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Text: We are pleased to be here today to provide an update on our progress after the fourth 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 taken 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 program at Target and the DKNY intimates license.
With me on the call today are Steve Bratspies, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer.
It's hard to believe that it has been a year since the pandemic began.
I hope you and your families are staying safe and healthy.
I'm extremely proud of how much the team has accomplished over the past year especially under such challenging circumstances.
I'm excited to speak with you today to provide an update on the progress we've made since our last call.
We're going to center the conversation on two main topics.
First, our execution and the financial results in the fourth quarter that drove a strong finish to the year.
Second, is the launch of our multi-year growth strategy, which we're calling our full potential plan that's being developed as a strategic assessment I outlined last quarter.
First, in terms of the fourth quarter, we delivered solid results as revenue, operating profit, earnings per share and operating cash flow all came in above our expectations despite the increasingly unpredictable environment.
We experienced strong consumer demand for our brands and products around the world, which drove market share gains in a number of categories including US basics and US intimates.
We also saw revenue momentum continues to build across our three largest businesses.
US Innerwear, we delivered another quarter of above category growth.
The sales excluding PPE increasing 16% over prior year.
We're also pleased with the global performance of our Champion brand during the quarter.
On a constant currency basis, global Champion sales increased 11% over prior year.
And outside of the COVID challenge, sports and college licensing business, global sales were up 18% in the quarter.
In international along with Champion strong performance, constant currency sales in our Australian Innerwear business increased 8% over prior year.
Now turning to the second topic, we've made significant progress on our growth strategy.
Since our last call, we've defined our growth drivers, we've identified the strategic initiatives needed to unlock growth and improve productivity and we began the early implementation of our full potential plan.
It was clear from our analysis of the business that simplification is critical to our future growth.
It will make us faster, it will lower costs and it will focus resources.
Specific actions that we've initiated over the past few months as we began to implement our full potential plan include portfolio streamlining and SKU rationalization.
I'd like to briefly touch on both of these.
First, we're streamlining our portfolio to increase our business focus and improve future returns.
Specifically, we are exploring strategic alternatives for our European Innerwear business.
While we are in the very early stages, we're committed to be transparent and we'll provide updates as we move through the process.
We're also moving on from PPE.
It's encouraging to see that COVID vaccines are rolling out around the world.
As a result, this rollout along with slowing retail orders and a flood of competitive offerings have dramatically reduced our future sales opportunities.
Therefore, we do not view PPE as a future growth opportunity for the company.
The second action we've taken to simplify our business is rationalizing our SKUs.
Based on the inventory review that we discussed on our last call, we are removing 20% of our SKUs.
We're also implementing a formal product life cycle management process.
This will heighten our product design and consumer focus as well as streamline our product offerings, which in turn should lower costs, improve in stocks and drive sales at higher volume, higher margin SKUs.
As a result of these actions, we've made the difficult but important decision to writedown our entire PPE inventory-related balance, as well as the inventory tied to our SKU rationalization.
Scott will provide more detail on this during his review of our financial results.
As I mentioned last quarter, our goal is to become a consumer-centric growth company, one that generates higher and more consistent revenue growth while also delivering higher levels of profitability over time.
Our full potential plan is the footprint [Phonetic] to accomplish this goal.
As you can see, we are moving forward with purpose and with urgency.
We've already taken action and we're focused on executing our full potential plan.
Overall, HanesBrands delivered solid fourth quarter results.
On an adjusted basis, we exceeded the high end of our expectations across all of our key metrics driven by continued top line momentum.
Looking at the details of our fourth quarter results, sales increased 8% over prior year to $1.8 billion.
Excluding PPE, sales increased nearly 7% as we experienced continued sequential improvement in our Innerwear, Activewear and international segments.
For the quarter, FX in the 53rd week contributed 190 and 290 basis points of growth respectively.
Adjusted gross margin of 41% was above our expectations for the quarter due to higher sales and product mix.
As compared to last year, gross margin declined 80 basis points due to the expected negative manufacturing variances, which were partially offset by higher sales and favorable product mix.
Adjusted operating margin declined 250 basis points over prior year to 12% as a gross margin declined along with the expected higher cost caused by COVID and our full potential plan more than offset the benefits from higher sales and mix.
Pre-tax restructuring and other related charges were $661 million in the quarter, of which 96% were non-cash.
The vast majority of these costs, approximately $611 million were inventory related charges tied with the business simplification action Steve mentioned as we began implementing our full potential plan.
Breaking this down, $400 million is related to the entire PPE inventory-related balance that we referred to on last quarter's call.
The other $211 million is related to our SKU reduction initiative and representative approximately 12% of our non-PPE inventory balance at the end of the year.
The remaining $50 million of charges in the fourth quarter reflect $25 million for a COVID-related goodwill impairment of our US hosiery business, $17 million from a write-off of a discrete tax asset tied to our Bras N Things acquisition and $8 million for business accelerated [Phonetic] actions as well as the previously disclosed supply chain restructuring.
Our adjusted tax rate which excludes $67 million of one-time tax benefits was 19%.
This was above our expectations due to the higher than expected profit in the quarter.
And adjusted earnings per share were $0.38, while on a GAAP basis, we had a loss of $0.95 per share.
Now, let me take you through our segment performance.
For the quarter, US Innerwear sales increased 20% over prior year driven by an 18% increase in Basics, an 8% increase intimates and the inclusion of $22 million of PPE revenue.
Excluding PPE, US Innerwear sales increased 16% over prior year.
Some of our strong consumer demand at point of sale, space gains in kids underwear, continued inventory restocking by retailers and the contribution from a 53rd week.
In our Basics business, we experienced growth in each product category.
And within our intimates business, gross sales increased at a double-digit rate, which more than offset the COVID-driven decline in shapewear sales.
For the quarter, Innerwear's operating margin declined 60 basis points over prior year to 24.1% driven primarily by higher distribution costs, which were partially offset by the benefits from higher sales in mix.
Turning to US Activewear, revenue increased 7% compared to last year, driven by growth in the online, wholesale and distributor channels.
While our sports and college licensing business declined over prior year due to continued campus closures and limited attendance to sporting events, we saw sequential improvement in this year-over-year revenue trend in the fourth quarter.
Looking at the Champion brand across all the channels in our Activewear reporting segment, Champion sales increased 11% over last year.
Activewear's operating margin was 8.9% in the fourth quarter.
As expected Activewear's margin declined compared to prior year due to the expected negative manufacturing variances, which were partially offset by the benefits from higher sales in mix.
Putting to our international segment, revenue increased 2% compared to last year.
Excluding the $6 million of PPE sales, international revenue increased 1% and with respect to the Champion brand within our international reporting segment, sales increased 6%.
On a constant currency basis, international sales declined 3% over prior year.
We experienced growth in Australia driven by our Bonds and Bras N Things brands across the retail, wholesale and online channels.
We also saw growth in Canada and Latin America.
However, this growth was more than offset by COVID-driven declines in Asia and Europe.
For the quarter, the international segment's operating margin declined 160 basis points over prior year to 14.3% [Phonetic] due to the expected negative manufacturing variances, COVID expenses in mix.
Turning to cash flow, we generated $217 million of operating cash flow in the quarter, which exceeded our guidance and $448 million for the full year.
Looking at the balance sheet, excluding the actions and writedowns previously discussed, inventory declined approximately 4% sequentially and leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis which compares to 2.9 times at the end of last year.
And now turning to guidance.
At this time, we are providing guidance for the first quarter.
We plan to provide a full-year 2021 outlook as well as three-year financial targets as part of the detailed review or full potential plan at our upcoming Investor Day in May.
With respect to the first quarter, we expect the uncertainty created by the COVID-19 pandemic to continue to impact the global consumer environment and we have reflected this on our outlook.
At the midpoint, we expect total sales growth of 14% over the prior year.
Adjusting for $50 million of foreign currency benefit, the midpoint of our sales guidance implies 10% growth on a constant currency basis.
We expect adjusted operating profit of $150 million to $160 million, which at the midpoint implies an operating margin of 10.3%.
Expected year-over-year margin expansion is due to higher sales, positive manufacturing variances and the anniversary of last year's COVID-driven volume deleverage.
We expect interest and other expense of approximately $48 million and a tax rate of 16% and our guidance for both adjusted and GAAP earnings per share is $0.24 to $0.27.
So in closing, we delivered strong fourth quarter results and with the momentum we are seeing across our business, we believe we are well positioned to deliver continued growth in the first quarter of 2021.
We're excited about our future and we're confident in our ability to build on our business momentum in 2021 while also positioning the company for long-term success.
And now I'd like to spend a few minutes providing some additional details on our full potential plan.
Through the plan, we have defined our four pillars of growth and identify the initiatives to unlock this growth and create a more efficient and productive business model.
My confidence in the strengths of HanesBrands that I outlined on last quarter's call have only been reinforced as we've developed our growth strategy.
We have iconic brands, we have global breadth and supply chain scale, we have a solid balance sheet, we have a long-standing commitment to sustainability and we have a dedicated passionate team with a genuine appetite and readiness for change.
This is a strong foundation to leverage and capturing opportunities for growth and driving shareholder value.
With respect to our four growth pillars of our full potential plan, they are grow Champion globally, drive Innerwear growth with products and brands that appeal to younger consumers, build e-com excellence across channels and streamline our global portfolio.
Touching briefly on each of these.
First, with Champion, we're making rapid progress developing our global brand strategy that defines our consumer segments, geographies, product offerings and channels of distribution.
We have solid momentum in this business and we're being thoughtful in how we position the brand going forward.
We see significant opportunity to grow Champion over the next three to four years.
We're engaging directly with the consumer through digital platforms, we're leveraging our global design centers to deliver innovative products, we're driving category expansion including a greater focus on women's and kids as well as layered outerwear and casual athletic footwear and we're expanding in China with our partners to an integrated front-end strategy stand-alone stores and online.
Our second growth pillar is to get younger in Innerwear.
In Australia, we'll build our momentum by fueling the growth of our Bonds and Bras N Things brands, particularly through our D2C channels.
In the US, our plan is to build on our recent Innerwear growth by shifting our portfolio younger while defending our core, we must maintain our strength with our current consumers while adding the growing base of younger US consumers.
We are well positioned to capture this growth opportunity by targeting our incredible brand portfolio of Hanes, Maidenform, Bali and more to reach unique consumer groups.
We plan to invest to meet changing lifestyles targeted in innovative products.
Third, we're building e-com excellence across all online channels.
Consumers are rapidly adapting digital tools as a way to connect with our brands and buy our great products.
To be successful over time, we must build our e-comm capabilities to serve consumers however they shop.
We're leveraging data analytics to get to know our consumers better and build long-term loyalty, we're improving performance marketing so consumers can find our products online and we're developing a frictionless shopping experience to help consumers easily buy and receive our products, whether it's on our own sites or our retail partner sites.
Finally, we're streamlining our portfolio and positioning for global growth.
This will allow us to focus our resources and efforts on higher growth, higher margin businesses.
As I mentioned earlier, we're moving on from PPE and we are exploring strategic alternatives for European Innerwear.
With that overview of our growth opportunities, let me turn to the other key components of our plan, setting the strategic initiatives and making investments to unlock growth and create a more efficient and productive business model.
We've already begun executing on a number of these including a multi-year cost savings program intended to substantially self-fund our investments.
We've identified 20 strategic initiatives, each with its own leader, tactical team, KPIs and deliverable schedule.
While I'm not going to run through all these initiatives today, let me provide some high level thoughts.
We'll be coming more consumer and product focus.
We will lead with product design and innovation.
We'll elevate the discipline of brand and channel management and we'll extend our sustainability heritage beyond our supply chain and into our brands and consumer marketing.
We're optimizing data and modernizing our technology.
Data and technology are key enablers for a number of our initiatives in our full potential plan.
We're making data a tool through standardization and accessibility across the global organization and we're investing in technology to make us more efficient, both in terms of revenue optimization and cost management.
We're segmenting our supply chain so we can better serve our customers.
Our supply chain is a competitive advantage, and it's been a long-standing strength of the company.
Given our broad diversified portfolio of products, we're enhancing our capabilities to adapt to the changing environment and needs of the digital consumer.
Segmenting our supply chain allows us to efficiently meet growth opportunities, deliver innovation and be quicker to market for our respective Innerwear and Activewear businesses and over time, this should provide greater revenue opportunities while also lowering cost.
And we're transforming our organization to speed up decision making, align ourselves to deliver future growth and to build a winning culture.
We're designing a flatter and more responsive organization around the global Innerwear and global Activewear structure.
This will help us to leverage innovation, improve supply chain service and efficiency and build powerhouse brands that meet the changing demands of our consumers and customers around the world.
We're bringing in new capabilities and leadership.
We've added outstanding new leaders including our CHRO, our Chief Consumer Officer and most recently, our President of Global Innerwear.
We've also restructured and reorganized a number of existing goals to drive alignment and to focus expertise on critical components of our full potential plan particularly within supply chain and IT functions, all of which designed to leverage and unleash the knowledge and expertise of our long-tenured talent base.
So to sum up, we're excited about the progress we made in the quarter.
Revenue momentum continues to build across our business, which was evident in our strong fourth quarter performance and we've begun implementing our full potential plan to drive growth and higher long-term profitability.
This gives us confidence that we can build on our business momentum in 2021 while also positioning the company for long-term success.
We're looking forward to a more in-depth discussion about our growth strategy at our May Investor Day.

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q4 adjusted earnings per share $0.38.
q4 gaap loss per share $0.95.
sees q1 adjusted earnings per share $0.24 to $0.27.
q4 sales $1.8 billion versus refinitiv ibes estimate of $1.64 billion.
exploring strategic alternatives for european innerwear business.

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