HanesBrands Outlines Pandemic’s Impact On Q1 Financials, Future Plans
HanesBrands has released first-quarter financial results that were significantly affected by the COVID-19 pandemic. Prior to the pandemic’s late-quarter disruption of economies around the world, the company experienced strong revenue and profit trends, but in the past two weeks of the quarter, it reported an unprecedented drop in sales and profit. Winston-Salem, North Carolina-based HanesBrands participates in the promotional products industry as suppliers Hanes/Champion/ComfortWash (PPAI 191138, S10) and Alternative Apparel (PPAI 217134, S5).
Due to disruptions to retailer operations and the unpredictability of consumer confidence, HanesBrands says its pandemic response is focused on several initiatives: serving channels of trade that are generating sales, preserving cash and enhancing liquidity, and developing a product line of personal protective garments, including face masks, to meet emerging commercial and consumer demand.
“We were on a pace to deliver a strong first quarter above our expectations until the late quarter impact of the COVID-19 pandemic,” says Hanes CEO Gerald W. Evans Jr. “Prior to the pandemic impact, sales for our U.S. Innerwear business were significantly better than our expectations. Champion was a driver of better-than-planned U.S. Activewear growth, and our International businesses were in line with expectations.
“The effects of the pandemic changed those trajectories. In response, we prioritized operational protocols for the safety of our employees, consumers and communities. I am proud of the terrific effort and achievements of our global teams. We quickly pivoted to preserve cash, create balance sheet flexibility and build strong liquidity. We used our large-scale global supply chain to manage inventory, continue to serve key channels, including mass retail and online, and seize the opportunity to expand our manufacturing capability to include cotton face masks,” he adds.
The company’s first quarter ended March 28 and the effects of the COVID-19 pandemic are reflected in both GAAP and adjusted measures that exclude actions. The company estimates the late-quarter impact of the pandemic reduced revenue by approximately $181 million, operating profit by approximately $86 million and earnings-per-share by approximately $0.20.
First-quarter net sales were $1.32 billion compared with $1.59 billion a year ago, which included net sales of $94 million from the now exited C9 Champion mass program and the DKNY intimate apparel license. HanesBrands notes that excluding the exited programs, the impact of COVID-19 and foreign exchange rates, total constant-currency net sales for the first-quarter 2020 would have increased 1.6 percent.
First-quarter GAAP operating profit and adjusted operating profit excluding actions were $34 million and $63 million, respectively, compared with $150 million and $171 million a year ago, respectively. GAAP and adjusted EPS excluding actions were $(0.02) and $0.05, respectively, compared with $0.22 and $0.27 a year ago, respectively.
To navigate the current economic environment, the company is limiting discretionary spending and capital expenditures, has temporarily reduced salaries and furloughed select employee groups, is managing inventory and supply chain production, and is adding liquidity to its balance sheet. The temporary pay reductions and furloughs, as well as reductions in discretionary spending such as media and marketing, are expected to save approximately $200 million in 2020. The company is operating production and distribution facilities on a demand-adjusted basis.
The company ended the first quarter with nearly $1.1 billion of cash on hand. To be prudent, the company intends to secure approximately $500 million in debt financing, subject to market conditions, with the proceeds used to repay the company’s revolver and further enhance liquidity. HanesBrands says it has stress tested its balance sheet under various scenarios and believes its liquidity plans provide significant operating flexibility during the pandemic, strengthens the company’s long-term business model and positions it to take advantage of opportunities as the world economy emerges from the pandemic.
Due to the uncertainty and unpredictability of the COVID-19 pandemic, HanesBrands withdrew its first-quarter and full-year financial guidance on March 25. Until visibility of the pandemic’s effect on global economies improves, the company will not provide quarterly and full-year guidance and expectations.
“The COVID-19 pandemic is proving to be a significant challenge for every aspect of society to navigate,” says Evans. “As a 120-year-old business enterprise, we feel confident that we have the right plans, the consumer-trusted brands and products, and a superior workforce to not only overcome these short-term business challenges but to thrive over the long term.”
HanesBrands reports that it continues to generate sales through channels that have remained open during the pandemic, including online, mass retail, dollar store, and food and drug. The company generates online sales through its own ecommerce websites, retailer websites, large internet pure-plays and business-to-business customers. Total online sales increased five percent globally in the first quarter. Online growth rates accelerated in the last two weeks of the quarter and have continued to accelerate in April.
HanesBrands is also producing face coverings and gowns, and expects to build an ongoing personal protective garments business. The company is making more than 320 million cloth face coverings and more than 20 million medical gowns for the U.S. government. In addition, it is also ramping up production to launch a cotton face mask business for consumers and business-to-business customers, including large employers seeking to reopen business operations. The company expects to create an ongoing product line of basic personal protective garments to serve the consumer, commercial and governmental markets. Sales in 2020 are expected to be more than $300 million, and HanesBrands believes the business has the potential to expand further in future years.
Breaking down its business segments, HanesBrands’ international segment sales declined 14 percent while operating profit decreased 48 percent. On a constant-currency basis, net sales decreased 11 percent and operating profit decreased 47 percent. Sales and profit were affected by the global COVID-19 pandemic. In addition to wholesale business declines, approximately 1,000 of the company’s 1,200 brand stores, which closed in March, are located in international geographies. Prior to the impact of the pandemic, international segment constant-currency sales were in line with expectations.
Prior to mid-March, the company’s U.S. innerwear segment sales and profit were trending significantly better than expected with net sales down less than a percentage point. HanesBrands reports that strong performance for both basics and intimates in that period, including market share gains, highlighted strong underlying fundamentals for the ongoing innerwear revitalization. Net sales decreased 11 percent while operating profit decreased 22 percent, both affected by the pandemic and exit of the C9 Champion mass retail program. When year-ago results are rebased for program exits, segment net sales decreased nine percent and operating profit decreased 21 percent.
Its U.S. activewear segment first-quarter sales decreased 29 percent, or $117 million, as a result of the COVID-19 impact and $85 million of C9 Champion sales in mass retail in the year-ago quarter. When the year-ago quarter is rebased for the C9 Champion program exit, net sales decreased 10 percent. Prior to mid-March, the segment had higher-than-expected performance with continued consumer demand for Champion brand products and increases for other activewear brands in the sports licensing business’ mass and mid-tier channels and seasonal activewear in the online channel.