Hanesbrands Inc. (NYSE:HBI) Q4 2023 Earnings Call Transcript

Hanesbrands Inc. (NYSE:HBI) Q4 2023 Earnings Call Transcript February 15, 2024

Hanesbrands Inc. misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.09. Hanesbrands Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And thank you for standing by. Welcome to the HanesBrands’ Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your today, T.C. Robillard, Vice President of Investor Relations. Please go ahead.

T.C. Robillard: Good day, everyone, and welcome to the HanesBrands’ quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the fourth quarter of 2023. 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 in the Investors section of our hanes.com Web site. On the call today, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks include those related to current macroeconomic conditions, consumer demand dynamics, our ability to successfully execute our strategic initiatives, including our Full Potential transformation plan, the Champion performance plan and our evaluation of strategic alternatives for our global Champion business, our ability to deleverage on the anticipated time frame and the inflationary environment. These risks also include those detailed in our various filings with the SEC, which may be found on our Web site as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today’s references to our consolidated financial results and guidance exclude all restructuring and other action-related charges and speak to continuing operations.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today’s news release. With me on the call today are Steve Bratspies, our Chief Executive Officer; and Scott Lewis, our Chief Financial Officer. For today’s call, Steve and Scott will provide some brief remarks, and then we’ll open it up to your questions. I’ll now turn the call over to Steve.

Stephen Bratspies: Thank you, T.C. Good morning, everyone, and welcome to our call. 2023 was a year marked by various challenges and hurdles, but also progress in a number of areas. We experienced a sales environment that was even more challenging than our cautious view, particularly with the U.S. Activewear market and in Australia. And this drove sales, operating profit, and EPS results that did not meet our expectations for the quarter and the year. While we are not at all satisfied with our results, we’ve seen several positive indicators that demonstrate progress on our strategy, and give us confidence that our margins and our leverage have reached an inflection point. Despite the top line headwinds, we continued to strengthen the foundation of our business in 2023.

The actions we’ve taken to simplify our business, reduce inventory, cut costs, and reignite Innerwear are working. And we’re beginning to see the initial benefits of these actions in our results. We returned gross margin to pre-inflation levels as expected. We exited the year with gross margin of 38%, a 400 basis point improvement over prior year. We reduced inventory by more than $600 million, unlocking working capital as planned. We returned operating cash flow to its historical $400 million to $600 million range. For the year, we generated $562 million of operating cash flow, exceeding our plan. We paid down more than $500 million of debt, which was $100 million ahead of our debt reduction target for the year. We eliminated more than $45 million of fixed costs spread across cost of goods and SG&A.

And we gained market share across our U.S. Innerwear business, leveraging data analytics to drive better on-shelf product availability, and successfully delivering our largest innovation launch in decades. Looking into 2024, we expect the challenging sales environment to continue particularly in Q1, which Scott will discuss in a moment. That said, we’re confident we can build on our progress this year. With visibility to input costs on our balance sheet and cost savings actions in our supply chain, we expect continued year-over-year improvement in gross margin. We expect another year of strong cash flow driven by expected recovery in profit margins and the additional opportunities we see for working capital improvement. We plan to pay down another $300 million of debt this year as we remain committed to using all of our free cash flow to reduce debt.

And the expected combination of debt paydown and EBITDA growth, we expect to further reduce our leverage in 2024. And we expect continued market share gains in Innerwear as we roll out another record year of innovation, including plans to increase our brand strength and marketing investments. Now, let me provide an update on Champion before finishing with some thoughts on our reignite Innerwear strategy. We continue to aggressively implement our Champion performance enhancement plan to strengthen the brand and position Champion for long-term profitable growth. We went into the execution of our Champion strategy with the full understanding that these long-term strategic actions would create real top line headwinds in the short-term, which we’re seeing play out.

And not surprisingly, these headwinds have been compounded by challenges within the Activewear apparel category over the past year. The combination of these two factors drove a 23% year-over-year decrease in global Champion sales in the quarter. Despite the top line pressure, we’re progressing on a number of our actions to strengthen the brand. We’re cleaning up our inventory in the channel, we’re implementing a disciplined product and channel segmentation strategy with a focus on our fall/winter 2024 offering. We’re building brand heat within our pinnacle product and account offerings. And we’re gaining traction with our global “Champion What Moves You” marketing campaign, with plans for increased marketing investment this year. We’re confident we’re taking the right steps to drive the long-term success of Champion.

However as we’ve previously stated, it’ll take time for our strategic actions to translate to the P&L. With respect to our review of strategic alternatives for the global Champion business, which I know is top of mind, the process is progressing as expected. We continue to evaluate the right path forward as we’ve seen strong interest from a broad and diverse group of global parties. And while there’s nothing specific to add at this time, we remain committed to updating you as appropriate when there is news to share. Next, I’d like to pivot the discussion to our reignite Innerwear strategy, which continues to gain traction and build momentum. Recall, when we laid out our strategy a few years ago, our Innerwear business in the U.S. had been consistently declining and losing market share.

With our reignite Innerwear strategy, we said we’d shift this business to growth and market share gains over time. And we do this by delivering innovation that consumers wanted, by increasing brand marketing investments, by bringing younger consumers into our brands, and by making our products available where, when, and how consumers wanted to shop. We made significant progress on executing this strategy. We’ve globalized our design process. As a result we’re now launching cross-category cross-geography products. And we have a robust innovation pipeline that provides visibility to new product offerings through 2025. We’ve improved our speed to market across a large portion of our products, with the lead time from design to on-shelf availability shortened by 30%.

We’ve become more efficient with our inventory. We’ve significantly reduced SKUs to focus on higher-velocity higher-margin SKUs, as well as making room for innovation products. We’ve leveraged our advantaged global supply chain to further improve our cost structure. And we’ve built our global talent. And we’re seeing this translate to our Innerwear results. Our U.S. Innerwear sales have grown an approximate 2% compound annual growth over the past four years. Certainly, the market has seen significant swings over this time, which we continue to experience. But over time, we believe this is a stable category with stable consumption patterns. We are gaining market share, which is the best indicator of future growth during challenging market environments.

In the fourth quarter, we gained additional market share with both Men and Women in the U.S., with the strongest share gains coming from younger consumers. In fact, in the back-half of the year, each one of our Innerwear categories gained share with younger consumers. We returned to historical segment margins while supporting higher levels of marketing investments. We’re successfully delivering innovation. 2023 was our most successful innovation year in decades. Hanes Originals was the largest innovation launch in our history, spanning multiple product categories and five countries. We also built on our absorbency platforms in both Australia and the U.S. And we launched M by Maidenform in the fourth quarter, which we’ll support with a media campaign this year.

And looking at 2024, we have a robust pipeline of new product launches, including Hanes SuperSoft, Bonds anti-chafe, and Bali briefs. We believe these innovation launches, along with our planned increased investment in brand marketing, position us well to continue to grow share, especially with younger consumers. As I close, I’d like to take a moment and thank the entire Hanesbrands team. Your agility, teamwork, and passion are the reason we continue to make progress on our transformation journey despite the headwinds we faced. 2023 had its challenges, especially with respect to the sales environment. However, it also had many successes. We are making progress on our Champion performance enhancement plan. The actions we have taken to simplify our business, reduce inventory, cut cost, and reignite innerwear are working.

We reached a key milestone with a positive inflexion of our margins and our leverage. And though we expect another challenging sales environment in 2024, we have solid visibility to be able to deliver continued margin improvement, strong cash generation, further debt reduction, and continued market share gains in innerwear. And with that, I’ll turn the call over to Scott.

Scott Lewis: Thanks, Steve. Let me echo your thanks to the global HanesBrands’ team. 2023 certainly presented sales challenges. But through a continued focus on executing our initiatives to simplify the business, reduce cost, deliver innovation, and leverage our supply chain capabilities, we were able to exit the year with momentum across several key performance metrics. For today’s call, I’ll touch on the highlights from the quarter, our improved financial position. And then, I’ll provide some thoughts on our outlook. For additional details on the quarter’s results and our guidance, I point you to our news release and FAQ document. At all level, the fourth quarter was mixed relative to our expectations. Sales were below our outlook as the consumer environment proved more challenging than we expected, particularly in the U.S. Activewear market and in Australia.

This in turns drove lower than expected operating profit and EPS. That said, we continue to reduce SG&A with expense dollars decreasing as expected. We delivered results that were ahead of our expectations for gross margin, inventory reduction, and operating cash flow. And, we paid down more debt than planned. Looking at the details of the quarter, net sales were $1.3 billion. This represents a decrease of 12% versus prior year with a 130 basis points coming from U.S. Hosiery divestiture and 40 basis points from Fx headwinds. On organic constant currency basis, net sales decreased 10% in the quarter. Touching briefly on sales by segment, our U.S. Innerwear business was essentially in line with our outlook. For the quarter sales decreased 1% versus last year, which compared against the 5% decrease for the overall market.

We gained market share in the quarter driven by retail space gains, improved on-shelf availability as well as successful consumer-led innovation and new product launches. In our International business, constant currency sales decreased 7% as macroeconomic pressures continued to weigh on consumer demand in Australia and Europe. These headwinds more than offset growth in our innerwear business in the Americas and our Champion business in China. And in our U.S. Activewear business, sales decreased 24% as compared to last year. The decrease was driven by the continued combination of challenges within the Activewear apparel category and the expected top line headwinds from the strategic actions we have taken to strengthen the Champion brand and position it for long-term profitable growth.

Turning to margins, adjusted gross margin of 38.2% was strong and above our expectation. This represents an increase of 395 basis points over prior year. The year-over-year improvement was driven primarily by the benefits from our inventory and cost savings initiative as well as lower input cost from commodities and ocean freight. These two factors more than offset the impact from wage inflation. With respect to adjusted SG&A, expenses decreased $38 million as compared to last year, in line with our outlook. The lower expense was driven by a combination of cost savings initiatives, disciplined expense management, and lower variable expense which more than offset increased brand marketing investments. As a percentage of sales, SG&A expense increased a 100 basis points over prior year.

The deleverage, despite lower SG&A dollars was driven primarily by the impact from lower sale, increased brand investments. This resulted in an adjusted operating margin of 8.5% for the quarter, an increase of 295 basis points over last year. Looking at the remainder of the P&L, interest and other expenses were $77 million. Adjusted tax expense was $22 million, which exclude a onetime discrete tax benefit of $81 million, and adjusted earnings per share for the quarter was $0.03. Turning to the balance sheet and cash flow, we continue to strengthen our balance sheet and increase our financial flexibility as we reduced inventory, paid down debt, and increased liquidity. We saw further improvement in our inventory position as we continued to implement and build our capabilities around inventory management.

We ended the year with inventory of $1.37 billion, which represents an improvement of 31%, or $612 million as compared to last year. This was more than $100 million ahead of our $1.5 billion target as we were progressing faster-than-expected on our inventory initiatives. We generated $562 million of operating cash flow for the year, which was ahead of our $500 million goal, and we successfully unlocked tied up working capital. We paid down more than $500 million of debt for the full-year, $100 million ahead of our debt reduction target, driven by the higher-than-expected operating cash flow. Our leverage was 5.2 times on a net debt to adjusted EBITDA basis. It was below our fourth quarter covenant of 6.75 times and our peak of 5.6 times in the second quarter of 2023.

We remain committed to using all of our free cash flow to pay down debt. We expect to further reduce our leverage in 2024 driven by a combination of EBITDA growth and continued debt reduction. And all of this has led to our liquidity position increasing to more than $1.3 billion at the end of the fourth quarter. And now turning to guidance, all of my comments will refer to adjusted results from continuing operations and will be based on the midpoint of our guidance ranges. At a high level, we expect the sales environment and our categories to remain challenging in 2024, particularly the first quarter. We expect positive progressions on top line trends through the year, driven by two factors. First, in our global champion business, as we previously discussed, our fall-winter 2024 line is the first global offering from the new team that’s based on a global segmentation approach.

Therefore, with the actions we’re taking ahead of that launch, particularly on cleaning up our inventory in the channel, we believe we’re moving through the trough of champion sales in Q1 and the first-half this year. Second, in our global innerwear business, based on our forecasting analytics and consumer consumption trends, we expect the category headwinds to be most challenging in the first quarter before moderating through the rest of the year. And we expect to outperform the category as we’re well-positioned to gain market share behind our innovation launches and increased brand marketing investments. We expect a challenging sales environment. We believe we’re well-positioned to deliver strong operating profit growth for the year. This outlook is based on infinite cost visibility we have on the balance sheet and our cost savings initiatives, as well as the conservatism we’ve layered into our profit outlook.

We expect year-over-year improvement in both gross and operating margins in each quarter of 2024. And with lower interest expense due to lower outstanding debt balances, we expect earnings per share to grow even faster than operating profit for the year. With respect to our first quarter outlook, we expect net sales on a reported basis to decrease approximately 16% as compared to last year. Adjusting for the impact from the U.S. hosiery divestiture and FX headwinds, organic constant currency sales are expected to decrease approximately 14%. That said, we expect first quarter operating profit to increase approximately 10% over prior year and operating margin to expand approximately 145 basis points to 6%. And with the timing of last year’s refinancing, interest expense is expected to be up year-over-year resulting in an EPS loss of $0.07, which is essentially in line with last year.

Turning to our full-year outlook, we expect net sales on a reported basis to decrease 4% as compared to last year. Adjusting for the impact of the U.S. hosiery divestiture and FX headwinds, organic constant currency sales are expected to decrease approximately 2%. We expect full-year operating profit to increase approximately 26% over prior year and operating margin to expand approximately 225 basis points to 9.4%. And for EPS, the midpoint of our guidance range is $0.45, which implies a 650% growth over prior year. Lastly, with our expected profit recovery and additional working capital opportunities, we expect to generate approximately $400 million in cash flow from operations for the year. So, in closing, while 2023 was challenging from a sales perspective, we made significant progress across a number of key performance metrics, including reaching a positive inflection in our margins and our leverage.

As we look to 2024, we expect the sales challenges to continue, particularly in the first quarter. However, with our view to input costs and cost savings initiatives, we have visibility to deliver on the strong operating profit and ESP growth outlook. Furthermore, we believe we’re well-positioned to continue to expand margin to deliver another strong year of operating cash flow, and to continue to delever our balance sheet. And with that, I’ll turn the call over to T.C.

T.C. Robillard: Thanks, Scott. That concludes our prepared remarks. We’ll 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?

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Jay Sole with UBS.

Jay Sole: Great, thank you so much. My first, just on Champion, could you just talk about the margins of Champion? You talk about fiscal ’23, and then maybe talk about the plan to improve the margins? And based on ’24 guidance, what’s your expectation for margins for Champion in fiscal ’24? And then Scott, if we can just talk about the guidance for fiscal ’24, what are you expecting specifically for Innerwear? You mentioned in the comments about expecting to outperform the category. If you could just give a little bit more color there that’d be super helpful? Thank you

Scott Lewis: And good morning, Jay, thanks for your question. So, I’ll speak to margins on a couple levels. One, you were talking about Champion, but also want to speak to margins overall as we think about 2024, and what to expect there. So, for ’23, and this applies not just to Champion and the Activewear business, but also total company. Our margins were pressured by the higher inflationary costs that we saw in ’23, right? And so now, as we go into ’24, that is largely behind us now, and we can move forward with momentum with an enhanced margin recovery going forward. So, some of the same elements again we saw in Champion you’re going to see total year, the input costs. We also — Champion had little bit of a sales volume pressure in ’23 than the rest of the business.

As you look at 2024 and the margin outlook, I think a couple things that you need to keep in mind to make sure you understand the cadence from ’23 to ’24. So, and we’ve talked about this at the very beginning of ’23, that we expected margin recovery and into the upper-30% range in the — by the time we get to the fourth quarter. And we achieved that — actually overachieved that in the fourth quarter, at 38.2%, and so as you look at that, and now we’re back to pre-inflationary levels from a margin standpoint. As you move to 2024, our profit outlook is at 38.5% gross margin. We had that in the first quarter, and we’re holding that steady throughout 2024. We have a high degree of confidence in that margin profile because we have really cost visibility, both from an input cost as well as the cost savings that we’ve already put in place.

So, that’s very important to understand as you think about margins going into 2024. Another fine point I want to make sure you hear on the profit outlook is, as we were looking at the overall view of ’24, and Steve is going to speak to the sales side, is clearly there’s a lot of — still a lot of dynamics and lot of pressures from a top line standpoint, that the consumer environment is still challenged. Keeping that in mind and knowing that, as we looked at, with our profit outlook, what we wanted to make sure is we make sure we layer it in from an incremental conservatism in our profit outlook to make sure we can hedge and de-risk from the standpoint of managing that potential volatility on the top line. And we’ve already considered some, but anything unanticipated beyond, we have already baked in, we want to make sure we have — we hedged our profit for that.

Now a good example of that, as you look at and we’ve talked about this before, we have really good visibility to profit to two, three quarters out from a cost of sales standpoint. We know it’s on the balance sheet. We can see that roll out. And we will — again, putting near the profit outlook, we wanted to make sure that we didn’t bake all of that upside in, right? We have, again, the lower input costs, we have the cost savings. We want to make sure we protect on the downside in case, again, there’s unanticipated volatility not flattering our sales outlook. So, Steve, anything on the sales you want to add to that?

Stephen Bratspies: Yes, thanks, Scott. And good morning, Jay. I think when you think about the sales plan for the year, the guide for the year, obviously, we felt with our current environment and understand where we are in, and sales have been challenging, there’s not doubt about it. And the consumer environment has been difficult for us as we go forward. But we’re starting to see improvement in that space, and we’re pretty confident in the numbers that we delivered for the year. When you look at Champion specifically, we think the business is going to drop in the first quarter and first-half of this year. And we’re taking actions to make sure that we clean up the channel ahead of our fall/winter ’24 line that’s going to be launching.

And this is going to be a progressive growth throughout the year. Obviously, retailers are being a little cautious, but that category has been clean. Our collegiate business is going to be on a more normal cadence. That the fall/winter line that we’re going to be introducing in Champion has gotten really strong response from pinnacle accounts which, of course, is really important to set the tone for the brand. We’re going to be ready for a replenishment chase model in the back-half of the year. And we’re going to be spending behind the brand, and really support this. So, we think that brand can grow in the back-half of the year, and start to pivot to a much more positive space. And the same thing for global Innerwear, I’m really pleased with where we’re headed in the global Innerwear business and the share gains that we’re seeing in this business.

We’ve got pretty good forecasting analytics to understand where the category is going to be over time. And we’re going to continue to take share. The category was down 5% in Q4, and we took a lot of share, and we’re expecting those trends to continue in the early part of the year but then to improve. So, with our innovation that’s coming, with our media that’s coming we’re going to be leaning in. And we think that the back-half is going to be better than the front-half, for sure. And that leads to all the margin opportunities that Scott talked about. We’re really confident in the profit outlook for the year. And there is some conservatism built in. As Scott said, we have a lot known savings that have been included at this point. So, we can adapt to a volatile top line environment, if it occurs.

Scott Lewis: Yes. And if I could just add one more thing, Jay, you were asking about the Innerwear margin. So, one thing I think is important to keep in mind too as you’re looking — and I mentioned about this earlier about just the margin pressure we saw in 2023, Innerwear, over the last five quarters, has had significant margin expansion. It was 8.3% in Q4 of ’22. And we finished the year in Q4 at 21.1%. So, again, that really demonstrates again where we are, and we’re back in that pre-inflationary margin levels.

Jay Sole: Got it. Thank you so much.

Operator: Thank you. Our next question will come from the line of Paul Lejuez with Citi.

Paul Lejuez: Hey, thanks, guys. Curious if you could talk about the permanent retail space gains that you mentioned on the Innerwear side. And what retailers are you seeing those gains, and are there any places where you’ve seen permanent space losses that would offset those gains? Maybe if you can frame just what percent of net increase you’re seeing on permanent space gains? And then curious on your cash from operations guidance, what should we expect on the inventory line as we move throughout the year, and to end year, how much of a benefit or drag will that be on your cash flow guidance? And then last, just curious what is the size of the Australia business? Thanks.

Stephen Bratspies: Sure. Let me start with the space gains. I’ve been really pleased with the space gains that we’ve been getting in key accounts for us. A lot of it — not all of it is driven by innovation. So, the product that we’re bringing to market last year with Hanes Originals, if it’s men’s, women’s, kids, across the board, M by Maidenform that’s now launching, and as we then include the new innovation that’s coming this year with SuperSoft and anti-chafe, are all taking incremental space. So, that’s the good news, as we sell in we’re all gaining space. And the other thing that’s going on and I don’t want to talk about specific customers, but if you go out and you look, you’ll see us taking permanent space away from other national brands, and that’s our base business.

And that’s because the business is performing better, and turning factor for the retailer. So, they’re making those choices, and there are some obvious ones going out there. The other thing that I think is really important, and I got this question the other day as we were having a discussion, I think it’s important, is private label is not playing the role that it had been in the past. And actually private label is losing share in the innerwear market right now. So, that’s opportunity for us to continue to go out and gain that permanent space as well. So, it’s broad, it’s across categories, it’s across channels. And then we’re pleased because it’s going to drive our business going forward.

Scott Lewis: Hey, good morning, Paul, and thanks for your question. So, for cash flow, very proud of the team and what we deliver on cash flow in ’23, really solid execution across the business. That did a great job of managing working capital. We knew there’s a lot of opportunity and really delivered on that in ’23. So, for ’23, we had $562 million of cash flow, right? So that returns us back to that range of cash flow. And in fact, we were guiding to $500 million of cash flow for the year. We saw upside in that and that was driven by working capital, especially inventory. We ended the year inventory $130 million below what we were targeting. So, again, great job with execution there by the team, which accelerated cash flow and accelerated debt pay down.

So, as you move to ’24, keeping that in mind again, we had a little acceleration of cash into ’23. As we look for ’24, we are guiding $400 million of cash flow for the year, again, within that historical range that we’ve seen in the past. As far as the mix, I would say again, there’s still opportunity with working capital. As you look at the overall mix of cash flow generation, I’d say about two-thirds of that is going to come from profit and a third of that is going to come from working capital. And the working capital is going to come across all working capital, inventory. There’s still opportunity there. There’s [AR MVT] (ph) opportunities, and we’ve got a good track record of managing working capital. Our team is very focused especially like for cash conversion cycle.