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Text: We are pleased to be here today to provide an update on our progress after the second quarter of 2020.
Hopefully, everyone has had a chance to review the news release we issued earlier today.
These risks include those related to the impact of the COVID-19 pandemic and measures by governmental or regulatory authorities to combat the pandemic on our business and operations as well as the business and operations of the consumer, our customers, suppliers, business partners and labor force.
These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases.
The use of the term PPE relates to our personal protection garment business, including face masks, face coverings and gowns.
Also, please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the exited C9 Champion program at Target and the DKNY intimates license.
With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer.
This quarter, I have never been more proud of this organization and our employees' ability to rise to the occasion and meet challenges to deliver exceptional performance, even in the midst of a devastating pandemic.
Despite the economic disruption of COVID-19 around the globe, Hanesbrands delivered strong second quarter results, driven by better-than-expected performance in both our apparel and our new PPE businesses.
For the quarter, revenue increased 6%, operating profit increased 41%, earnings per share increased 58%, and we generated $65 million of operating cash flow.
Our strong second quarter performance in one of the most challenging retail and consumer environments in decades underscores the strength of our brand portfolio, the agility of our organization, the scale of our company-owned supply chain and the cash-generating power of our business model.
In my view, there are four key highlights in the quarter that speak to the strength of our underlying model.
And our ability to grow this business going forward.
First, our apparel business outperformed; second, the organization quickly pivoted to create a new PPE business; third, we generated positive cash flow; and fourth, we ended the quarter with $1.8 billion of liquidity.
Touching on our apparel business performance, which excludes PPE, our strong second quarter results were meaningfully ahead of our base case scenario in each of our three main segments: U.S. Innerwear, U.S. Activewear and international.
Point-of-sale trends improved sequentially through the second quarter in all of our key geographies, with the positive momentum carrying into July, as consumers settled into new routines, stimulus initiatives were rolled out, and retail doors reopened around the world.
In fact, point-of-sale in our U.S. Basics and Champion businesses in May and June exceeded pre-COVID levels.
In U.S. Innerwear, point-of-sale trends accelerated through the quarter.
Moving from down 29% in April to up 8% in May and up 11% in June.
We experienced strong momentum in our Basics business with mid-teens point-of-sale growth, yielding more than 300 basis points of market share gains in the quarter.
Within our Intimates business, point-of-sale returned to essentially flat in June and improved to up 3% in July, regaining its pre-COVID momentum as the mid-tier and department store channels reopened.
We experienced a similar trend in our Champion business within the U.S. Activewear segment.
In the quarter, Champion point-of-sale accelerated from down 14% in April to up nearly 40% in May and up more than 70% in June as consumers continued to actively seek out the brand, particularly within the online channel.
With store reopenings under way in our International business, we saw monthly progression within our Innerwear businesses in Europe and Australia as well as within our Champion businesses in Europe and Asia.
Strength in our Online business continued globally in the second quarter, with sales up more than 70% over prior year.
We experienced strong growth across our key regions in the quarter, with triple-digit online growth at some of our largest customers and nearly 200% growth on our newly enhanced champion.com website.
Within our Apparel business, which excludes PPE, online represented over 30% of total sales in the quarter.
We are encouraged by the strong POS trends, which we believe points to the improving shipment and revenue trend in our Apparel business as we move through the second half and into next year.
Turning to the second highlight of the quarter.
Our newly created PPE business generated over $750 million of revenue.
This was well ahead of our initial expectation as we benefited from additional government contracts for both mask and reusable gowns, and we were able to fulfill demand for a number of businesses.
We recently launched our consumer PPE facemask business at retail.
We expect to generate more than $150 million of additional PPE revenue in the second half of the year.
Looking forward, we continue to believe this consumer product line represents a meaningful ongoing business opportunity.
The third highlight of the quarter was cash flow, as we generated $65 million of cash flow from operations.
Year-to-date, operating cash flow was $40 million better than last year.
With the majority of retail doors closed for half the quarter, this performance speaks to the cash-generating power of our model and the discipline of the organization to aggressively manage operating cost and working capital.
We continue to expect to generate positive operating cash flow for the second half of the year.
And finally, in terms of liquidity, we said on our last call that our focus in this environment was on managing cash while positioning the company to be able to take advantage of opportunities.
This focus allowed us to capture stronger-than-expected demand for our products in the quarter as well as maintain our dividend.
We ended the quarter with $1.8 billion of liquidity, which we believe provides us ample capital to maximize our operating flexibility and positions us to grow the business going forward.
Looking ahead, there remains uncertainty about the extent and pace of reopening economies in the midst of COVID-19, and we are planning accordingly.
Absent any rollbacks of store reopenings, we expect year-over-year revenue trends in our Apparel business to improve sequentially in the second half.
Our core brands are healthy.
We are gaining market share.
Point-of-sale trends remain strong.
Our back-to-school and holiday plans are set and initial spring 2021 bookings of Global Champion are up meaningfully over prior year in each region.
We believe the positive underlying trends in our business, both prior to and during the pandemic, positions us for growth in a post pandemic environment.
So in closing, we delivered a strong quarter in a very challenging global environment.
Momentum is building in our Apparel business, and we believe we have ample liquidity.
We believe our diversified global business model continues to position us to drive growth and take advantage of opportunities over the next several years.
I've enjoyed getting to know you and exchanging points of view over the years.
To the Hanesbrands team, it's been an honor to be part of the HBI family for so many years.
Together, we built a company and successfully expanded it to be a global leader in our categories.
These are things that could only be achieved by the determined efforts of 60,000 team members around the world pulling together.
I look forward to watching Hanesbrands continue to prosper under the leadership of Steve Bratspies in the years ahead.
Our strong second quarter results, including double-digit growth and adjusted and GAAP EPS, underscore the earnings and cash flow leverage, our vertically integrated business model can generate.
Sales for the quarter were $1.74 billion, which includes $752 million of PPE revenue.
As compared to last year, sales increased 6% on a reported basis and 7% on a constant currency basis.
Excluding PPE, Apparel revenue declined approximately 40% over prior year.
This is well ahead of our expectation and accounted for more than half of the upside in the quarter relative to our base case scenario.
Adjusted gross margin of 37.9% decreased approximately 180 basis points over the last year.
Approximately 50 basis points of the decline was the result of deleverage from minimum royalty payments in our sports license business.
The remainder of the decline was driven by COVID related door closings, which had a greater sales impact on our core international and our Champion and U.S. Activewear businesses.
As a reminder, these businesses carry higher gross margins, but they also carry higher SG&A expense.
Adjusted operating margin for the quarter increased approximately 430 basis points over prior year to 17.5%.
Higher sales drove meaningful SG&A leverage, which was further benefited by our temporary cost savings initiatives.
Interest and other expense declined $8 million over prior year to approximately $47 million due primarily to lower average rates in the quarter.
Restructuring and other related charges were approximately $63 million in the quarter.
Our planned supply chain restructuring actions and program exit costs, which remain unchanged, accounted for $11 million of these costs.
The remaining approximately $52 million are nonrecurring COVID related costs in the quarter, which are noncash.
These include a $20 million intangible asset write down, $11 million of bad debt expense and approximately $21 million of inventory adjustments primarily related to canceled orders from retailers for seasonal product we already made.
The tax rate of 17.8% was higher than our expectation as better-than-expected performance in U.S. Innerwear and PPE resulted in a higher mix of U.S. profit in the quarter.
And adjusted and GAAP earnings per share increased 58% and 12% over prior year to $0.60 and $0.46, respectively.
Now let me take you through our segment performance.
From a high level, all of our segments experienced a similar progression through the quarter.
We saw significant year-over-year pressure in April, as regions sheltered in place.
This was followed by sequential improvement in May and June as consumers shifted to open channels, including online and closed stores began to reopen.
For the quarter, U.S. Innerwear sales increased approximately 67% over the prior year, while the operating margin expanded nearly 550 basis points to 27.8%.
Both revenue and operating profit exceeded our base case scenario, driven by better-than-expected sales in both our core Innerwear and new PPE businesses, our significant fixed cost leverage from higher sales and by lower SG&A expense due to our temporary cost reduction initiatives.
Adjusting for sales from our PPE business, core U.S. Innerwear performed significantly better than our base case scenario.
Core revenue declined approximately 27% over prior year, with Basics down 18% and Intimates down 52%.
These better than base case results were driven by the strong performance of our Basics and Intimates businesses, within the channels that remain open as well as the reopening of mid-tier and department store channels late in the quarter.
On the back of improved point-of-sale during the quarter, we have seen booking trends in both Basics and Intimates strengthen through July.
Turning to U.S. Activewear.
Revenue declined 52% over prior year, which was better than our base case scenario.
The year-over-year decline was due to COVID related door closures as well as school closings and fewer group events that significantly impacted our Sports Apparel and Printwear businesses.
As expected, Activewear's operating margin declined over prior year.
Deleveraged from lower sales, deleveraged from minimum royalty payments in our Sports License business.
And our decision to hold Champion marketing investment flat over prior year more than offset our temporary cost savings initiatives.
While Champion experienced headwinds due to COVID related channel closures, we were encouraged by the accelerating point-of-sale trends through the quarter and a continued POS strength in July.
We believe this underscores the consumers' ongoing desire for the brand and points to improving revenue trends going forward.
Switching to our International segment.
Revenue is well ahead of our base case scenario.
As compared to last year, revenue declined approximately 20% on a reported basis and 17% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 44% as compared to the prior year.
The better than base case performance in our core International business was driven by online as well as the performance of our company-owned stores as they reopened.
The International segment's operating margin of 17.3% increased 310 basis points over prior year, driven by lower SG&A costs as we benefited from various temporary cost savings initiatives.
Touching briefly on our Global Champion business.
Excluding C9, revenue declined 46% over prior year with declines in both our domestic and international businesses.
Like other parts of our business, Global Champion was hindered by closures of our company-owned stores and channel partner doors early in the quarter.
As doors reopened, Global Champion trends improved through the quarter with momentum continuing through July, reinforcing our expectation for sequential improvement in Champion sales through the balance of the year.
Turning to cash flow and the balance sheet.
We delivered a strong cash flow performance in the quarter, generating $65 million of cash flow from operations.
Year-to-date, operating cash flow was approximately $40 million above last year.
The strong performance was driven by previously planned inventory reduction efforts, temporary cost savings initiatives, continued working capital discipline and timely actions taken within our manufacturing network.
With respect to our balance sheet, inventory declined approximately $265 million or 12% compared to last year.
Leverage was 3.4 times on a net debt to adjusted EBITDA basis, down from 3.5 times last year.
And we ended the quarter with approximately $1.8 billion of liquidity, which we believe provides us with significant cash capital cushion in this uncertain environment.
Due to the uncertainty and unpredictability of the COVID-19 pandemic as well as the current lack of visibility in our business environment, we are not providing third quarter or full year 2020 guidance at this time.
However, I will like to share a few thoughts to help frame some of the key levers within our business model.
Looking at our Apparel business, which excludes PPE, revenue declined approximately 40% over prior year in the second quarter.
Absent any rollbacks of store reopenings, we currently foresee an environment for the year-over-year decline in our Apparel business to improve sequentially in both this third and fourth quarter.
With respect to our PPE business, we currently expect more than a $150 million of PPE revenue in the second half, the vast majority of which is expected in the third quarter.
While we continue to tightly manage SG&A expenses, the amount of temporary cost savings from the second quarter are currently not expected to repeat in the second half.
Combined with a lower overall unit and sales volume, we believe it is reasonable to assume year-over-year pressure on margins in both this third and fourth quarters.
Now with respect to our tax rate, we currently expect a rate of approximately 17.5% for the second half.
And in terms of cash flow, we continue to expect to generate positive cash flow in the second half of the year.
So in closing, we delivered strong second quarter results.
Our balance sheet is healthy, and we believe we have ample liquidity.
While there remains a significant amount of uncertainty, we are encouraged by the positive underlying momentum in our Apparel business, which we believe points to a return to pre-COVID levels in our business once the pandemic has passed.

user
compname reports q2 adjusted earnings per share $0.60.
q2 adjusted earnings per share $0.60.
q2 gaap earnings per share $0.46.
q2 sales $1.74 billion versus $1.76 billion.
quarter-end liquidity of approximately $1.8 billion.
incurred about $63 million in both planned restructuring actions and additional covid-related costs in q2.
will not provide quarterly and fy performance guidance until visibility of pandemic's effect on global economies improves.
decline in apparel sales in q2 was better than co's base-case scenario.
anticipates sequential improvement of sales declines q3 and q4 for apparel sales.
estimates it could sell more than $150 million of protective garments in h2 2020, primarily in q3.
expects to generate positive cash flow in second half.
expects foreign currency exchange rates to reduce net sales and operating profit in 2020.

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