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Text: I'm excited to be speaking with you on my first earnings call as CEO of Hanes Brands.
I'm honored and excited to be leading such a passionate team as we embark on a growth-oriented journey.
The global pandemic has clearly created significant challenges and uncertainty.
It's impacted everything from our business visibility to our manufacturing, to consumer traffic in our stores and on our website.
And it continues with this week's European announcements regarding new lockdowns and curfews.
In this unpredictable environment, I'm encouraged by the progress we're making on a number of fronts.
I've been impressed with the team, the way they've been able to adapt and respond to the challenges of 2020.
We're seeing revenue momentum in our business, and I feel good about our strategic assessment and the progress we've already made toward defining the ambition and strategic goals for the organization.
For today's call, I'll begin by sharing some insights about myself and why I was attracted to this opportunity.
I'll then speak to the strategic assessment that we began on my first day.
I'll offer some thoughts on the process, what we are looking at as well as share some initial observations.
And I'll end with a few comments on our current business performance before handing off to Scott for a more detailed review of the results and our fourth quarter guidance.
Hanesbrands is a great company.
We have iconic brands.
We have global breadth and supply chain scale.
We have a solid balance sheet.
There's a long-standing commitment to sustainability, and we have a dedicated, passionate team with a genuine appetite and readiness for change.
With this strong foundation, I see significant opportunities and potential to drive growth and shareholder value.
With respect to my background, at heart, I'm a brand and product person.
I believe in providing great products borne directly from consumer insights.
I believe in the power of brands to differentiate, tell stories and build lasting loyalty.
I like to change and transform things.
And I like to think big.
To that end, I want Hanesbrands to be one of the most admired global apparel companies, one that is growth oriented and consistently delivers strong shareholder value.
I'm also a big believer in communication, being unvarnished, honest and transparent, both internally and with all of you.
With that backdrop, I'd like to give you a sense of how I spent my first three months as CEO.
The global pandemic has certainly altered my approach.
My preference would be to spend the first several weeks traveling, meeting with customers, visiting our stores, touring our manufacturing facilities in Asia, Central America and the Caribbean and sitting with our teams around the globe.
While it's frustrating not to be able to get out and meet face-to-face, I've had plenty of interactions with our global team and our customers via video meetings and virtual plant tours.
I've done a lot of listening, I've been asking a ton of questions and I've immersed myself in learning about our various businesses.
As I mentioned on my first day, we began a detailed, objective assessment of the business.
This is what I call the unvarnished truth.
It will define our opportunities as well as the challenges we must address to be successful and reach our full potential.
The strategic assessment is the foundation on which we will set our ambition for Hanesbrands.
From there, we will build our short- and long-term operating plans to achieve our goals.
With respect to the scope of the strategic assessment, we are evaluating our entire global portfolio.
We're looking at historical performance, category trends, channel dynamics and competitive landscape across geographies and business segments.
We're analyzing our cost structure across spend categories.
We're analyzing the current level and mix of our inventory, and we're looking at how we're organized.
We're also studying our supply chain, our technology infrastructure and our concept to consumer processes.
We're evaluating our online and direct-to-consumer capabilities.
We're analyzing our consumer mix, our brand equity measures and our product quality.
We're even looking at how we are perceived by retailers.
So let me share some initial observations from our work today.
This is a great company with a strong foundation that we can leverage.
However, in an environment where the pace of change is accelerating, for us to be successful and reach our full potential, we must become a more agile, consumer-centric, growth-oriented company.
So what does this mean?
It means that we're going to align Hanesbrands to become a company that embraces change, acts decisively, moves quickly and shares a common ambition.
We'll have a consumer-centric mindset.
The consumer is going to be at the center of everything that we do.
We'll become faster and more flexible by simplifying our organizational structure as well as streamlining processes and decision-making, particularly around concept to consumer.
We'll commit to growth.
For example, we'll support the momentum in the Champion brand globally as well as the growth in Bonds and Bras N Things in Australia, particularly online.
And not surprisingly, we need to return U.S. Innerwear to consistent year-over-year growth by applying a more consumer-centric approach to our brands, evolving our supply chain capabilities and capturing new opportunities.
Lastly, it means we're going to build certain capabilities that improve efficiency and speed, enable growth and position the company for long-term success.
We are looking for opportunities to modernize our technology.
We're looking at segmenting our supply chain to accelerate our time to market and meet the unique needs of our diverse brands and businesses.
We must expand our digital focus and capabilities to be able to capture our share of online growth.
And we'll invest in talent, filling current gaps while also developing the next generation of leaders.
Our investments will be deliberate and targeted.
We've already started a comprehensive review of our current cost structure to identify near-term savings opportunities that can be used to fuel some of our investments.
I feel very good about the progress we've made.
The global team is highly engaged, and there's a lot of energy, excitement and a genuine desire for change.
We're working with purpose, and we're moving fast.
This will be a multiyear journey that I believe will be rewarding for both our people and our shareholders.
You'll begin to see parts of our strategy unfold this quarter, and we look forward to updating you on our progress over the coming months.
Turning to our results.
Overall, Hanes brand had a solid third quarter, with revenue, operating profit, earnings per share and operating cash flow coming in above our expectations.
Scott will provide a more detailed review of our results, so I'll focus my comments on four key takeaways from the quarter.
First, we saw good momentum across the business as apparel revenue trends improved sequentially in each of our business segments.
We're encouraged by the trends in U.S. Innerwear.
Sales, excluding PPE, increased 11.5% over prior year driven by continued point-of-sale strength and broad-based inventory restocking by retailers.
Despite shipments exceeding point-of-sale in the quarter, inventory at retail remains below last year's levels.
Therefore, we expect some level of retailer restocking to continue in the fourth quarter.
We're pleased with the global improvement in Champion as sales increased nearly 130% from the second quarter.
Compared to last year, sales declined 9% due primarily to our sports apparel business where COVID-related headwinds have essentially shut down sporting events and college bookstores.
Excluding this, sales would have been down 2%.
We were also impacted by COVID-driven supply challenges in the quarter.
Absent these two items, Champion sales increased over prior year.
We expect the supply challenges to improve in the fourth quarter.
And with global spring/summer 2021 bookings up over 2019 levels, we expect Champion's momentum to carry into next year.
Looking forward, I'm excited and confident in the global potential of Champion.
There's a lot of opportunity for growth over the next several years.
The second takeaway is that we're facing second half profitability headwinds, which were mentioned on last quarter's call.
The timing of negative manufacturing variances and higher SG&A expense are expected to pressure both gross and operating margins in the fourth quarter.
We're also facing additional uncertainty from the latest COVID trends.
Third, we delivered another strong cash flow quarter, generating nearly $250 million of operating cash flow.
While we now expect to end the year with higher-than-anticipated PPE inventory, we continue to expect to generate positive operating cash flow in the second half and for the full year.
And the fourth takeaway for the quarter, we further strengthened our liquidity, ending the quarter with $2 billion of liquidity, which we believe provides us with plenty of operating flexibility in this uncertain environment.
So in closing, we're making progress in an increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
We're moving quickly with our strategic and cost assessment.
We're defining our ambition, identifying our opportunities and building our plans to become a more agile, consumer-centric, growth-oriented company.
I'm excited to begin this multiyear journey, one that I believe will be rewarding to both our people and our shareholders.
Overall, Hanesbrands had a strong quarter, with the results across all of our key metrics coming in above our expectations.
Revenue momentum continued across the business driven by continued strength in point-of-sale trends and broad-based inventory restocking.
As expected, margins declined over prior year but less than we were anticipating, and we generated $249 million of operating cash flow, further strengthening our liquidity position.
Turning to the details of the results.
Third quarter sales increased 3% over prior year to $1.81 billion, with foreign exchange rates accounting for 80 basis points of the quarter's growth.
Apparel revenue performed better than our expectation for the quarter.
Excluding $179 million of PPE sales, apparel revenue declined 7% compared to prior year.
This represents a significant improvement from last quarter's 40% decline as each segment experienced a sequential improvement in year-over-year revenue trends.
Adjusted gross margin of 36.7% decreased approximately 275 basis points over last year due to increased inventory reserves as well as negative manufacturing variances, which were incurred earlier in the year, rolling off the balance sheet and onto the P&L.
Adjusted operating margin declined approximately 170 basis points over prior year to 12.6% as the gross margin pressure and higher operating costs from COVID were partially offset by ongoing SG&A controls as well as benefits from our temporary cost savings initiatives.
Restructuring and other related charges were $53 million in the quarter.
Approximately $49 million are nonrecurring costs from restarting portions of our manufacturing network that closed for approximately 10 weeks beginning in March due to the COVID pandemic.
We experienced a stronger-than-expected recovery in point-of-sale.
In an effort to meet demand and best serve our customers, we chose to expedite shipments via airfreight as well as temporarily leverage third-party manufacturing capacity.
This resulted in short-term incremental cost in the form of freight and sourcing premiums relative to our normal manufacturing cost.
We believe this was the right long-term business decision.
And in fact, we are already seeing the benefits in the form of newly captured retail shelf space.
The remaining $4 million of these costs relates to our previously disclosed supply chain restructuring actions and program exit costs.
These actions and their associated costs are on track and remain unchanged from previous disclosures.
Our tax rate for the quarter was 17.3%, which was in line with our expectations.
And adjusted and GAAP earnings per share decreased 11% and 43% over prior year to $0.42 and $0.29, respectively.
Now let me take you through our segment performance.
For the quarter, U.S. Innerwear sales increased 41% over prior year driven by a 15% increase in basics, a 7% increase in intimates and the inclusion of $166 million of PPE revenue.
Excluding PPE, U.S. Innerwear sales increased 11.5% over prior year due to the continued positive point-of-sale trends and inventory restocking by retailers.
In our basics business, we experienced growth in each product category, which drove approximately 170 basis points of market share gains in the quarter.
Within intimates, bra sales increased at a double-digit rate.
This more than offset the decline in shapewear sales, which is a category that continues to be negatively impacted by the coronavirus pandemic.
Looking forward, we have seen positive point-of-sale and order trends continue through October.
With these trends, as well as retail inventory that remains below last year, we expect some level of restocking to continue in the fourth quarter.
For the quarter, Innerwear's operating margin expanded approximately 80 basis points over prior year to 21.7% driven by fixed cost leverage from higher unit volumes as well as favorable product mix.
Turning to U.S. Activewear.
Revenue declined 27% compared to last year, which is an improvement from the second quarter's 52% decline.
The vast majority of the year-over-year decline was from our sports apparel business, which continues to be significantly impacted by COVID-related headwinds.
Activewear's operating margin was 9.1% for the third quarter.
As expected, Activewear's margin declined compared to prior year due to the timing of negative manufacturing variances, inventory reserves for some of our non-Champion brands as well as SG&A deleverage from lower sales volumes.
However, I will note that the segment margin improved significantly from last quarter's operating loss.
Touching briefly on Champion, sales of the Champion brand within our Activewear segment increased approximately 85% from the second quarter.
Compared to last year, sales declined 27%, with the vast majority of the decline due to the COVID-challenged sports apparel business.
Despite the challenges in sports apparel, we continue to expect sequential improvement in Champion's revenue trends in the fourth quarter driven by continued point-of-sale growth in key channels and online as well as improved product availability.
Switching to our International segment.
Revenue declined 5% compared to last year on a reported basis and 7% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 7% as compared to prior year, which is a significant improvement from a 44% decline in the second quarter.
For the quarter, International Champion sales increased 5% over prior year.
Excluding the impact from foreign exchange rates, we experienced growth in our Americas and Champion Europe businesses.
This was more than offset by declines in our European Innerwear, Asia and Australia businesses where COVID-related challenges have slowed the retail recovery.
International segment's operating margin declined approximately 100 basis points over prior year to 15.2% driven by deleverage from lower sales volumes, which was partially offset by continued tight SG&A cost management.
Turning to cash flow.
We generated $249 million of operating cash flows in the quarter.
Looking at our balance sheet, inventory increased 4% over prior year which was in line with sales growth and includes approximately $400 million of PPE inventory.
Excluding PPE, inventory declined 15% compared to prior year.
Leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis, which was comparable to last year.
While liquidity remains our short-term focus in a post-COVID environment, our focus would be to return our leverage ratio to below three times.
We further strengthened our liquidity position in the quarter even while reducing debt by approximately $130 million and paying our regular quarterly dividend.
We ended the quarter with $2 billion of liquidity above the $1.8 billion at the end of the second quarter.
We continue to believe we have significant capital cushion in this uncertain environment.
And now turning to guidance.
Outlook reflects the continued uncertainty due to the COVID-19 pandemic.
Our outlook is based on the current business environment, which, among other items, reflects the lockdowns and curfews put in place over the past week in Europe.
Outlook does not reflect any potential impact to the consumer or operating environments should governments or businesses institute additional lockdowns and store closings.
I want to remind everyone that all year-over-year comparisons reference our rebased 2019 results.
For the fourth quarter, we expect total sales of $1.60 billion to $1.66 billion, which, at the midpoint, implies a 2% decline over prior year.
Prior to this week's European lockdowns, our revenue outlook assumed a low single-digit growth.
Included in our sales outlook is approximately $50 million of PPE sales, approximately $10 million of foreign exchange benefit and contributions from a 53rd week.
We expect adjusted operating profit of $160 million to $180 million, which, at the midpoint, implies an operating margin of 10.4%.
Expected year-over-year margin pressure is due to the timing of negative manufacturing variances and higher SG&A expense.
We expect interest and other expense of approximately $50 million and a tax rate of approximately 17.5%.
Our guidance for adjusted and GAAP earnings per share range from $0.25 to $0.30 and $0.24 to $0.29, respectively.
And our guidance for full year 2020 operating cash flow is $300 million to $400 million, which includes the impact from the higher-than-anticipated PPE inventory.
Based on our year-to-date cash flow, this implies fourth quarter operating cash flow of approximately $70 million to $170 million.
So in closing, I'm encouraged by how we're managing through the increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
I'm excited about our strategic assessment we're doing to define our strategy, and I look forward to the journey ahead.

user
compname reports q3 gaap earnings per share $0.29.
sees q4 2020 adjusted earnings per share $0.25 to $0.30.
sees q4 2020 gaap earnings per share $0.24 to $0.29.
q3 sales $1.81 billion versus refinitiv ibes estimate of $1.67 billion.
q3 gaap earnings per share $0.29.
sees q4 2020 sales about $1.6 billion to $1.66 billion.
full-year 2020 net cash from operations is expected to be $300 million to $400 million.
continues to expect to generate positive operating cash flow in second half and for full year.
qtrly adjusted earnings per share $0.42.

assistant