Q3 2021 HanesBrands Inc Earnings Call

Good day and thank you for standing by welcome to the third quarter of 2021 Hanesbrands earnings Conference call.

At this time I'll participant lines are and listen only mode.

After the speaker's presentation there'll be a question and answer session.

I ask a question during the session you'll need to press Star then one on your telephone keypad.

Please be advised that today's conference may be recorded.

If you require any further assistance during the conference. Please press Star then zero.

I'd now like to him the conference over to T. C rebel aren't cheap 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 an update on our progress after the third quarter of 2021.

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

The news release updated F. A Q document and the replay of this call can be found in the investors 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 the actual results to differ materially. These.

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 our operations as well as the business and operations of the consumer our customers suppliers business partners and Labor Force.

These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news release.

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 actually related charges and speak to continuing operations given.

Given the volatility of the comparisons due to the impact of the COVID-19 pandemic, we have focused our comparisons to 2019. Please note that unless otherwise stated all comparisons are to 2019 results that have been rebased to reflect the move of our European Innerwear business to discontinued operations as well as the exited C. Nine program at mass.

And the DKNY intimate apparel license comparisons to 2020 results 2019 results as well as additional information, including the reconciliation of these and other non-GAAP performance measures to gap can be found in today's news release.

With me on the call today are Steve Brad fees, or Chief Executive Officer, and Michael Dash, two our Chief Financial Officer for todays call Steven Michael 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 TC good morning, everyone and welcome I would like to begin by thanking the entire hanesbrands team around the world. This past year and a half has been marked by a constant stream of macro challenges I've been amazed by our associates dedication and resilience as they rise to any occasion find solutions and deliver results.

As I've said before our associates our greatest strength. They are an integral part of the success of our full potential plan and I want to recognize all their hard work.

Hanesbrands delivered strong third quarter results revenue was in line with our forecasts. Despite an unexpected locked down in Australia that close two thirds of our stores were essentially the entire quarter opt.

Operating profit and earnings per share exceeded the high end of our guidance range, we generate strong operating cash flow and our leverage improved.

Today, I would like to highlight for key takeaways from the quarter number one <unk>.

Consumer demand for our brands remains extremely strong around the world to diversify supply chain. It's competitive advantage. We're in a good inventory position and we believe we will continue to capture strong consumer demand the manufacturing of our product has not been an issue.

Three our entire global team continues to effectively manage through the various macro challenges. This was evident in our strong third quarter results in a reiteration of our fourth quarter guidance.

And finally, a full potential plant is on track. Despite all the global disruptions, we continue to effectively execute our long term growth strategy.

Let me expand on each of these highlights.

Consumer demand for our products and brands remains strong.

Since our May Investor day, we've increased our full year revenue outlook by more than $500 million and or profit outlook by $90 million. We continue to experience broad based point of sale momentum, which is driving the market share gains in both our innerwear and activewear businesses.

For the quarter champion brand sales were up 20% compared to 2019 with growth balance between the us and international <unk>.

<unk> is all about being fun and inclusive consumers around the world loved the champion give them the confidence to express themselves and to feel good doing it as a result champion use share position increased in the quarter and both men's and women's categories.

In Europe, we continue to execute our champion growth strategy with expansion in key categories, such as kids and footwear increased space gained as well as expansion into new geographies.

And in China, we continue to expand our consumer touch points, we're adding stores, who are partners were broadening our product assortment with key pure plays and we're expanding onto social ecommerce platforms.

And USA nowhere year to date or market share increased 140 basis points from 2019 with share in space gains across categories and brands, including Hainsey Maidenform.

We're seeing strong consumer response and returns from our increased marketing investments, particularly and intimates.

Our consumer need based innovation strategy is delivering great new products investment behind our maidenform tame your tummy Shapewear product our main form one fat fit bra and are badly easy like fries has driven increased market share as well as retail space gains an incremental distribution.

And total support patch continues to exceed our expectations. We have plans in place to expand the franchise globally and introduce additional product features to continue to win in men's underwear.

Iconic brands outstanding products and effective marketing it as a great strategy. It works and we're seeing it play out in our innerwear and activewear businesses.

Next I would like to touch on our supply chain, which is clearly demonstrating why it's competitive advantage or diversification strategy balances production between Asia and Central America, we operate with a strong or manufacturing base and with long term sourcing partners that are spread across 29 countries.

Advantage approach has given us the resilience flexibility and visibility to successfully manage through the macro challenges over the past 18 months.

Production across all 32 of our own manufacturing facilities was up and running throughout the quarter as strong consumer demand for our brands has continued throughout the year, we've been able to increase production to keep up by.

By the end of the year, we expect will have made nearly 25% more units in our initial 2021 plan.

This is allowed us to capture the stronger than expected demand all year. It also puts us in a good inventory position for the fourth quarter and into the first quarter of 2022 to continue to capture the consumer momentum in our brands.

Making our product has not been a significant challenge for us, but we are not immune to the other macro challenges like the vast majority of companies around the world, we're facing worldwide transportation bottlenecks as well as higher levels of inflation.

This is like thing at the time it takes to get product from our manufacturing facilities to our customers. It's also increasing costs.

Our team has done an amazing job managing through the various macro challenges all year. This was evident in our strong third quarter results, especially when you consider the extended government Lockdowns in Australia, we're not contemplated in our prior guidance.

We are delivering cost savings and efficiency opportunities, we're leveraging our scale in our global footprint will also aggressively managing expenses without sacrificing the full potential investments that will drive growth.

This gives us confidence to reiterate our fourth quarter guidance, despite the increasingly challenged macro environment.

Adding to our confidence that consumer demand environment remains strong we have the inventory to meet the demand and consumers in Japan, and Australia are gradually returning to stores as the government Lockdowns have recently been lifted.

Looking into 2022, we expect the broad based inflation pressures to continue this isn't anything that's unique to us inflation is impacting everyone globally. We're aware of the pressures and we're working to mitigate the impact this.

This includes raising prices globally as we know our brands have pricing power, we're being thoughtful and our approach and keeping the consumer at the center of our decisions plus we're continuing to work on additional cost savings and efficiency initiatives.

Turning to our full potential plan.

We continued to execute our long term growth strategy media and marketing investments behind our brands continue to ramp we're encouraged by the returns we're seeing on these investments and in line with our full potential plan, we expect brand investment to continue to increase in the fourth quarter and again in 2022.

We continue to improve the consumer experience on a E. Com sites. We've added capabilities. We've increased site speed, we've improved inventory availability and we've enhanced search functionality to name a few.

This has helped drive higher conversion rates and higher average order values on our sites globally.

In addition, we're progressing on our technology modernization initiative, we plan to simplify our system's down to nine core platforms running on a single core technology backbone. This will help us globalize, the business and reduce costs, you'll drive better business insights and consumer connections and it will improve decision, making forecasting and planning.

We've completed the planning and scoping for this initiative and are beginning are phased implementation.

We're also building a winning culture at Hanesbrands, we continued to add talent to the organization in the last several months we've brought in a number of key leaders in our champion business on global brand marketing team as well as in our HR organization.

We've also initiated a voluntary retirement program to create more career growth opportunities for our associates and to generate savings that will be reinvested in the business.

And lastly, we've taken an integral step in our full potential plan to simplify and focus our global portfolio.

We signed an agreement for the sale of our European Interweb business. We greatly appreciate our Haynes European Innerwear teams hard work partnership and understanding throughout this process as we drive greater resource and investment focus and improved operating speed.

Our full potential plan is progressing as expected. We're encouraged with the results were seeing and we remain focused and committed to executing our long term growth strategy.

So in closing consumer demand for our brands remains strong diversified and resilience supply chain puts us in a good inventory position to capture demand and despite macro challenges, we're delivering strong results, while simultaneously executing our full potential growth strategy.

And with that I'll turn the call over to Michael.

Thanks, Steve we had a great quarter I am really pleased we were able to deliver on our increased guidance, especially in light of a number of headwinds, including the extended lockdowns in Australia, and Japan, as well as higher transportation and inflation costs.

The team did an amazing job managing through these challenges and it is evident in our strong third quarter results.

For today's remarks, I will touch on some of the key highlights from the quarter, including our revenue drivers profitability and leverage as well as provide additional insights on our outlook.

As compared to 2019 sales increased 11% or $179 million to $179 billion on a constant currency basis sales grew 10%.

Champion brands sales globally increased 20% over third quarter 2019, with 22% growth in the U S and 19% growth internationally.

<unk> growth in the quarter was driven by strong consumer demand across channels in the U S continued growth in our European business as well as the ramp over of our partners in China. So.

Switching to use innerwear sales increased 25% over 2019 with double digit growth in each of our businesses, including socks kids women's and men's.

Consumer demand across our Innerwear brand portfolio is driving strong point of sale trends and increased market share while pent up consumer demand is fuelling category growth rates above historical levels.

We're seeing momentum from our innovations and increased media investments with particular strength in our maidenform in Bali Shapewear and brought products.

With respect to our international Innerwear businesses sales were consistent with 2019 weeks.

We experienced strong growth in the Americas, while sales in Australia declined due to Covid related lockdown.

Although two thirds of our Australian stores were closed for almost the entire quarter online growth in Australia was strong as we were able to capture a portion of the loss store traffic by leveraging our omnichannel at capabilities.

Since the end of the quarter the Lockdowns have been lifted in both Australia and Japan.

Stores are beginning to reopen in both countries and reflected in our fourth quarter outlook is the assumption for modest ramp up of traffic.

Gross profit increased $80 million or 13% compared to 2019, and gross margin expanded nearly 65 basis points to $39 1%.

Cost savings programs, and our supply chain and benefits from business mix more than offset higher transportation inflation costs in the quarter.

SG&A Deleveraged, approximately 100 basis points, driven primarily by two factors.

One consistent with our full potential plan, we invested in incremental $25 million in brand marketing as compared to 2019.

I am pleased with the returns were seen on these investments including improvement in our brand equity measures better conversion on R. e-commerce sites as well as higher point of sale trends.

And two we experienced higher wage costs in our distribution centers, which is a challenge across many industries.

Operating profit increased $20 million or 8% over 2019 and are operating margin declined by 40 basis points to $14, 7%.

Turning the cash flow and the balance sheet for the quarter, we generated $315 million of cash flow from operations, bringing year to date operating cash flow to $527 million.

With respect to inventory, we have strategically invested an additional inventory.

This has allowed us to capture the stronger than expected demand all year and.

And it has put us in a good inventory position going into the first quarter to capture the stronger consumer demand momentum, we're seeing on our products and our brands.

Our performance has translated into new improved financial strength leverage at the end of the quarter was two six times on our net debt to adjusted EBITDA basis.

This is a significant improvement from three six times last year and three three times in the third quarter of 2019.

Additionally, we intend to refinance our senior secured credit facility in the fourth quarter subject to market conditions. We plan to use the proceeds from this transaction and cash on hand to redeem the $700 million of 2025 senior notes, which are are five and three eights coupon and were issued in may of 2020.

In response to the global uncertainty caused by the Covid pandemic.

These senior notes carry a make whole provision, which along with the transaction fees is estimated to result in a one time charge of approximately $45 million in the fourth quarter.

Through this transaction, we expect annual interest savings of approximately $35 million of which $4 million is expected to come in the fourth quarter. The.

The expected interest savings and one time charge are factored into our fourth quarter guidance.

And now turning to guidance.

Similar to my prior remarks, my comparisons will be the 2019 point.

Point, you to our news release, an F. A Q document for additional guidance details. However, I would like to share a few thoughts to frame our outlook.

We reiterated our fourth quarter guidance for sales and adjusted operating profit we.

We increased our adjusted earnings per share guidance due to the expected interest savings I just reference in a lower tax rate we.

We increased our operating cash flow guidance for the fourth quarter, our guidance for net sales is 1.7121 $708 billion, which at the midpoint represents 15% growth over fourth quarter of 2019.

Adjusted operating profit is expected to be $200 million to $220 million, which at the midpoint represents an operating margin 12%.

As we mentioned in our last call, we expect the headwinds for brand marketing investments and cost inflation to increase sequentially through the second half of this year.

This outlook has not changed.

With the ongoing disruptions in the global transportation environment, we're seeing incremental pressure from higher freight costs, particularly ocean freight as well as higher labor costs and our distribution centers.

Despite the incremental pressure and freight and transportation costs were comfortable maintaining our adjusted profit and margin outlook, we've identified additional efficiencies and savings opportunities in the quarter to be able to offset these higher cost.

With respect to adjusted earnings per share, we increased our fourth quarter rage to 40 to 45.

To reflect the expected $4 million of interest savings and lower than expected tax rate.

And despite the strategic inventory investments I spoke about we raised our full year operating cash flow outlook to $550 to $600 million to reflect the better full year profit performance.

Touching briefly on 2022, given we are in the middle of our planning process and the global operating environment remains fluid, we're not providing specific guidance for next year. At this time. However, we wanted to highlight a couple of items as you think about next year.

The current environment remains very challenging like the vast majority of companies around the world. We expect broad based inflation pressures to continue into 2022 cents.

Second we are working on initiatives in an effort to mitigate these pressures we're looking at cost reduction in productivity initiatives. We are also raising prices globally, while being thoughtful and keeping the consumer at the center of our decisions and.

And third our full potential plan remains on track. We're pleased with the results were seen and we're committed to maintaining our growth related investments.

Will provide more details on 2022 guidance on our fourth quarter call.

So in closing I'd like to Echo Steve's comments.

Demand for our brands remains strong we believe we are well positioned to capture this demand given our investments in inventory and marketing and despite macro challenges, we're delivering strong results, while simultaneously executing our full potential growth strategy.

And with that I'll turn them to call back to T C.

Thanks, Michael that concludes our prepared remarks 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.

As a reminder, if you'd 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.

Please stand by while we compiled the Q&A roster.

Our first question comes from.

With Evercore.

Thank you and good morning.

I appreciate the update.

I guess I'd like to focus around the active where to wear commentary you made.

Just the underwear is incredibly strong.

But the.

The act if you could just elaborate on the comments comes here on active where the activewear category, it's not something we've heard from other companies.

And.

Along those lines.

How do you think about champion coming out of Covid are there any signs that champion is experiencing any slowdown post that kind of COVID-19 comfortable.

Reverse we've sweatshirt trends thanks, guys.

Thanks, Omar good to hear from you.

So let me talk about activate a little bit and he'll jump at champion.

Feel really good about the business quite frankly, and overall don't see any trend change consumers are definitely seeking the product we do still have a headwind in our activewear business around sports cause licensing business is there.

<unk> channel was pretty conservative coming out of Covid to open up this year, but we expect that to continue to grow and while we're not back 2019 levels in that channel. Yet we are above 2022. So I think that's going to continue to grow and I think there's big opportunities for us in that business in terms of champion.

I see accelerating I don't see it slowing down at all coming out of the Covid timeframe.

Certainly had a good quarter up 20% versus 2019, a lot of momentum around the globe. We are continuing to pick up new doors, gaining space, adding new categories. The footwear growth in Europe is really encouraging our kids business in Europe really encouraging and we're seeing the same thing in the U S. We just launched our.

Reverse week, which kind of really celebrating the iconic reverse we've platform that we have really strong consumer engagement.

That is.

Introducing some consumers quite frankly to reverse we even then reengaging others at the same time. So the response was really strong the innovation that we're putting out and champion. The latest thing we just put out with an enhancement to our soft touch innovation in bras and leggings, it's doing extremely well, it's gaining new space. So I feel really good about the activewear business we got.

Get the college bookstore business going again, but champion has a lot of momentum not only domestically or globally and we expect it to continue to only increase we go forward.

Thank you guys. Thank you. Thank you.

Our next question comes from Susan Anderson with the Riley.

Hi, good morning, nice to have in the corner.

And I was wondering if maybe you could talk about your own online business is and wondering if you're seeing kind of an increase in growth. There is you revamp care sites, particularly with the new champion site.

Good morning, Susan Hot So our digital business is one that is growing well if you look at Q3.

Online total online so are including retailers dot com versus 19 were up 62% our own sites are up 50%. So there's really good growth there and volume that said I know we have work to do to continue to improve their I'm pleased with the progress the team is making but I still think it's a huge upside for us were underdeveloped still.

We're adding new capabilities, our inventory availabilities, improving search functionality is getting a lot better and we're seeing some what I call. Some really strong green shoots and the performance of the business as average order value and conversion continue to go up globally.

But we have work to do so I think I look at it is all upside for us as we continue to get better and continue to improve the business, but I'm encouraged with the growth that we're seeing right now.

Great. That's good to hear and then just add one follow up I'm wondering if you can give an update on your capital allocation priorities here cash balances are strong it's nice to see the increase in free cash flow expectations. Just curious how you were thinking about returning cash to shareholders. It feels start to repurchase shares again. Thanks.

As soon as it's Michael that yet something we're definitely talking a lot about it clearly it's a very important part of our full potential plan I think when you. When you look at where we are today were.

Were invested in the business, we're paying a healthy dividend and as you probably also saw in the release.

Call that my comments were working on a debt retirement.

Working through refinancing our credit facility.

And what we're going to do is.

Call five three eighths nose.

Using both refinancing plus cash.

And so when you look at that I think that's really strong step forward for the company.

I think the other pieces, Steve called out his comments right.

We're on trend to generate $500 million more in sales of $90 million more profit of what the organization.

Where we would be at the beginning of the year. So there's clearly a number of things that we can do here. So we're working through the financial outlook for 2022.

And as part of that clearly we need to lay out our long term capital allocation strategy and I would expect that when we were back together here three months for our fourth quarter.

Call will be able to lay that out.

Detail and insight.

Our next question comes from Michael Binetti with Credit Suisse.

Hey, guys. Good morning, Thanks for all the updates here.

I do want to ask you a little bit as you think maybe just I know you don't Wanna guidance on 22 today, but may be semantically.

I know that you mentioned, there's going to be cost inflation that extends through next year and there's some pricing maybe just some thoughts on the timing of how you see that cost inflation working through the P&L. I know you guys have lead times and have some visibility there versus the pricing you might be able to take I am wondering if there is a timing mismatch there at all to think about and in particular the reason I am thinking about that is.

Because I know you have.

A really tough compare in the first quarter as your anniversary a lot of the success you had in the innerwear business, specifically last year. So I'm trying to think Steve about how you are approaching that on innerwear, maybe you could speak to.

I guess cost versus pricing would be it would be helpful. In timing, but then also just.

Category share gains that you're looking at for early 22 that can help you with that big hurdle.

Sure.

Let me start I'll talk a little bit about the category early and 22 and a little bit we're doing pricing and like I'll, let you talk a little about timing on costs and things like that so we go back.

A year ago, basically coming out of our unvarnished truth session, we really pegged innerwear as roughly 1% growth category and quite frankly, we are losing sure at that time, so as part of our plan. We really laid out in may that we are committed to a pivot and we're going to get us anywhere business growing again.

Focusing on the consumer we got to drive more innovation that we have historically done and increasing investments in our brand and I feel like we're on a good path to doing that so when you look at.

Michael This next year, what are we going to grow if you look at the category. This year category. This year is going to grow about 25% now our business in the U S is going to be up 35%, we backup PBE. So we feel really good about our performance that said I don't think this is 25% growth business going forward and I know you don't either.

So it's going to naturally moderate overtime and our goal in that space is to continue to grow faster than the category and continue to take take sure I feel like we're really well positioned to do that.

Exactly what the category growth is going to be next year I don't know, but I just know that we're going to grow faster than the category as we go forward.

Part of that.

In terms of managing headwinds is going to be your point on pricing and as we mentioned we are going to take priced globally. In 2022, we actually have a plan in place for executing that plan already it will be broad based across brands channels and product lines.

Michael You mentioned this year cause we're going to do it thoughtfully, we're going to keep the consumer mind.

Key components of our planet consumer Centricity, and making sure that we understand where we are from a competitive standpoint, partnering with our our retail partners and throughout it we're going to continue to gain share. So I know we have the pricing power within our brands. If you think about our brand portfolio, we've got either category leaders or position and really fast.

Growing categories that are in high demand the champion brand growing very quickly we've got good.

Retail partners and there's different ways of doing prices right there is absolute pricing.

Six pack size, so we're going to pull a lot of different levers on pricing to make sure that we're offsetting the cost inflation that we're seeing as much as we can but also keeping our eye on growth and that's part key part of our plan and we're not going to give up growth as we go forward into into Q1 and Michael only to what you were talking about the timing of costs and how you think they're going to.

Sure No I mean, I think clearly you guys are seeing this across the entire industry right. There is.

There's.

Transportation costs, probably probably the largest impact as we are currently looking at the business.

We've got ocean freight rates up in some cases sort of 500%.

And we're also doing more air freight that would normally be doing.

Because of in transit times.

There are some commodity prices clearly cotton and some oil et cetera that are gone up.

And we saw some of that in Q3, you'll see some more of it definitely in queue for and that's reflected in our guidance I do think our supply chain team has done a nice job trying to offset fees. I think you saw that in our Q3 results I mean, whether it's just traditional productivity improvements.

Raw material utilization.

Been working on programs to reduce overhead over the last couple of years and a nice job there.

Internalizing production and then I think one of the things that we've been.

Talking more about doing a little bit I think there's more opportunities consolidate our third party suppliers, leveraging those things and and when you combine that with the fact that.

Steve and the team.

Almost a year ago now came up with the program too for my cycle skew management, reducing the numbers skews by over 20%.

Clearly that gives the organization.

A lot more flexibility when it comes to managing costs. So.

There are going to be pressures. That's why we wanted to make sure we were calling that outflow. We're working on a number of things to try to offset it.

Great and if I could ask just one follow up on that.

I guess, Steve how did you land. This if you look at next year, we've heard a couple of other.

Apparel companies.

Look there could be a mismatch in in some of the lapping some of the strong demand from 21 with we didn't have time to bring back the investments that we wanted to so we'll see some cost pressures $2 to 22, I mean as you land. This 20 to be a year in line with the algorithm that you laid out at the analyst day.

Well.

We're not gonna give specifics on 22 as we go forward, but here's what I would tell you is I think the actions that we laid out on Investor day are going to continue so one of the things that I am adamant about continuing to invest behind our brands and we've done that in Q3, we're going to do it in Q4.

We plan to continue to do that as we go forward. Despite the headwinds so the.

<unk> the operating algorithm that we put in place is going to continue next year do I think all.

All of the disruption everything changes are full our view of our full potential plan and long term now we're confident we can continue to deliver against that full potential plan. The operating algorithm is in place it's going to be working with dialing up the things that Michael talked about we have to find more cost savings to get more efficiency, but the fundamental way we're approaching the business the way.

We're going to operate under a full potential plan won't change as we go forward.

Our next question comes from Jim Debbie with Stifel.

Thank you good morning, Thanks for taking my question.

Among my client base, there's a lot of concerns around.

Gotten costs for Hanesbrands, you've spoke to inflation broadly I know cotton exposure is likely a small smaller portion of your cost of goods and fiber usage and many expect but can you size your cotton exposure directly in setting Fraser side, maybe provide a view on what you're seeing for product costs as we look into 2002.

Two.

Yeah sure Jim how are a good morning, good to hear from you. So.

Certainly important to us, but what I would say at this organization knows how to manage it extremely well.

And when we look at the prices were locked in.

Into the second half of next year. So we have good visibility to what it is and as I said This company knows how to do it extremely well, we dollar cost average or direct purchases. So will always be just below average price for the year and when you think about cotton.

And you mentioned that it represents high single digit on a per cent of Cogs for us. So there's a lot of other things that quite frankly are bare costs headwinds to us as we go forward. So we're managing it closely and buying as we go we think we can manage it well as I said, we have good visibility beyond the midpoint of next year.

As to what it's going to be and we're focusing on all of our cost base to make sure that we can continue to deliver the margin commitments that we're going to make.

Great. Thanks for that Steven and just one more if I may can you speak to the current state of channel inventories relative to sell two trends has the channel caught up with the strong consumer demand.

So not completely it's interesting when you look at our situation where we are.

Definitely consumer demand is outstripping the total capacity of the entire supply chain system right. Now that said, we have the inventory that we need our challenge is to continue to get it into the right place at the right time, so our manufacturing plants are doing extremely well around the globe one of the things that.

We think is an advantage for us is the diversification of our supply chain around the globe good balance eastern hemisphere, Western Hemisphere, 32 facilities, they've been running extremely well and.

Michael Menzies earlier, we've been able to produce or we're going to produce 25% more units. This year than we planned at the beginning of this year. So we're producing a lot of product we have to get it into the right place at the right time, we have more in transit inventory than we would normally have.

Right now about 30% of our inventory is in transit. So we we think we have the right inventory the right amount of inventory the right seasonal inventory, we're still working on getting the right place at the right time, but one of the things that I feel really good about going into Q4 and going into next year's we're going to have the inventory that we need we just got to continue to pump it.

Through the pipeline at the right rate to make sure. We can meet the continually increased consumer demand.

If we had a little bit more in the right place we have sold a little bit more in Q3. There is no doubt about that the demand is there.

Our next question comes from Michael <unk> with Wells Fargo.

Hi, Good morning, guys. This is will gardener on for.

I just wanted to dig a little bit more into the champion business.

Can you just sort of size up.

What the penetration is in the U S vs Europe versus China.

And and in China are you guys see any sort of pushed back and nationalism against the brand as some other.

Medic brands listed.

Sure.

In terms of the business.

It has a good global footprint, obviously the U S is the biggest part of the business right. Now are a champion Europe business continues to grow and is doing extremely well and we're kind of just getting started in Australia at high expectations for the business over there over time and growth has been has been really good I was really pleased with the 20% that we put up globally. This <unk>.

Last quarter versus 2019, so the business continues to run extremely well and picking up all kinds of new space. There is a lot of momentum behind the innovation with great strong retail partnerships and champion Dot Com is again, a huge upside for us the point I was making earlier about E com and digital I have high expectations for.

For champion Dot Com and what it can do for us over time in terms of China.

No pushback our business is running well our partners are doing a really nice job. We continue to ramp up stores. We have over 300 doors right now businesses is growing really well, we're up 140% versus the 2019 number. So we feel good and I feel good about is the gross baths.

Once between men's women's kids.

Physical and E com business as we as we enter new platforms. There. So we have not run into the pushback against our brand.

And continue to think that business presents a lot of opportunity for us.

Great. Thank you.

<unk>.

As a reminder, if you would like to ask a question at this time that is star one.

Our next question comes from Carla K satellite with J P. Morgan.

Good morning, and congrats on the quarter.

Just a couple of quick ones from US. This is Mike on for Carlo by the way I was curious if you guys had amount of proceeds and you're expected from the euro and our sale and whether or not that completes the strategic review and then the second margins came in pretty good we're kind of curious I mean inflation front I know you guys have spoken to it a little bit.

If you could give us a little bit of color on what amount came from labor or materials and I think it was also mentioned oil and air freight just get a better sense of what's really driving any sort.

And inflation you are saying.

Thanks again.

Thanks for the question. So let me start with our European aware business.

Over a year ago, when we started our deep dive assessment entire business when we called our unvarnished truth.

We came out of exercise one of the key tenancy components of our business was to focus our global portfolio and simplify our business overall and part of that was about the European Innerwear business and we thought that that was a business that we didn't want to drive investment over time, we thought we could spend our cash.

Capital of management time and resources in other areas of the business to drive greater return. So we started the sale business. We are pleased to announce the agreement with reached to sell the business and we think it allows us to move on to think about investment where we can drive higher returns for the business over time Michael.

Like when you went to who will cost.

Yeah, No I think clearly.

There is a number of.

Different things driving cost pressure I touched on the transportation costs, because probably on a percentage basis, probably have the most significant.

But clearly there's pressure on cotton, there's pressure on oil there is pressure on wages, whether it's globally in manufacturing or whether it's here in the U S. As it relates to our distribution.

And.

Most of most of the things I just spoke about clearly impact cost of goods, so distribution impact SG&A.

So.

It's across a number of different fronts and as you can also probably appreciate we we had anticipated business was factored in when we were together three months ago.

And so we probably.

Had a little bit of timing shifts, there's probably a little bit more that we anticipate hitting queue for now versus what ended up getting Q3. So that helped us that's why we are.

Part of the reason why we were better on the margin in Q3 Q4, we expect there to be more pressures that inventory starts to roll through the P&L from a cost of goods sold perspective.

And there will be as we said there will be pressure into 22, but I think when you think about the initiatives that we are working through them.

Productivity better utilization of material et cetera, all the different things I spoke about a few minutes ago. I think we have a pretty good plan to try to.

Work through offsetting as much as we can and then clearly from a business perspective, Steve spoke about price and some of the things that we're working on there so.

Or to come when we get together in queue.

Great. Thank you very much and best of luck.

That concludes today's question and answer session I'd like to turn the call back <unk> for closing remarks.

I'd like to thank everyone for attending our call today, and we look forward to speaking with you soon have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].