For the quarter ended June 29, net sales increased 2 percent to $1.2 billion, operating profit increased 51 percent to $181.4 million, and diluted earnings per share increased 78 percent to $1.19 from 67 cents a year ago.
The company’s Innovate-to-Elevate platforms, which integrate the strengths of the company’s iconic brands, low-cost supply chain and product innovation, continue to help drive results, while the year-ago quarter had substantially higher cotton costs.
While the sales increase reflected a soft retail sales environment, gross and operating margins were strong, each up by approximately 500 basis points. Operating margins increased in each of the company’s four business segments with Activewear achieving record double-digit margins for the second quarter and the first half.
Based on year-to-date results and the economic environment, Hanes has increased its 2013 guidance for EPS, operating profit and free cash flow, while slightly lowering expectations for sales. The company’s new full-year guidance anticipates net sales of approximately $4.55 billion; operating profit of $550 million to $575 million; EPS of $3.50 to $3.65; and free cash flow of $450 million to $550 million.
"We achieved record profit margins and EPS in the second quarter with each business segment achieving improved profitability," Hanes Chairman and CEO Richard A. Noll said. "Our Innovate-to-Elevate platforms continue to excel and are quickly delivering results for us and our retail partners. We are on solid footing to continue to deliver value for consumers, retailers and investors. We have moved into the low end of our target range for sustained operating profitability sooner than anticipated, and our cash flow and solid balance sheet have allowed us to begin paying quarterly dividends and agree to acquire Maidenform Brands."
Segment SummaryKey accomplishments for the second quarter and first half include:
- Innovate-to-Elevate Platforms Driving New-Product Success. The company’s Innovate-to-Elevate product platforms continue to perform well. In particular, Hanes Comfort Blend and X-Temp underwear and socks are driving strong growth in Innerwear basics, and Smart Size bras are performing well across brands in Innerwear intimate apparel.
- Strong Second-Quarter and First-Half Operating Margin. The company achieved record profitability in the second quarter with an operating margin of 15.1 percent, up 490 basis points over the prior-year quarter. Operating margins increased in each business segment in the second quarter. For the first half, the company’s 12.4 percent operating margin increased 630 basis points over the previous year’s first half.
Innerwear Segment. Despite the continued soft retail environment, Innerwear net sales increased 3 percent and operating profit increased 23 percent for the second quarter. New products continued to perform well.
Strong Operating Margin Improvement. Innerwear operating margin increased to 22 percent in the second quarter and was 21 percent for the first half. Both basics (socks and underwear) and intimates (bras, panties, shapewear and hosiery) achieved margin expansion in the half.
Socks and Men’s Underwear Thrive. The segment’s net sales increase was driven by strong sales of socks and men’s underwear, each of which increased by double digits and achieved strong margin expansion. For intimates, hosiery sales increased while bra and panty sales declined.
Activewear Segment. The Activewear segment, formerly named Outerwear, achieved strong profitability improvement on flat sales in the second quarter.
Strong Profitability. The segment delivered record profitability with an operating margin of 12.6 percent for the second quarter and 10.4 percent for the first half. Each of the segment’s categories – retail activewear, branded printwear and Gear for Sports – achieved double-digit operating margins in the second quarter.
Sales Stability. Activewear net sales were comparable to the year-ago quarter, but sales increased by 2 percent excluding the wholesale branded printwear category, which is reducing low-margin sales as planned. Retail Champion and C9 by Champion sales increased by mid-single digits, and Gear for Sports sales increased by double digits.
International Segment. International segment net sales decreased 1 percent in the second quarter as a result of unfavorable currency exchange rates, while operating profit increased 7 percent and the operating margin was 10.2 percent. On a constant currency basis, net sales increased 5 percent and operating profit increased 18 percent in the second quarter.
Direct to Consumer Segment. Direct to Consumer sales for the quarter declined 2 percent, while operating profit increased 30 percent. The segment’s operating margin for the quarter was 9.8 percent.
2013 Guidance
Based on year-to-date results and the near-term economic outlook, Hanes has updated its full-year guidance. The company now anticipates net sales of approximately $4.55 billion; operating profit of $550 million to $575 million; EPS of $3.50 to $3.65; and free cash flow of approximately $450 million to $550 million. The guidance implies an operating margin between 12 percent and 13 percent, which is in the lower half of the company’s longer-term goal of sustained operating margin of 12 percent to 14 percent.
Hanes’ previous guidance for the year was 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 $350 million to $450 million.
Hanes continues to expect a decline in branded printwear sales in 2013 of $40 million to $50 million from rationalization that began in mid-2012; of the expected decline, $20 million occurred in the first half of 2013.
The company continues to expect its overall media investment to increase in 2013 with higher media spending of $20 million to $30 million in the second half of the year.
Full-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.
The free cash flow guidance for 2013 was increased $100 million to $450 million to $550 million as a result of improved first-half profitability, an improved outlook, and higher working capital productivity. Free cash flow guidance includes expected pension contributions of approximately $38 million and net capital expenditures of approximately $50 million.
Current and previous guidance for 2013 excludes any potential effects of or contributions from the pending acquisition of Maidenform Brands, Inc. Hanes announced on July 24, 2013, that it entered into a definitive agreement to acquire Maidenform, and the company expects to close the acquisition in the fourth quarter of 2013 pending regulatory and Maidenform shareholder approval and other customary closing conditions.
Hanes continues to expect to retire all of the remaining $250 million of 8 percent senior notes in the fourth quarter of 2013 and expects to end the year with $1 billion in bond debt. If the Maidenform acquisition closes in the fourth quarter, as expected, the company expects to end the year with a ratio of long-term debt to EBITDA within the company’s previously disclosed target range of 1.5 to 2.5 times.
"The true earnings power of our business is only beginning to shine through," Noll said. "Significant earnings potential remains as we push toward the higher end of the range for our longer-term operating margin goal. When you couple the current momentum in our business with a 10- to 15-cent contribution from Maidenform, a reasonable goal for 2014 EPS is in the low $4 range."
In 2012, the company announced it was 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 half of 2012, discontinued operations reported 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.
HanesBrands' brands include: Hanes, Champion, Playtex, Bali, JMS/Just My Size, barely there, Wonderbra and Gear for Sports. The company sells T- shirts, bras, panties, men’s underwear, children’s underwear, socks, hosiery, and activewear produced in the company’s low-cost global supply chain.
By press release through SportsOneSource
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