct to Consumer sales decreased by 6 percent, while operating profit was slightly positive compared with a loss in the year-ago quarter.
2013 Guidance
For full-year 2013, Hanes expects net sales of approximately $4.6 billion; operating profit of $500 million to $550 million; and EPS of $3.25 to $3.40. The company expects a decline in branded printwear sales of $40 million to $50 million from rationalization that began in mid-2012; of the expected decline, $15 million occurred in the first quarter.
The company expects its overall media investment in 2013 to increase by $30 million to $40 million, with more than two-thirds of the increase in the second half of the year.
Interest expense and other expense are expected to total $120 million, including approximately $15 million in prepayment expenses to retire the remaining $250 million of 8 percent senior notes due 2016. The full-year tax rate is expected to be in the teens. However, due to enacted tax-law changes and anticipated discrete tax items, Hanes expects its tax rate will fluctuate by quarter, with the third-quarter rate expected to be toward the lower end of the range and the second- and fourth-quarter rates expected to be at the high end of the range.
Free cash flow is expected to be approximately $350 million to $450 million, including expected pension contributions of approximately $38 million and net capital expenditures of approximately $50 million. Free-cash-flow priorities are funding the company’s quarterly dividends and early retirement of the outstanding 8 percent senior notes.
Discontinued Operations
In 2012, the company announced exiting certain international and domestic imagewear businesses that are now classified as discontinued operations. Discontinued operations have no effect on 2013 results.
On May 30, 2012, Hanes sold its European imagewear business, and the company subsequently completed in 2012 the discontinuation of its private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. In accordance with generally accepted accounting principles, the company reported results for the second, third and fourth quarters of 2012 on a continuing-operations basis and revised prior-period results, including the first quarter of 2012, to reflect continuing operations. The company’s branded printwear operations continue to operate and serve the domestic screen-print market with Hanes and Champion brand products.
In the first quarter of 2012, discontinued operations reported a loss per diluted share of $0.03.
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