Q4 2020 HanesBrands Inc Earnings Call
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Ladies and gentlemen, and today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Hanesbrands fourth quarter 2020 earnings Conference call.
At this time all participant lines are in listen only mode. So if you require operator assistance. Please press Star then zero.
After the presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one.
Be advised the today's conference maybe recorded.
I'd now like to turn the conference over to your host today. Mr. T C Robillard, Chief Investor Relations Officer. Please go ahead.
Good day, everyone and welcome to the Hanesbrands quarterly Investor Conference call and webcast. We're pleased to be here today to provide and 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.
The news release updated Faq document and the replay of this call can be found and the investors section of our Hanes Dot com website.
On the call today, we may make forward looking statements either in our prepared remarks, and 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 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 the detailed in our various <unk>.
Fillings with the SEC, which may be found on our website as well as and 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 and guidance exclude all restructuring and other action related charges. 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 the C. Nine program at target and the DKNY intimates license additional 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 are Steve <unk>, our Chief Executive Officer, and Scott Lewis, Our Chief Accounting Officer, and interim Chief Financial Officer for today's call. Stephen Scott will provide some brief remarks and then we'll open it up to your questions I will now turn the call over to Steve.
Thank you T C and good morning, everyone and welcome it's hard to believe it has been the year since the pandemic began and I hope you and your families are staying safe and healthy to.
To that and I want to begin by thanking the entire hanesbrands team around the world for its ongoing dedication the hard work and focus on safety and service I am extremely proud of how much of the team has accomplished over the past year, especially under such challenging circumstances.
I'm excited to speak with you today to provide and update on the progress we've made since our last call we're going to send to the conversation on two main topics first our execution and the financial results and the fourth quarter and drove a strong finish to the year.
And is the launch of our multi year growth strategy, which we're calling our full potential plan.
It's being developed out of the 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 and a number of categories, including U S basics and use instruments. We also saw revenue momentum continued to build across our three largest businesses.
And U S. Innerwear, we delivered another quarter of above category growth the sales, excluding PPE, increasing 16% of 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% and the quarter and.
And then the international along with champion strong performance constant currency sales and our Australia, and 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 cost and it will focus resources specific actions that we've initiated over the past few months as we began to implement full potential plan include portfolio of 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 improved future returns specifically, we're exploring strategic alternatives for our European Innerwear business, while we are and the very early stages, we're committed to being transparent and we'll provide updates as we move through the process.
We're also moving on for PPE it's.
It's encouraging to see the 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 and therefore, we do not view PPE is of 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. While also implementing of formal product lifecycle management process. This will heighten our product design and consumer focus as well as streamline our product offerings, which in turn should lower cost improve in stocks and drive sales of higher.
Higher margin Skus.
As a result of these actions we have made the difficult but important decision to write down our entire PPE inventory related balance as well as the inventory tied to our SKU rationalization SKU.
<unk> 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 blueprint to accomplish this goal as you can see we are moving forward with purpose and with urgency and we've already taken action and we're focused on executing our full potential plan.
I look forward to sharing more details about the shortly but first I'll turn the call over to Scott for a review of our results and our first quarter guidance Scott.
Thanks, Steve 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.
The increase 8% over prior year to $1 8 billion.
Excluding PPE sales increased nearly 7% as we experienced continued sequential improvement and our innerwear and activewear and international segments for the quarter FX and the 50 <unk> week contributed 100 money and to a 90 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.
And 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% of the gross margin decline along with the expected higher cost to the Covid and our full potential plan more than offset benefits from higher sales and mix.
Pre tax restructuring and other related charges were $661 million and the quarter of which 96% were non cash.
The vast majority of these costs approximately $611 million for.
For related charges tied to the business simplification actions, Steve mentioned as we began implementing our full potential plan.
Breaking this down $400 million is related to the entire PPE inventories related balance that we referred to on last quarter's call. The other $211 million is related to our SKU reduction initiative and represented approximately 12% of our non PPE inventory balance at the end of the year.
And the remaining $50 million of charges and the fourth quarter reflects $25 million for of Covid related goodwill impairment of our U S. Hosiery business $17 million from the write off of a discrete tax asset tied to our bras and things of that position and.
And $8 million for business actually of actions as well as the previously disclosed supply chain restructuring.
Or just the tax rate, which excludes $67 million of onetime tax benefits was 19%.
This was above our expectations due to the higher than expected profit and the quarter and.
And adjusted earnings per share were <unk> 38 cents, while on a GAAP basis, we had a loss of 95 per share.
Now let me take you through our segment performance for the quarter U S. Innerwear sales increased 20% over prior year, driven by an 18% increase and basics and 8% increase and intimates and the inclusion of $22 million of PPE revenue.
Excluding the PPE the U S innerwear sales increased 16% over prior year sort of a strong consumer demand at point of sale space gains and kids' underwear continue to inventory restocking by retailers and the contribution from the 50 <unk> week.
And our basics business, we experienced growth and each product category.
And within our intimates business cross sales increased at a double digit rate, which more than offset the COVID-19 driven decline in shape for sales for the quarter and whereas the operating margin declined 60 basis points of prior year to 24, 1% driven primarily by higher distribution costs, which were partially offset by the benefits from higher sales and mix.
Turning to U S activewear revenue increased 7% compared to last year, driven by growth and the online wholesale and distributor channels.
And while our sports and college licensing business declined over prior year due to continued campus closures and limited attendant. The sporting events, we saw sequential improvement and as of year over year revenue trend and the fourth quarter.
Looking at the champion brand across all of the channels and are actively of reporting segment champion sales increased 11% over last year.
<unk> operating margin was eight 9% and the fourth quarter as expected activewear margin decline compared to prior year due to the expected negative manufacturing variances, which were partially offset by the benefits from higher sales and mix.
Switching to our international segment revenue increased 2% compared to last year.
Excluding the fixed and dollars 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% of of prior year, we experienced growth and Australia, driven by our bonds and process and 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 of Covid driven declines in Asia and Europe.
For the quarter the international segment's operating margin decline of 160 basis points over prior year to 14, 3% due to the expected negative manufacturing variances COVID-19 expenses and mix.
Turning to cash flow regenerate of $217 million of operating cash flow and the quarter, which exceeded our guidance and $448 million for the full year.
Looking at the balance sheet.
And the actions and write downs previously discussed inventory decline of approximately 4% sequentially and leverage at the end of the quarter was three three times on a net debt to adjusted EBITDA basis, which compares to two nine times at the end of last year.
And now turning to guidance I'll point, you to our press release and <unk> document for additional guidance details at this time, we are providing guidance for the first quarter.
And to provide a full year of 2021 outlook as well as three year financial targets as part of the detailed review of our 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.
And we have reflected this and our outlook.
At the midpoint, we expect total sales growth of 14% over 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 and operating margin of 10, 3%.
To the 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 of tax rate of 16%.
And our guidance for both adjusted and GAAP earnings per share is 24 to 27.
So in closing we delivered strong fourth quarter results and with the momentum we're seeing across our business. We believe we are well positioned to deliver continued growth and the first quarter of 2021 and with that I'll turn the call back over to Steve.
Thank you Scott, we're excited about our future and we're confident and our ability to build on our business momentum and 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 identified the initiatives to unlock this growth and create a more efficient and productive business model.
And my confidence and the strength of Hanesbrands and 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 of dedicated passionate team with a genuine.
And 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 for growth pillars of our full potential plan. They are growth champion globally drive innerwear growth with products and brands that appeal to younger consumers build the E com excellence across channels and streamline our global portfolio.
Touching briefly on each of these.
First we champion, we're making rapid progress developing our global brand strategy at the fines are consumer segments geographies and product offerings and channels of distribution, we have solid momentum and this business and we're being thoughtful and 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 with leveraging our global design centers to deliver innovative products with 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 and integrated front end strategy Standalone stores and online.
Our second growth pillar is to get younger and Innerwear, and Australia will build and our momentum by fueling the growth of our bonds and bras and things brands, particularly through our D to C channels and the.
The us our plan is to build and our recent innerwear growth by shifting our portfolio of younger while defending our core we must maintain our strength with our current consumers, while adding the growing base of younger U S consumers.
We are well positioned to capture this growth opportunity by targeting our incredible brand portfolio of Hain, Maidenform, and Bali and more to reach unique consumer groups, we plan to invest to meet changing lifestyles with targeted and innovative products.
Third we're building E comm excellence across all online channels consumers are rapidly adopting digital tools as a way to connect with our brand and by our great products to be successful over time, we must build our E comm capabilities to serve consumers. However, the shop, we're leveraging data analytics to get to know our consumers better.
<unk> and build long term loyalty, we're improving performance marketing so consumers can find our products online and.
And we're developing a frictionless shopping experience to help consumers easily buy and receive our products, whether it's on our own site or a 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're exploring strategic alternatives for European anywhere.
With that overview of our growth opportunities, let me turn to the other key components of our plan.
Getting the strategic initiatives and making the investments to unlock growth and create a more efficient and productive business model and we've already begun executing on a number of these including a multiyear cost savings program intended to substantially self fund our investments.
And 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 of these initiatives today, let me provide some high level thoughts.
We're becoming more consumer and product focus we will lead with product design and innovation will 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 and our full potential plan, we're making data of 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.
<unk>.
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 overtime and this should provide greater revenue opportunities while also lowering costs.
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 improved supply chain service and efficiency and build power.
House brands to meet the changing demands of our consumers and customers around the world.
And we're bringing in new capabilities and leadership, we've added outstanding new leaders, including our <unk>, 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 are designed to leverage and unleash the knowledge and expertise of our long tenured talent base.
So to sum up and we're excited about the progress we made in the quarter revenue momentum continued to build across our business, which was evident and our strong fourth quarter performance and we began 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 and 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.
And in closing I'd like to once again, thank the entire hanesbrands team around the world for all your efforts and these challenging times and.
And with that I'll turn the call over to Tc.
Thanks, Steve that concludes our prepared remarks, we will now begin taking your questions and we'll continue as time allows I'll turn the call back over to the operator to begin the question and answer session operator.
Ladies and gentlemen, if you would like to ask a question at this time. Please press the star and the number one key on your Touchtone telephone to withdraw your question press the pound key.
The interest of time, we ask that you limit your questions to one and the brief follow up.
Our first question comes from Omar Saad with Evercore ISI.
Good morning, Thank you for taking my question.
The nice quarter.
I guess, Steve and I My number one question would be as you think about the full potential plan and thanks for laying out some of the initial details and thoughts around that maybe you could share some of the findings behind during the comprehensive review of the findings behind some of the key findings behind the.
And that are behind the plan.
Especially around the champion brand.
Sure. Thanks for the question I appreciate you being on the call and when we started really my first day back in August to look at the business and really assess it we did a real comprehensive view and we looked at everything we looked at how our brands are positioned and how we go to market and how the supply chain performing who are key customers with our channel mix on a global base and so we took a <unk>.
The comprehensive book and really got to what we call kind of the unvarnished truth underneath our business and every time you do that of course, you learn things about your business and things are better at than you. Initially thought things of that you have big opportunities to to improve upon so.
We looked at all of that and the strategy that we built came right out of that so as you think about growing champion that what we learned is of what I learned is how strong the brand really is and how much potential it really has and as I said and the last call. It's one of the reasons I joined the company because I think there is so much opportunity there when you think about the brand from.
And its heritage and this is a 100 year old brand. It's got to incredible track record of innovation. It's got a really strong global footprint, that's continuing to grow we're seeing a lot of excitement behind the brand. So it's an area that we need to lean into and we need to continue to build upon and I think the foundation is really strong and the upside and the future is really good.
Good.
And really key growth areas is the U S innerwear business and.
And it's a business that's been inconsistent in terms of its growth I would say over the last couple of years and obviously, it's a large part of our business and very profitable part of the business.
And as we looked at our brands really understanding where we are what we've learned is that our brands are tending to skew a little older.
And a lot of the growth in the category is coming younger younger consumers shopping differently looking for different products. So we're looking at our brand portfolio I love. The brands that we have I think and particularly the hanesbrands is a bit under leveraged right now and has massive opportunity to grow as we expand that and we're going to spend a lot of time.
Thinking about how do we segment each brand has to have a very clear reason for being a very clear consumer segment that had the targeting and.
Capture a larger consumer base as we go for it just just one example, I'll give you the thing that we learned.
And getting very granular look at Haynes men's underwear business and the U S. We have the number one share position and the over 35 age group and we also have the number one share position and the under 35 age group, but the actual share is very different we have a lot more share absolute share in the over 35 and within the growth has come.
And the end of the 35, so we saw that as the big opportunity for us to understand that consumer a little bit better how the shopping what products that they want and we're going to be very focused and targeted on going after that consumer and we have had some products and the pipeline that are coming very soon that will enable us to to capture that opportunity.
One of the other key learnings I would say that we had was that I don't think we are doing a good enough job leveraging our global earnings.
And our brands and our consumer so tie back to that men's underwear. Examples I, just giving you our Australian business, particularly the bond grant had gone through a very similar exercise just a couple of years ago. They found themselves aging a little bit and then pivoted and now are doing extremely well capturing younger consumers with a bit of of different positioning different brian different that product.
Offering over time, so there's a lot of learning inside this global company that we can build upon and and improve upon and so that's one of the connection point that we're trying to make as we go forward. So just a couple of the learnings that tie directly into key actions that we're taking going forward.
Got it that's Super helpful. And then for a quick follow up did you guys provide the E commerce and digital metrics. This quarter I know, it's one of the strategic priorities building E Commerce excellence across channels. Thanks.
Sure.
We didn't in our and our release, but let me just talk a little bit about where we are from our we call. Our consumer directed business. So from an online basis, it's about 21% of our sales and the quarter. It grew 46%. So we're pretty pleased with the performance.
And at that business over of the year and that was both with our third party suppliers and with our sales and our own personal sites. So continue to see momentum and our online business work to be done there. It's one of our strategic priorities I think we can get a lot better.
Were good not great and we need to improve upon that but that consumer continues to find us and we keep seeing momentum there.
Yes.
Our next question comes from Paul <unk> with Citigroup.
Hey, Thanks, guys.
And if you could on the E comm business, if you could give to those metrics on the company owned piece of it ex within the third party sites.
Just to follow up on a model question, there and wanted to understand a little bit more about the SKU reduction and you said.
The 20% of Skus, 12% of inventory of what percentage of sales.
Does that represent and what we see from some of the brand and the happening more on the champion Todd one the innerwear side if.
If you could provide any help there for.
Sure, let me take them in reverse order and I'll, let Scott talk a little about the online.
From a SKU activity perspective, I think one of the things thats important to understand kind of the context around why we did what we did.
And it's really part of the initial full potential plan in the fourth quarter kickoff is we took a number of actions to simplify our business and simplify the seem that youre going to hear for me a lot I think it's really critical for us to be able to increase speed lower cost to create focus and our in our resources and also ultimately that need to provide our consumers with a better experience.
And thats in stock whether that's.
And our products, whether that's better cost of the shelf. So we're going to focus on simplification and the SKU rationalization initiative is a key step and that and it is about 20% of the skus.
That is that we.
And take action on it was about 12% of our inventory at the end of the year as we went forward.
Some of what are you going to see I don't know.
And I actually hope you don't see anything and that you don't necessarily notice of this and I think thats kind of of the intent that youre not going to be of consumer who is now is disappointed that they can't get product out to the can't get brand y.
When you when you think about SKU rationalization.
This pruning.
One is to reduce but it's also to create room for other things for newer areas. So that we can drive growth. So while we take 20% of our Skus out we're still adding skus, where it makes sense to our business for us to grow but we took a very disciplined approach to the SKU reduction.
I would bucket it into three areas for you and some of it is just no regrets theres a rich some routine cleanup of the need to be done small amount and the skus that small amount of inventory can be broken inventory irregular. So you shouldnt see that at all and others is some what I would call some unnecessary downstream complexity in packaging to configure.
<unk> or maybe some sub brands are labels that are relatively small and our kind of declining businesses legacy businesses that we wanted to clean up and.
And the third area is really kind of past season merchandise that we're continuing to replenish over time for certain customers, where we really confident that we can move them into a more recent and version of of the product. So we took a very disciplined approach. This was the global activity all of our businesses were involved we followed it and a very rigorous manner.
That got us to the 20%, but I don't see you looking at and go Oh, and now I'm missing that we intend to to actually to accelerate growth and our system to enable us to move faster and for us to improve margins over time. So it should be it should be seamless from the consumer perspective.
Sure and your other question and thanks for your thanks for your question on this so the online and make sure I'm clear on your question I have and while adjusting online as far as the growth there.
The 21% of sales versus the 16% last year. So we are seeing an incredible amount of growth there as we as we as the consumer behaviors shopping behaviors change and adapt and so and this is another area that and as far the force of the full potential plan. We know there is lot of opportunity with E Commerce and online and so we have more capabilities that we're going to invest and.
To us we really look for this as an opportunity to growth and more as we move forward.
And I would just add to that our with our own websites are about 27% of our total online sales. So you can kind of get a feel for how important they are to us and the opportunities that they present for us going forward.
Our next question comes from David Buckley with Bank of America.
Hi, Good morning, Thanks for taking my question I know when you will hear more details and made but just keep of the first quarter Guide do you believe you can return to fiscal 19 earnings level in 2021, and then can you share any details on the size and margin profile of the European Innerwear business. Thank you.
Yes, So let me start off and I. Appreciate your question as far as the 2021 and as we mentioned in our prepared remarks for not given for 2000 and 'twenty one guidance for the outlook. At this time, we are still working through and developing our full potential plan and when you look for to addressing that fully and the may investor day and so.
As we think about the first quarter again were really encouraged about the momentum that we're seeing within the business across all our segments and we're seeing that we saw that momentum continue into January and we feel really good about the first quarter based on what we've seen so far and as we think about going down the P&L from a margin perspective looking for pretty substantial margin.
Accretion there both from a gross profit and <unk>.
SG&A standpoint, as we continue to have the topline growth of really able to leverage the fixed cost and SG&A.
And I agree with Scott and we're seeing good momentum and the business and we feel good about heading to 2021.
In terms of our European Innerwear business I'll give you just a little bit of color. We are at the very early stages. So we don't have a lot to share in terms of the process, but we wanted to just to let you know that where it started the process and our commitment to being transparent with you, but just a few details overview of the business.
In 2028 to $500 million to $600 million and sales the corporate operating and the average operating margin is a bit below the corporate average, it's largely of wholesale business, but it does have some online and demand retail with it the biggest countries. We operate in are France, Germany, Italy, Spain, and the business has some great.
And if you're familiar with that market, the Dean brand and France near D and Germany.
Upon Dorado and spanned lovable in Italy of really really good brands, we've got a very strong team over there but for US. This is just we have finite resources and we are focusing on where we think we can generate the best long term return so it's a good business, but which.
We're just questioning the is it the right business for US right. Now. So we are we started this process and we'll keep you and the loop as more develops.
Thank you I appreciate the color.
Our next.
<unk> comes from Adrienne <unk> with Barclays.
Good morning.
Good morning.
Yes, let me add my congratulations.
Steve Thanks for all of the color my.
My first question is actually how are you viewing some of the.
<unk> from the <unk>.
Digitally native brands had sort of offered up it seems like they are making pretty good connection with the millennial whether its third love or something really small and nascent like the Tommy John So to my first question to <unk> and then my second question is for Scott on the manufacturing variance aspect of it does the SKU reduction.
And any way and the SKU reduction combined with the non go forward to GTE will that have any impact on day to manufacturing variance.
And kind of along with that are you, replacing so it is.
The non go forward Skus with more innovation. Thank you very much.
Okay, Let me talk about the.
The digitally native brands first yes, there's a lot of them out there and they are to interesting obviously, we watch them very closely and learn from them and understand how they are attracting consumers and what they can do.
I look at it versus our brand portfolio, where we have really strong brands and the business whether that Haynes, whether that valley, whether the maidenform the challenge for us going forward and the work that we're doing right now is to make sure that we do and very clear segmentation and positioning of each one of these brands one of the challenges that we have is I think and many times.
The brands overlap, a little bit too much and or to close to each other and we need to push them apart segment them and position them to capture the younger consumer and I think we of the capability to do that and we're seeing the momentum with our broad business being up double digits and the last quarter, we're already starting to implement a few things that have been underway, but theres more to be done, but I think.
We have the brands that we need right now to <unk>.
<unk> physician it we need to improve our E commerce presence and performance that we talked about earlier, we need to make sure we have the right innovation, but.
We look forward to growing that business and I think we're well positioned to do it we have work to do but I think we have the assets in place that we need.
And good morning. Thanks for your question in regard to the SKU reduction and the manufacturing capacity, we do not anticipate any manufacturing and kind of.
Variance of the drag as we go into next year, just recall back when we and when Covid emerged and we did supply of it and we did set of supply chain down and the PPE business was able to absorb and kind of take all of that capacity and the interim and as things ramp back up we're back and we're back to full capacity as we kind of work through the rest of the year. So we did have some manufacturing variances.
And the second half of the year with international and Activewear and wheat.
Talked about that and the last quarter's call and we saw that play out and the fourth quarter, but again that was the.
Short term drag and as we go into 2021 and that'll be behind us.
And I would just add to that the idea of we're going to be adding new skus the interest yes.
We're looking at adding we're trying to not we're obviously not going to raise our SKU count back to where we were in the past. So we're going to be constantly be adding and pruning and manage that as we go forward, but we are looking to add to use to drive growth and more newness and our assortment, whether and there's different ways of doing that some of it is just new products of events. Some of it is back to being a global company, how do we lift and land.
Global styles and share on a more global basis, I think we've and opportunity to be more seasonally relevant with color and print rotations different silhouettes and fabrications for looking at for the younger consumer so the 20% reduction gives us room in our operating model to do more of it simplifies the manufacturing process it simplifies our disk.
<unk> process and allows us to be focused on where the true growth opportunities are so we're looking to grow and we will definitely add skus as we need to.
And just one more point on the the SKU reduction and the state was just pointing out the efficiencies again, there's efficiencies will help drive down costs actually with some of the skus that we identified of lower performing and sort of run times and so we're able to kind of offset that with core higher volume skus. So I would expect if anything it will be more efficient over time.
Our next question comes from the wrong as Alaska with Exane BNP Paribas.
Good morning, and thanks for taking my question Steve.
And Steve Scott could you, possibly give us some direction on where champion should grow for first quarter and then.
And last quarter, you talked about spring summer bookings to be higher than 2019 levels for champions and still the case and then second question just how do we think about the U S Activewear EBIT margin.
And since it was down 700, that's for the fourth quarter, how do we think about it for the first quarter. Thank you very much.
Sure Scott I'll start with the margin first and Im sure.
And definitely in the morning. Thanks for your thanks for your question. So from an activewear margin standpoint, and actually overall for the for the quarter were actually pleased with activewear as results and from a margin perspective, we've talked about this and the last call, we expect and margins to be down and the fourth quarter.
We have for manufacturing variances that were unfavorable that were incurred early in the year and now we're flowing through and the second half and so that was negatively impacting our margin for the activewear business now and there is a short term headwinds that we had and as we're moving into 2021, that's going to be behind us and so that's going to be a good rebound.
And from a margin perspective from activewear as we go into 2021, and then again just on layering on top of that as the volumes and and.
And topline increases and growth are going to be able to spread cost even more so basically get a margin expanding back to where it was before.
Good morning, Laura in terms of champion, we're feeling really good about the business and where it's going and yes bookings continued to be up and strong as we go forward and we're expecting good performance from champion and the first quarter the.
The big headwind that we had that we talked about in the and the third quarter was around to our sports and college licensing business and as activities aren't.
And our muted and people are and attending events and college bookstores are closed that obviously it remains a headwind for us, but when you look at the quarter and you look at global champion being 11% and up 18% when you back out the the challenge sports and Cogs licensing business you can see the impact there, but we feel good about champion and the quarter, we think we're going to.
Continue to have momentum.
And consumers really reacting and innovation is working and the channels are working for us as well. So we're very bullish on champion going forward.
Our next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Good morning. Thanks.
For all of the details today.
I guess jump ball, but could you could you speak to the guidance for the first quarter, sorry to focus on the near term for a minute, but it points to an operating margin. That's above the first quarter of 2019 of lot of us are trying to model to pre COVID-19 levels. So I'm trying to think maybe you can help us with.
The gross margin versus SG&A in the first quarter and just so we can think about how those businesses and how those lines compared to the the first quarter of <unk> 19.
And as well.
And is that is that being above the those margins is that the sustainable dynamic as we try to roll through to the next few quarters. After <unk> understanding that you don't want to guide as yet for the full year I'm, just trying to get a better picture of what this business looks like.
And the other side and then Steve when you.
We look at the potential option early on in the and the strategy to exit the Europe business is the comment that you can self fund. These transformation initiatives does that assume that you have the savings initiatives.
The initiatives that you're looking at.
Of enough savings to offset any potential dilution from the Europe business.
And there is some stranded costs or even though its scott.
You said of that margins below the corporate average.
Sure. Let me let me go first and then and it's gotten to go back into the guidance. So yes, we are kicking off a very substantial cost savings initiatives that we think can help transform our cost structure over time and substantially self fund our investments separate from any.
And changes we made to our portfolio I want you to think about the the investments or the self funding of the investments from our cost savings initiatives kind of our ongoing base business and I think you should include that in 2021 as you think about your modeling those cost savings to start today and our investments start today. So I think you can connect to us.
<unk>.
And in 2021 as we go forward.
And depending upon when I refer to hei, our European Innerwear business Thats, our internal and external words, sorry about that.
And our European Innerwear business.
And we'll see where that goes and as I said its early but that would be separate from our cost savings initiative. It's not that's not how we're tending to fund investments going forward.
Excellent and good morning. Thanks for your question on our Q1 guidance and let me kind of first step back and now Youre asking about the margin. So I think it's important to understand kind of the broader view of kind of what we're looking at from a topline perspective, that's one of them actually drive margin performance as well and again like I said earlier, we're off to a strong start to 2021.
We have some really good momentum across the business and you can see that and our and our actually our segment top line guidance with and double digit growth expected for U S. Innerwear, both in the U S Activewear and international we're expecting mid to high single digit growth and the first quarter. So it can really continue the momentum and the underlying momentum that we saw and the second half and all of that being said.
And we are still facing the unknowns, we have continuing headwinds from Covid and some operational challenges and we are very overall very optimistic as we go into 2021, and a margin perspective and that we are anticipating.
A big bump as far as our profit improvement 550 basis points over the first quarter of last year and I think it's important to understand when you are comparing to 2020 and of course, there's a lot of noise and 2020 and the and the first quarter of last year I guess, some COVID-19 charges that we incurred the first part was on gross margin, where we had a $12 million negative manner.
Factoring variance from shutting our supply chain down back in March timeframe and that started for a couple of months and we also had a bankruptcy charge with a relative to a retail customer of $11 million. So those two things were in the margin last year that would not repeat.
For the first quarter of this year, not anticipating and the balance of the improvement of the mix between gross profit and SG&A.
And back to the SKU reduction initiatives, we're actually seeing the benefits already and the first quarter of that we're expecting lower excess and obsolete inventory charges and we're also anticipating the savings from the supply chain restructuring actions. We've done recently as well. So we're seeing the excitement about savings closer to the P&L now and we're going to have some incremental costs as you think about the first quarter.
And like I mentioned, we have some operational challenges and and these are widespread supply chain the logistics constraints that the industry wide of saying the port congestion and product availability issues and and impact of this a little bit and Q4, but also there is going to continue through the first quarter and that includes incremental cost of like higher freights, and some repackaging costs, where we're trying to lever.
Existing inventory and repackaging that to meet customer demand to kind of work through that and meet that meet deadlines. There from an SG&A perspective, it's really mostly about just leveraging the topline growth and leveraging those fixed costs and getting.
The higher and higher kind of spreading of that cost of arrival of larger sales.
The volume.
So and I would just I would just to add on top of all of that so Scott and I think that's a really good kind of where we are today, but as we kick off the full potential plan and we work towards us and when we get together in May and our Investor day, we will share much longer term view of it but our goal and our intent is to be a higher growth more consistent growth.
The company that delivers higher levels of profitability over time. So we're building a long term plan that enables that and we feel like we're going to have a good story to tell you when we get together and May and we'll be able to put all the pieces together to show you how we get there.
Our next question comes from Susan Anderson with B Riley.
Hi, Good morning, Thanks for taking my question and.
And I was wondering if you could talk a little bit about the performance of C&I and on Amazon and the quarter I guess, how is the consumer and resonating with the brand and how is it performing versus your expectations.
Sure Good morning, Susan.
Yes, the C&I and our full year sales were in line with our expectations. We are focused on Amazon right now we're looking at the business in total it's part of our global champion brand strategy and it's really trying to understand where we can drive champion and how <unk> fits into that strategy. As we go forward. We do know that there is theres still good consumer equity and loyalty and the <unk>.
And and we're looking to see how we manage that and the long term, but to answer your question directly it's performing to our expectations on Amazon and what they expect and what we expect to going forward and both are pleased with the business all of them.
Great and then just if I can add a follow up and I'm curious, how you're thinking about and the long term growth of the segment segments, particularly innerwear, which is inherently a lower growth business I guess after we get past the restocking and how are you thinking about kind of the more normalized growth level for that segment of the business.
Yeah.
And I'm not going to give you what the long term number is for our growth right now what I would tell you is yes traditionally innerwear in total has been.
Modest growth business, but to our segments of the business that are growing much faster than others and one of the things that we've done in our assessment of the business is really go back in and understand what product categories, what consumer groups ages channels demographics.
Our growing and we are of much more granular understanding of that today than we've had in the past and I think what we need to do and what we will do is we will target those opportunities specifically, so that theres growth underneath and when you pull back the covers and the key is to be able to have the right brands of the right product right pricing structure of the right channel approach to go after those.
Opportunities. So our plan is to have consistent growth and our innerwear business, particularly our U S. Innerwear business going forward, which will be an inflection point for the company as we move forward and in.
And may well talk a little bit more about that.
Our next question comes from Paul Trussell with Deutsche Bank.
Hey, good morning. Thank.
Thank you for the color I guess wanted to maybe just see if there is any additional.
Information you can provide around what you've seen year to date, you spoke about momentum across the business.
In <unk>, maybe just more specifically on what youre seeing from the different divisions and the different geographies, particularly Europe.
To date.
Sure Good morning, Paul.
And in total we feel good about the business and the performance you saw in Q4 consistent performance across the business, whether that was innerwear activewear and and strength in our international business in total that was driven by champion and our Australia Innerwear business is really performing and we're very pleased with that business and we have <unk>.
Many of the new leader of their Tanya Deans is going to take that business to the next level for us. So we feel really good about that.
Europe, and Asia are headwinds and we're headwinds and the fourth quarter, and particularly Europe with a lot of theres closings of openings.
It's moving back and forth, but thats been a bit of a headwind for us and the.
And of our business the champion business and Europe held up has held up well and we're pleased with that performance and we continue to see that the performing over time, but the European market The challenge and Asia. The challenge in total Theres different parts, Japan was a very big headwind last year, we are starting to see of potentially some good news coming out of Japan of some opening but that's certainly.
With the headwind.
And but the other side of Asia, and China, we like where we're headed with the champion business and our partnerships there to build both online and.
And physical and physical retail and China with the champion business. So the portfolio, it's mixed around the globe and it's really a week to week type environment to understand.
And closings, where the spikes and cases and things like that to produce for US is I feel like we're managing through it very well the supply chain has held up very well through this and our ability to it.
We of manufacturing different places around the world controlling a lot of R.
Our own the supply chain has helped and allowed us probably to provide better service maybe than some of our competition, which has certainly helped us and for some longer term space gains as we go forward. So I think the organization is managing through it I'd be remiss, if I don't take a second and thank our entire organization for the really hard work that they put in and the last year and continued to put in.
And to position us.
To be successful in a in a difficult environment. So I feel good about where we are and we continue to manage it very closely and we of all the processes and controls in place to make sure that we can thrive in a very challenged difficult environment.
I appreciate it and then on PPE.
Certainly understand.
The strategic.
The process, maybe could you just remind us or give us some some numbers to kind of think about.
As you cycle of that business year over year, what was the impact.
Sure.
To the P&L from the top line and the EBIT contribution standpoint over the last 12 months.
Sure.
Appreciate you following up on that Paul and the PPE one.
This is challenging one for us obviously.
We have finite resources of company and we really want to focus and we see the best growth opportunity and the market has changed.
Back in the third quarter, we did just under $180 million of sales in Q4 was 28, so it's declined pretty significantly.
The sales trends of changes I mentioned competition is different consumers changing and what theyre looking for and the type of product for a lot more novelty and different things like that and it's not where we want to go.
In terms of the impact in sales it was roughly a $1 billion for the total year.
Which is obviously, a big number but I would tell you while we're writing it down and it wasn't big sales contributor in 2020, we don't see it as a headwind in 2021 from a sales perspective.
Our next question comes from Jay sole with UBS.
Yes.
Great. Thanks, so much for taking my question.
And so Steve I, just want to clarify something from one of the earlier questions. When you say that the multiyear cost savings program is intended to substantially self fund the investments necessary.
What exactly do you mean by substantially does that mean like entirely you will cover the cost of investments with the with the cost savings or there will be some incremental investments on top of the cost savings.
And then secondly, when you think about R&D and advertising traditionally R&D is maybe 50 bps of total sales advertising, a little bit less and 3% of total sales.
With the cost savings program do you intend to take those percentages higher can you just tell us where you see those two line items within the P&L moving Thank you sure. Let me take the questions in reverse order. So in terms of R&D and advertising I think we've and opportunity to invest there and I think we've and opportunity to spend more particularly and advertising if you.
Look back historically back to 2013 to 15, we spent and the three two to three 5% range 17 to 19 that was down and the low twos and then and this last year. We were at about to now 2020 different year. So theres a lot going on there, but I think we're understanding and corporate.
The advertising as a percent of sales and it varies by brand and it varies by part of the part of the world that we're in but fundamentally I think we've and opportunity to have our brands work harder for us and do more and expect to for us to invest in that and there are a lot of that comes along with R&D product development is the big opportunity for us.
As we go forward. So you should look for us to invest in those areas as we go for it and.
In terms of substantially self fund our investments I don't know the exact number at this point to be perfectly honest with you I know, we're going to be making investments I know we have line of sight to some significant cost reduction opportunities over time and this is going to be of journey, it's going to be a couple of years to get there. When we get will we be able to self fund of 100% of it I don't know at this point.
Our goal is to to self fund its much of it as we possibly can and we think we will be able to self fund a substantial portion of that.
Our next question comes from Ike <unk> with Wells Fargo.
And everyone understood two quick ones for me and one in the first quarter basically to all of the share count.
And guided to come up for a couple of million was kind of curious what's going on there and then.
And maybe I'm not understanding can you clarify and youre, saying of the PPE, the $1 billion and lapping it without net revenue recurring but you don't view that as a headwind to im not sure Im understanding.
Youre describing it.
Sure.
Let me start with the PPE and it was about a bit of dyas when I say it wasn't headwind I think we'll be able to lap it with our base business and our current business as we go forward.
So, it's obviously, a big number, but where we see the opportunity as markets open up to to cover that $1 billion of sales that we had in the past from that category.
Yeah and from a share count standpoint, we're not anticipating any large fluctuations in our share price or the the stock.
Outstanding shares really of the function of the share count can be of a mix of stock price. We also have our long term incentive plan is share base and as you have a grant investing that tends to kind of extra.
Share price and the outstanding shares kind of fluctuate over the year.
But nothing significant to call out.
Our next question comes from John Kernan with Cowen.
Hey, good morning, Thanks for taking my questions.
And maybe just on U S innerwear in the back half, even ex that the PP&E sales and organic growth.
Much better than trend and the first half and certainly and.
On a multiyear basis, maybe talk to the specific drivers of.
What is producing the better organic growth and innerwear and then just on the competitive dynamics within.
The category.
How do you view, what's your view on private label.
You did talk earlier, a little bit about some of the DTC brands and what's your view on the overall competitive environment with the private label.
Sure.
In terms of in terms of innerwear and the momentum that we have there's a couple of things going on and obviously, there was particularly and in Q3 and a lot of restocking going on and the momentum behind that we got some benefit out of that and Q4, you'll probably be a little bit going forward, but obviously that starts to wane over time as everyone catches up we see good.
Pos performance and consumers pulling the product and some of that is from space gains that the team has had some of it through I think we simplified our assortment and certain in certain accounts that has really helped us.
And per the ports and our inventory and stock has been pretty good from a relative perspective so.
Executing the fundamentals of the business and the Innerwear is.
US and I think the opportunity for us going forward I still think we can get a lot better at it and as we add new products and as we execute the fundamentals and the basics of the business well, we should see momentum and growth there.
In terms of private label to get back.
The category and we're looking at all the different brands.
Being the top brand and the top share brand is a good position to be in and I've mentioned this before but for me private label is.
It's something we need to think about but we need to do our job and this brand as brand leaders and when we do the right thing for our brand when we're producing high quality products that consumers want and when we manage price gaps and we have a reasonable price and good value, which we should be able to do from our low cost manufacturing and we continue to invest and our brand the way we need.
To.
I think we'll hold up extremely well versus the private label environment retailers want brands like Haynes like valley like made to drive traffic to their stores. That's what that's why they had brands. So the people come into the stores. So our part of that equation is to make sure that we're innovating that we're messaging back to the advertiser.
The discussion, we just had a minute ago, we're getting our message out there, we're making our brands incredibly relevant and brands that are in desire and if we do that we drive traffic to retailers and retailers are happy.
We're happy with the business of overtime. So we need to act like the leading brands that we are and put the foundation and behind that and if we do that I think we will compete very well of private label along with all the other brands that are out there.
Our next question comes from Jim Duffy with Stifel.
Good morning, Thanks for taking my question I wanted to start by congratulating Hanesbrands organization, and the AOS recognition for sustainability and reducing the carbon footprint.
And there guys. Thank you.
Steven I think of the Hanesbrands as having been in the process of tightening the belt over a number of year period what are the.
The further areas of where you find savings to fund the investment that you're talking about can you highlight some of the opportunities and then Scott I know youre, not giving guidance for all of 'twenty one but.
Can you share thoughts on tax rate given the changing business mix going forward and then Scott what's behind the increase in accrued liabilities and the fourth quarter.
Yes.
Let me start Jim first of all thank you for the recognition and the call out on sustainability is something that.
Is it is very important to us something that we're very proud of and something that you really ingrained and the DNA of the company and we're going to continue to to do and strive and continue to improve and that place and I think youre going to see us to start to talk about more of an ingrained into our brands. It's ingrained in the company, we didn't bring greater and our brands going forward, which is an opportunity for us to the increasingly.
The relevant to younger consumers over time.
In terms of in terms of cost program that you talked about I hate to have a lot of programs over time and in the past and I've learned a lot about those and the approach to they've taken here's what I'd say is the difference to you in the past a lot of the cost reduction programs that we've just been about reducing costs and they are kind of isolated programs. This cost reduction.
Graham it can be tied into the full potential plan and it's integrated into the strategies and then all of the initiatives. The <unk> initiatives that we talked to that help find savings over time. So it is not just it works horizontally across the organization finding lots of different opportunities from how we're going to work differently. This is about changing the work and that enables.
Us to reduce cost over time, but we're looking at all of the big buckets. I mean, you look at our P&L of the big buckets are around.
SG&A and we're going to looking at all of the the non labor activities around SG&A and obviously part of Covid changes, how we think about operating our business going forward. So there will be some opportunities there.
Our labor model as we think about segmenting, the supply chain and going to market differently and serving consumers differently and then the other big line is obviously cost of goods. So we're doing a really in depth look at sourcing.
Sourcing and procurement optimization, how do we get more efficient, but we're doing it through the lens of the full potential plan, it's not a standalone cost initiative and I think thats, what really makes different and that's what's going to unlock a lot cost for us going forward.
Thanks, Lee and thanks for the question so the on the on the tax rate and we are expecting of 16% tax rate and the first quarter.
Not at this time I can give you anything on the full year, but you know we're always working with our advisors to really try to optimize our tax rate just under the rules and regulations.
And that exist.
And then the can ebb and flow of little bit over and over the time as you mentioned the mix of income that we always try to kind of manage that.
And from.
Year to year, and the standpoint of accrued liabilities.
And more of a function of the the strong fourth quarter results of <unk>.
And the accrued liabilities up you have.
The higher sales volume, so that creates a higher trade and incentive accruals at the end of the year higher taxes payable at the end of the year, that's really largely of portion of what's driving the the higher balance there and then you have some just timing items that can the contend to to go back and forth over the over the year, but that's really what's driving us to higher high performance and Q4.
Our next question comes from the line of Steve Marotta with CL King Associates.
Good morning, and Steven to Scott and T. C. Very one quick question Stephen regarding the E. Commerce excellence, one of the challenges and the owned and DTC channel over the years had been shipping costs versus the lower average AUR for Hanesbrands. How do you think about that going forward and particular by the way and the recency and when.
Shipping cost of increase have you crack the code there if not how do you think that code will be correct going forward.
Sure. It's of Great question and the short answer is no I don't think we've cracked the code on how to do that yet and it's something that obviously, we're thinking about as we build out both our own E Commerce and partner with our third party shipping costs are a major part of the P&L. So we have to be smart about skus and how we offer pack sizes and how we go to market on that but I would tell you.
It's not something we've solved at this point necessarily differently from from all of other competitors that everyone is struggling with as we go for it but as we build this business. We're building it through the lens of how do we do it and the most profitable.
From the SKU assortment.
And our SLA that we want to have over time, we're looking at all of those different things, but its work to be done as we build out ecommerce excellent because that's certainly a headwind that everyone faces and we have to understand exactly how we want to play and where we want to play.
On a net paradigm, it's not something that we have got to fairly locked in honor of figured out yet at this point.
That's helpful I'll take the balance of my questions offline. Thanks.
Thank you.
That concludes today's question and answer session I would like to turn the call back to T. C Robillard for closing remarks.
We'd like to thank everyone for attending our call today, and we look forward to speaking with you soon have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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