Q3 2019 Earnings Call

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I would now like to hand, the conference over to your speaker today, Mr. TC Robillard, Chief Investor Relations Officer. Please go ahead Sir.

Good day, everyone and welcome to the Hanesbrands quarterly Investor Conference call and webcast. We're pleased to be here today to provide an update on our progress after the third quarter 2019.

Hopefully everyone has had a chance to review the news release, we issued earlier today.

The news release updated Epay to document in the replay of this call can be found in the Investor section of our Haynes Dot Com website.

On the call today, we may make forward looking statements either in our prepared remarks or in the associated question and answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks are detailed in our various filings with the FCC and may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made.

Unless otherwise noted today's references to our consolidated financial results as well as our 2019 guidance excludes all acquisition integration and other action related charges and expenses.

Information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's press release.

With me on the call today, our Gerald Evans, our Chief Executive Officer, and Barry Heightening, our Chief Financial Officer.

For today's call Gerald and Barry will provide some brief remarks, and then we'll open it up to your questions I will now turn the call over to Gerald. Thank you TC Hanesbrands delivered solid results in the third quarter right in line with our guidance and as we've seen throughout the year our diverse business model offers us many avenues to deliver consistent revenue profit.

And cash flow growth.

In the quarter constant currency revenue increased 2% over prior year, we grew operating profit in earnings per share, while simultaneously increasing investments to support future growth.

Operating cash flow increased 47% to more than $300 million and we reduced our net debt by nearly a half a billion dollars over prior year.

And we achieved these results in spite of apparel traffic trends that were softer than we expected in the United States.

We continued to benefit from our multiyear diversification efforts with another quarter of strong performance from our key growth initiatives, including international consumer directed and champion.

Within each of these initiatives, we generated double digit constant currency revenue growth and expanded operating margins.

Looking at our growth initiatives International revenue was $20 million higher than our guidance driven by stronger than expected performance in both our active wear and innerwear businesses.

On a constant currency basis revenue increased 11% over last year.

We also continue to expand International's operating margin in the quarter.

And over the past five years, we've increased this segment's margin by more than 600 basis points through supply chain optimization and volume driven leverage.

International has quickly become our largest reporting segment.

Looking out over the next several years, we expect international to represent an even larger mix of total company revenue and profit through a combination of organic growth initiatives cross regional opportunities and complimentary acquisitions.

With respect to our consumer directed business our investments continue to generate strong returns.

In the quarter revenues increased 13% in constant currency with double digit growth both domestically and internationally.

We have significant momentum and consumer directed with additional opportunities for growth across geographies.

For example, the recent launch of our Maidenform Dot Com website is driving new users to the brand.

Our bonds brand generated mid to high single digit retail comp growth in the quarter.

And our bras and things business also continued its strong performance with growth in Australia, New Zealand and South Africa.

We are redesigning our champion website within mobile first approach to significantly improve the consumer experience and increase engagement globally.

We've also increased brand and content investments on several social media platforms behind a number of our brands and we're strategically investing and branded stores in Asia, Australia, Europe , and the United States.

Consumer directed currently accounts for 23% of total company sales and looking forward, we expect consumer directed growth to continue to outpace our category growth rates.

Turning to champion, we continued to see solid double digit growth.

Excluding see nine global champion sales increased 26% and constant currency during the quarter. This was ahead of our expectations for the third straight quarter. This year.

We're also expanding margins in our champion business as our brand investments normalized and we leveraged prior distribution investments.

Global champion has generated over $1 billion of incremental sales in just three years and its dollar growth continues to increase year to date on a constant currency basis Global champion revenue is increased approximately $470 million the growth through the first nine months of this year is already more than $100 million higher.

Then the growth at all of 2018.

Looking ahead, we believe champion is well positioned to generate another billion dollars of growth over the next several years.

And we have several factors supporting our view.

We see strong secular trends within the activewear category.

Champions brand equity scores are growing, particularly with Jim Z and millennials, we're expanding champions product portfolio, including a broader assortment within our performance kids and women's lines as well as in casual footwear and accessories, and we're increasing distribution in large economies, such as China and South Korea.

All of which positions us for continued double digit champion growth in 2020 and beyond.

We believe we have strong momentum and long runways in each of our growth initiatives. This along with contributions from allocating our strong cash generation should drive continued long term revenue profit and cash flow growth for the total company.

Touching on our US Innerwear business, we continued to execute our strategy to return this business to growth.

In the quarter, we delivered approximately $580 million of revenue.

Sales were modestly below our expectations driven by the impact of softer than expected retail traffic trends on our basics business.

Despite the challenging environment over the past year, our basic shares have remained stable, while our comfortflex fit and X temp innovations continue to expand.

Our intimates business performed in line with our expectations for the quarter shape, where delivered its fifth consecutive quarter of sales growth and we saw early signs of success with our broad innovations positioning our intimates business for improved revenue trends in the coming quarter.

Looking to the fourth quarter for total us innerwear, we expect sequentially improving revenue trends and strong margin improvement as we benefit from our brand investments in innovation, we anniversary a large retailer bankruptcy and we benefit from our price increases as commodity pressures have peaked.

So in closing we delivered solid third quarter results, our diversified business model continues to produce revenue profit and operating cash flow growth.

With our strong cash generation year to date, we were approximately $100 million ahead of last year, and well positioned to deliver our full year cash flow goal.

And our leverage is coming down positioning us for higher shareholder returns in 2020, as we will once again have acquisitions and share buybacks at our disposal and with that I'll turn the call over to Barry.

Thanks, Cheryl we delivered solid third quarter results with revenue and earnings per share coming in towards the high end of our guidance for the quarter sales were $1.87 billion and adjusted operating profit was $280 million, both increasing 1% over last year adjusted earnings per share increased 4% and GAAP earnings per share increased 9%.

Cash flow from operations of $302 million increased 47% and net debt declined $470 million from a year ago.

With that summary, let's turn to the details of the quarter's results.

Sales increased $18 million or 1% over last year, despite a $23 million headwind from foreign exchange on a constant currency basis sales were up over 2% or $42 million.

Adjusted gross margin of 38.7% declined 50 basis points over last year the impact from foreign exchange rates drove 20 basis points of the decline with lower innerwear margins accounting for the remainder higher champion margins, partially offset these items.

The price increases we implemented earlier in the year offset input cost inflation in the quarter. As we said before Q3 was expected to be the peak for commodity costs now that were passed the peak looking to the fourth quarter. We expect the net benefit from pricing to drive gross margin expansion over prior year.

Adjusted operating profit in the quarter was $280 million. This included $3 million of currency headwinds and $11 million of growth related investments as compared to last year.

Our adjusted operating margin of 15% was consistent with prior year.

For the quarter acquisition and other related charges were $10 million, our tax rate of 14.1% was inline with our forecast and adjusted and GAAP earnings per share were 54, and 51 cents respectively.

Now let me take you through our segment performance.

US innerwear sales declined 3.5% compared to last year, driven by headwinds from retailer bankruptcies as well as softer apparel traffic trends for the quarter basics revenue declined 2%, while intimates was down in line with our expectations.

In awareness operating margin of 21% was down 110 basis points compared to prior year due to volume mix and increased investments to support our intimates business.

And as previously discussed higher commodity costs in the quarter were offset by pricing.

Turning to our US Activewear segment as we discussed before we're focused on remix in parts of our activewear business to branded products, which drives improving margins. Therefore for the quarter revenue declined 1%, while operating profit increased 4% as compared to last year.

Champion Activewear sales, excluding cnine increased more than 18% over last year Cnine revenue was consistent with prior year and ahead of our expectation due to strong sell through trends.

And sales in the remainder of our Activewear segment declined approximately $45 million as compared to last year.

This was driven by the previously disclosed exit of commodity programs in the mass channel, which represented $30 million of sales last year as well as softer trends in the Printwear channel.

Active wear is operating margin increased 90 basis points to 17.8%, even with higher levels of investment to support our growth initiatives. The strong margin performance was driven by improved champion profitability favorable contribution from our remixing activity and the benefit from pricing.

In our international segment reported sales increased more than 7% and constant currency sales increased 11% or $68 million driven by growth in both our active wear and innerwear businesses in the quarter.

International's operating margin of 16.2% was up slightly over last year. This marks its fifth consecutive quarter above the company average and we see additional opportunities for margin expansion going forward.

Touching briefly on our global champion business, excluding Cnine constant currency sales increased 26% over prior year well ahead of our expectations. This consisted of 29% growth in our domestic champion business and 24% growth in champion International.

Turning to cash flow and the balance sheet.

In the quarter, we generated $302 million and cash flow from operations and increase of $96 million compared to last year. The growth was driven by improved working capital performance and higher GAAP net income.

Year to date cash flow from operations is up 73% as compared to last year.

Consistent with our cash generation and debt reduction strategy, our team drove a five day improvement in our cash cycle over last year.

On a sequential basis, we reduced our inventory balance by $125 million and our net debt by approximately $250 million and compare to last year, our net debt is down $470 million.

Our leverage at the ended the quarter was 3.3 times on a net debt to adjusted EBITDA basis.

This is down a half turn from last years, 3.8 times and down to tens from last quarters, three and a half times.

We're on track to lower our leverage to 2.9 times by the end of the year.

Now turning to guidance.

I'll point, you to our press release and fake you document for more details. However, I would like to share a few thoughts to frame our outlook.

For the full year, we narrowed our guidance ranges for revenue operating profit in earnings per share. We raised the midpoint of our revenue range to reflect stronger than expected performances in our champion and international businesses.

We tightened the high end of our operating profit range and we raised the midpoint of our EPS range driven by lower interest expense.

Today, we also issued fourth quarter guidance, which at the midpoint implies total sales are consistent year on year on a constant currency basis or down less than 1.5% on a reported basis.

Our guidance reflects nearly $20 million of currency headwinds in the fourth quarter as well as headwinds from the exited commodity programs and the wind down of Cnine.

With respect to our segments the midpoint of our fourth quarter revenue guidance assumes a decline of approximately 2% in our us Innerwear segment.

This outlook reflects improving sequential trends, including the anniversary of the Cedars bankruptcy.

In us activewear, the midpoint of our guidance assumes revenue decline of approximately 7% over last year. This is unchanged from our prior outlook. Although we now expect even stronger champion growth in the quarter.

We increased our fourth quarter champion active wear forecast by approximately $15 million to reflect the strong demand trends Gerald mentioned.

We now expect champion activewear, excluding cnine to increase at a high teens rate as compared to our prior outlook for a low double digit growth.

And reflecting my earlier comments, we've taken a more cautious outlook within the Printwear channel.

In our international segment, the midpoint of our guidance assumes reported sales growth of approximately 4% and constant currency sales growth of approximately 7%.

This is above our prior outlook as we've experienced stronger than expected performance all year from our international business.

Our fourth quarter operating profit range is $259 million to $284 million and reflects a $3 million headwind from exchange rates.

At the midpoint, our guidance implies a $12 million increases compared to prior year.

We expect interest and other expense of approximately $51 million.

Our fourth quarter guidance assumes a tax rate of approximately 14% diluted shares outstanding of slightly less than 366 million and approximately $11 million of acquisition integration and supply chain related charges.

Therefore at the midpoint, our fourth quarter adjusted net income guidance is approximately $190 million.

And our guidance for adjusted and GAAP earnings per share range from 48 to 54 cents and 46 to 52 cents respectively.

So in closing we delivered another quarter of solid results once again underscoring the benefits of our diversified business model, our key growth initiatives, including champion in international continued to outperform our expectations, we're generating higher levels of operating cash flow and our leverage is coming down positioning us for higher shareholder returns in 2020.

Beyond and with that I'll turn the call back over to TC. Thanks, Barry that concludes our prepared remarks, we'll now begin taking your questions. It will continue as time allows ill turn the call back over to the operator to begin the question and answer session operator.

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In the interest of time, we ask that you limit yourself to one question.

Please stand by what we compile the Q and a roster.

Our first question comes from Susan Anderson with B. Riley FBR. Your line is now open.

Hi, Good morning, Thanks for taking my question and I'm, just wondering on the basics pressure in the quarter was this consumers not accepting price increases or was that mainly just a lower traffic the and that closed doors and then also maybe if you could talk a little bit about the pricing impact in the quarter and then also.

The drivers that you see for fourth quarter for basic than I guess, the innerwear category as a whole services, let me take the first half of them Alison very touch a little bit more on the pricing at the end up from the standpoint, it limits to start with a quarter. We're very pleased with our quarter once again coming in at the higher end of our expectations on on sales and earnings.

And from the standpoint of our our diversified business is really continuing to show through in we love the where growth initiatives continue to to outperform within the Innerwear as segment. We also as I noted, we delivered $580 million in sales in the quarter and we viewed as a solid quarter for innerwear sales were modestly below our midpoint of our expectations.

And now with them about 8 million eight $9 million somewhere in there and we'd really did see a little slower retail traffic than we expected early in the quarter in particular tended to pick up a bit as we work through more in normalize as we work through and it includes since early in October to be normalized as well.

So we do this more the short term fluctuation in anything.

Of significance toe to worry about underneath we continue to see our basics business our shares or are performing very nicely as we look out over the last 12 months in spite of the challenging business environment in our innovations are gaining traction for example, our our comfortflex fit.

As continues to be up double digits, even 18 minutes 18 months. After its introduction with now continue to roll that out into women's underwear and socks. So we feel like the things we've set out to accomplish and innerwear are going fine on the basic side on intimates intimates came at once again and it has all year on running where our expectations, where we have started seeing early on the.

Shape, where perform it was our fifth consecutive quarter of growth. There, we're seeing our innovations in bras began to get traction as well. So as we look to the fourth quarter. We do have an expectation of sequentially improving revenue results with particularly good results or movement in our intimates business and Thats really all behind our IND.

Estimates in our brands in our innovations as well as we are overlapping a fairly significant retail bankruptcy in the in the quarter as well and then from a margin standpoint, our prices have been in place all year and we're passing the peak of commodities or begin to see some supply chain efficiencies that give us confidence on the March op margin side as well so very lumpy.

It's a little more of the pricing in particular and I think you hit the high points there Gerald Susan Hey, it's very good morning. Thanks for the question and we got all the pricing we expected and as you recall from earlier in the year that was.

Four or 5% on the vast majority of our innerwear business. So that is flowing through and has been.

For the last couple of quarters and the element related to.

The fourth quarter is that input costs are meaningfully down as we move forward and we've got a nice cost position so from standpoint of.

What you will see as the net benefit of that pricing really starts to flow into our gross margin as weve expected in the form for the fourth quarter for some time and that will help drive improved.

We're operating margins as we move through the remainder of the year. Thanks for the question.

Our next question comes from Jay sole with CBS . Your line is open.

Great. Thanks, so much so ill ask about the champion grow 26% growth ex FX outside of senior champion of you're talking about double digit growth next year. It sounds like you're raising that target 2 billion to 3 billion in the long term growth.

Gave some color on fiscal 2016, maybe just talk about the shape of fiscal 2000 unique and deliver positive growth for all the quarters of fiscal 2008, because the compares a little tougher in the first part of your then there will be in the next part of year. So maybe you could just help US there and then talk about what the addition of distribution partners in South Korea in the second one in China on me for the business will that be additive to sales right away.

What kind of benefit might that adds to the business.

Now we're very pleased thank you for the question on January we're very pleased with how to perform once again at once again outperformed our expectations and and you noted it was strong up 26% of 29 domestically 24 globally up across our innerwear as well as our active wear businesses. So feeling really good about that.

And we often get tangled up in the percentages, but we look at the real growth over $1 billion a growth in three years is just phenomenal in and we're already ahead of pace by $100 million over the full growth last year. So we couldn't be happier with where it's going we will surpass our $2 billion go next year two years early and we do believe it that that next billion dollars can emerge.

Over the next few years. So we've got a lot of momentum behind it you heard that we're seeing not only the secular trends in active wear but the equity scores growing we're expanding our product lines and the new geographies to your question I think I spoke last time about moving into China with the second partner, which also puts us on line. We've now added south Korea into that mix as well so.

Tremendous opportunity there and we do expect double digit growth and beyond and it will be an important driver as we look to next year from the standpoint, how the business performs in total and so we couldn't be happier with that.

Our next question comes from Omar Saad Evercore ISI. Your line is now open.

Hi, guys. This is less guide on file Meyer.

I'd say at similar questions on champion.

As you said you're going to be rolling out.

Balancing the demand, particularly domestically I think a lot of people see that champion products used as a promotion driver from a lot of your partners wondering how you balance like that demand aspect of keeping the demand high but youre not getting people use to too.

Promo.

Hi, guys.

I think let me just say from the standpoint investment we've been making that investment all year in the in the.

In the platform that we're going to roll. It comes active the first to the of next year. So thats already already underway for the champion and as an important part of the broader push we've got behind champion in the digital push from the standpoint of brands nothing could be farther than the truth is that as preceded us of promotion brand. It's actually continues to presses limits on price and premium fuzzy.

Vision and well segmented across the channels and we think Theres a lot of legs to continue to push it even higher over time as well as across.

Hey, guys. Thanks for taking my questions here.

Just a couple of quickly as you look at the expectation for pricing the flow through better and and fourth quarter as the commodities come down how should we think about how the competition on what they may do without expanding margin opportunity is there.

I was there any risk we should think about ano, particularly some of the private label competitors out there that they try to reinvest some of that commodity benefit into lower lowering the pricing spread.

I also wanted to ask on if you could help us unpack the gross margin in the quarter, a little more between champion and some of the underwear pressure that you saw.

Obviously.

I think youre expecting grosses me about flattish so maybe just to help us dimensionalize that and.

And help us think forward on it a little bit. Thank you Yeah, Let me take the first half of that and I'll, let Barry taking the second half from the standpoint of pricing in our pricing has been in place since mid February and is and we've seen as we've commented before we've seen a number of competitors and follow in different areas as well as we've seen private label take take pricing in certain.

Areas. So from the standpoint. These were our prices were put in place to maintain our margins in the face of rising commodity and input costs and we've seen others follow for the same reason to maintain their margins I assume so we feel our pricing is in place and well positioned.

And as we look forward, we see that.

Getting much better actually as we have a much better visibility on cost position getting better as we overlap. These peak commodity costs as we forecasted earlier in prior calls and just as a reminder year to date gross margin actually up 10 basis points on a constant currency basis and slightly down on a reported basis.

Okay.

Our next question comes from Polish way with Citi Research. Your line is now.

Hey, Thanks, guys.

Just talk about of pricing on the champion side I'm curious about AIU ours on your direct to consumer business for for Chad been then how much is price a driver of champion sales in the wholesale business as well if prices are driver curious how much is mix.

Within the champion brand versus higher prices on unlike items and also if you could.

Also on champion can you talk about the percentage of that brand sales coming from men's women's kids and where you think those percentages mico couple of years down the line. Thanks.

Yes, let me just take there from the standpoint of price versus other means of growth. This business has grown at such a phenomenal level. It's a combination of all of that as combination and continuing to push up to the so the more premium levels, but importantly, it's it continuing to build our distribution within our current customers across geographies and into new customers.

It's just all the momentum that you would expect them in this is phenomenal growth here. So it's not one item that's driving this growth from the standpoint of the business mix today, it's more mixed.

Into the May in the men's side of things, what we certainly see the opportunity to.

We continue to make that a bigger mix of of women's and kids is a area of tremendous opportunity as well and also the performance across the genders. The performance products across the general is a small but growing area that we also see as a growth potential for us. So as we you can tell we're very optimistic very bullish on this brand because we see lots of ways to keep growing up.

Our next question comes from Tiffany Kanaga with Deutsche Bank. Your line is now open.

Glass with existing lines.

Yes, let me just say, we're delighted with the international business and how well it's done up 11% in constant currency, 7% actual is phenomenal growth in that business and it's another quarter in a row that we've done that and we've done it all year long and this was a great indication of the power of the total business model, we saw growth in both our innerwear and activewear business.

As we commented a champion was up 24% for the Innerwear business was up mid single digit and if I dig down more than that innerwear business in total as growth across a number of geographies the hanesbrands.

Delivered nice growth across Mexico, Japan, Canada, Philippines, a bond brand and Rosin things brand grew nicely in in Australia, New Zealand in and of course, we saw champion growth across the region. So from the standpoint of our growth.

We've gotten a lot of room here to grow as well in from the standpoint of new areas. We've obviously added a second distributor in China that will we believe will quickly make China, our second largest geography for champion as we look to next year and beyond we just added a new distributors. We noted in our comments in Korea that opens up that sizeable.

Economy to us as well so there is tremendous opportunity to keep driving this business boarded already is our business segment and as I noted my comments I would expect that to get larger overtime.

Yeah, Hey, guys. This is Matt on for Mike.

I appreciate the color on gross margin in Threeq, Q and getting for Q operating margin should we continue to expect modest leverage.

On a deleverage on the has shannay side, and then as far as the.

Kind of the longevity of those expectations going forward.

Okay, Hey, Matt This is Barry I'll do the gross margin point, and then I'll, let Rick Gerald talk a little bit about retail.

Yes, thanks for the question on the fourth quarter profit.

Well, maybe frame that for the total company.