Hanesbrands Inc. (NYSE:HBI) Q1 2023 Earnings Conference Call May 3, 2023 8:30 AM ET TC Robillard - Vice President, Investor Relations Steve Bratspies - Chief Executive Officer Scott Lewis - Chief Accounting Officer and Interim Chief Financial Officer Jay Sole - UBS Ike Boruchow - Wells Fargo Paul Kearney - Barclays Tom Nikic - Wedbush Securities Jim Duffy - Stifel Carla Casella - JPMorgan Good day and thank you for standing by. Welcome to the Hanesbrands First Quarter 2023 Earnings Conference Call. At this ...

Sales Performance - In 2022, net sales from the Innerwear segment were $2.4 billion, representing approximately 39% of total net sales[34]. - The Activewear segment generated net sales of $1.6 billion in 2022, accounting for about 25% of total net sales[36]. - The International segment reported net sales of $1.9 billion in 2022, which is approximately 31% of total net sales[37]. - Approximately 69% of total net sales were generated in the United States in 2022[39]. - Sales to mid-tier and department stores in the United States accounted for approximately 8% of total net sales in 2022[41]. - Consumer-directed sales in the United States represented about 17% of total net sales in 2022[42]. - Sales to other customers in the United States made up approximately 25% of total net sales in 2022[43]. - Internationally, 56% of net sales were wholesale sales to retailers, while 44% were consumer-directed sales through owned retail stores and e-commerce sites[44]. - The company’s top 10 customers accounted for approximately 45% of total net sales in 2022, with Walmart alone representing 16%[102]. - In 2022, net sales from the International segment were $1.9 billion, representing approximately 31% of total net sales[130]. Strategic Initiatives - The company completed the sale of its European Innerwear business on March 5, 2022, as part of its Full Potential plan[15]. - In June 2022, the company purchased the Champion trademark for footwear for $103 million, enhancing its brand portfolio[17]. - The company aims to grow the Champion brand globally and enhance e-commerce excellence as part of its multi-year growth strategy[14]. - The company is implementing a significant number of strategic initiatives focused on building a consumer-centric company and enhancing capabilities[79]. - The company is focusing on growing the Champion brand globally and enhancing e-commerce capabilities as part of its Full Potential plan[208]. Sustainability Goals - The company has established 2025/2030 global sustainability goals to enhance transparency and track progress on key metrics[21]. - By 2030, the company plans to reduce greenhouse gas emissions by 50% and indirect emissions by 30%[70]. - The company aims to improve the lives of at least 10 million people through health and wellness programs and diversity initiatives by 2030[73]. - The company has set a goal to eliminate all single-use plastics and reduce packaging weight by 25% by 2030[73]. - The company earned an A- score in the 2022 CDP Climate Change Report, placing it in the top 11% of nearly 15,000 rated companies[70]. Operational Insights - The company operates its own manufacturing facilities, with over 60% of apparel units sold produced in-house or by dedicated contractors[19]. - The company operates 30 manufacturing facilities, with most cutting and sewing operations located in Asia, Central America, and the Caribbean Basin[46]. - The company distributed products from 45 distribution centers as of December 31, 2022, including 16 in the United States[49]. - The company has approximately 51,000 employees, with over 88% located outside the United States[71]. - The company’s largest manufacturing facility is approximately 1.1 million square feet located in San Juan Opico, El Salvador[176]. Financial Performance - Advertising and promotion expenses were approximately $209 million in both 2022 and 2021, representing 3.4% of total net sales in 2022[56]. - The company has $1 billion in a revolving loan facility and $1 billion in a term loan facility, along with $900 million in senior notes due 2024 and 2026[112]. - The pension plans experienced a loss of approximately 10% in 2022, with a funded status of about 96% as of December 1, 2022[125]. - The company holds approximately $1.1 billion in goodwill and $1.3 billion in intangible assets, representing 36% of total assets[124]. - The company estimates net sales for 2023 to be approximately $6.05 billion to $6.20 billion, with an unfavorable foreign exchange impact of about $42 million[198]. Market Challenges - The basic apparel market is highly competitive, with significant competition from brands like Fruit of the Loom, Nike, and Adidas[57]. - The company operates in a highly competitive market, facing challenges from both domestic and foreign competitors, as well as online retail[80]. - Economic uncertainties, including inflation and geopolitical conflicts, may adversely affect consumer discretionary spending and sales[111]. - Pricing pressure from competition and consumer demand changes may negatively impact margins and profitability[126]. - The company faces potential penalties and legal liabilities due to non-compliance with various privacy and data protection regulations, including GDPR and CPRA[88]. Risks and Compliance - The company is subject to various legal and regulatory risks, including compliance with the U.S. Foreign Corrupt Practices Act and other international laws[135]. - The company's reputation and financial results could be adversely affected by improper conduct by employees or business partners[144]. - The company actively protects its intellectual property rights, but infringement or counterfeiting could diminish brand value and adversely affect business[148]. - Negative publicity from labor law violations by third-party manufacturers could tarnish the company's brand image and result in a loss of sales[150]. - The company faces risks associated with international operations, including compliance with foreign laws and unexpected changes in tariffs and taxes[130]. Future Outlook - The company anticipates restructuring and other action-related charges totaling $60 million, including $54 million related to the Full Potential plan[198]. - Diluted earnings per share from continuing operations are expected to be approximately $0.14 to $0.25[198]. - The company expects gross and operating margin pressure to continue in the first half of fiscal 2023 due to higher-cost inventory, with expectations of easing in the second half[196]. - The company may incur additional costs to protect employee health and safety in response to the ongoing pandemic[96]. - The implementation of a new global enterprise resource planning system (ERP) requires significant investment and may lead to increased costs and operational risks[90].

Financial Data and Key Metrics - The company expects to generate approximately $500 million in operating cash flow in 2023, with a focus on debt reduction [23] - Adjusted gross margin for Q1 2023 is expected to decline by approximately 300 basis points due to commodity and freight inflation [50] - Full-year adjusted operating profit is projected to range between $500 million and $550 million, with Q1 adjusted operating profit expected to be between $50 million and $70 million [51] - Adjusted EPS for the full year is expected to range from $0.31 to $0.42, while Q1 adjusted EPS is projected to be a loss of $0.09 to $0.04 [52] Business Line Data and Key Metrics - The company has reduced global SKUs by 45% since 2019 and exited unproductive facilities, leading to high single-digit savings rates in sourcing and procurement operations [24] - The activewear business is undergoing operational streamlining, including global coordination of product design and merchandising, increased speed to market, and portfolio simplification [24] Market Data and Key Metrics - The company expects net sales to decline by 1% in constant currency or approximately 2% on a reported basis for the full year 2023, with easing comparisons beginning in Q2 [49] - The U.S. market is expected to remain challenging due to inflation, while Asia shows mixed results with improving traffic in Japan and China reopening post-COVID [124] Company Strategy and Industry Competition - The company is shifting its capital allocation strategy to focus on debt reduction, eliminating the dividend, and committing to reducing leverage to a range of 2-3x net debt to adjusted EBITDA [75] - The company is implementing cost-saving initiatives, including exiting unproductive facilities, consolidating sourcing vendors, and aggressively managing SG&A [22] - The company is confident in achieving its long-term financial targets, including $8 billion in sales and a 14% operating margin, despite a shifted timeline to 2026 [70] Management Commentary on Operating Environment and Future Outlook - Management expects macroeconomic challenges, including inflation and consumer demand pressures, to persist in 2023, particularly in the first half [38] - The company anticipates margin improvement in the second half of 2023 as lower-cost inventory begins to impact the P&L and inflationary pressures ease [21] - Management is optimistic about the company's ability to improve cash flow and margins as the year progresses, driven by cost-saving initiatives and operational efficiencies [44] Other Important Information - The company has recorded a non-cash reserve against its deferred tax asset, which will increase accounting tax expense and the effective tax rate in 2023 but will not impact cash taxes [28] - The company expects to refinance approximately $1.4 billion of its 2024 maturities in Q1 2023, subject to market conditions [29] Q&A Session Summary Question: Confidence in Business Improvement and Debt Refinancing [55] - Management expressed confidence in the business's foundational capabilities and expects margin improvement in the second half of 2023 as lower-cost inventory rolls through the P&L [56][57] - The company is prioritizing debt reduction and has eliminated the dividend to focus on improving shareholder returns in the long term [58] Question: Top-Line Progression and Retailer Inventory Actions [61] - Management expects a muted consumer demand environment in 2023, with retailer inventory actions likely to continue into Q1, leading to a conservative top-line outlook [62] Question: Inventory and Cost Dynamics [65] - Inventory dollars are up 25%, with unit costs increasing in the low to mid-teens due to inflation and mix [65] Question: Tax Rate and Inventory Cash Flow [67] - The effective tax rate for 2023 is expected to be 40%-45%, with deferred tax accounting expected to normalize over several years [68] - The company expects to release working capital and drive operating cash flow back to historical levels in 2023 [80] Question: SG&A Savings and Full Potential Plan [101] - The company has realized significant SG&A savings in 2022 and expects further savings in 2023 and 2024, while continuing to invest in technology and brand growth [102] Question: Champion Brand Recovery and Dividend Reinstatement [131][145] - Management is confident in the Champion brand's recovery, citing new leadership, product innovation, and channel segmentation as key drivers [132][133] - The company has no immediate plans to reinstate the dividend, focusing instead on debt reduction and long-term shareholder returns [149] Question: Interest Expense and Inventory Management [92][94] - The company expects adjusted interest and other expenses to be nearly $300 million for the full year, driven by higher variable rate debt and refinancing costs [51] - Inventory management is expected to drive working capital benefits in 2023, with units down 6% compared to the prior year [91]

Financial Data and Key Metrics Changes - Net sales decreased by approximately 7% to $1.67 billion, reflecting a 330 basis point headwind from foreign exchange rates [28] - Adjusted gross margin declined 460 basis points over the prior year to 34.5%, primarily due to inflation in commodity costs and ocean freight [32] - Adjusted operating margin was 10% for the quarter, near the high end of the forecast despite lower-than-expected sales [33] Business Line Data and Key Metrics Changes - U.S. Innerwear sales declined 11% compared to last year, but were 11% above pre-pandemic levels [29] - U.S. Activewear sales were comparable to the prior year, with a 3% increase relative to pre-pandemic levels [30] - International segment sales increased approximately 5% over last year in constant currency, driven by growth in Champion in Europe and Innerwear in Australia [31] Market Data and Key Metrics Changes - Retail inventory for Innerwear is below last year's level, but overall inventory management by retailers is negatively impacting near-term replenishment orders [11] - The consumer and retail landscape has shifted from high demand to excess supply, leading to order cancellations, particularly for Champion [10][11] Company Strategy and Development Direction - The company is focused on its Full Potential strategy, aiming to transform into a business that consistently generates higher growth and returns [16] - Efforts include reducing SKU counts by over 40% and improving supply chain efficiency to align inventory with demand [13][20] - The company is investing in digital analytics tools to assist retail partners in managing inventory and identifying replenishment opportunities [14] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenging operating environment and expects sales headwinds to continue into the fourth quarter [38] - Despite current challenges, management remains confident in the long-term fundamentals of the business and the Full Potential strategy [26][42] - The company anticipates a return to more normal cash flow levels in 2023 as inventory levels are reduced and macroeconomic conditions stabilize [41] Other Important Information - The company amended its credit agreement to provide additional financial flexibility amid current market conditions [15][35] - Inventory units are expected to be down year-over-year by the end of the year, despite overall inventory dollars being up [34][76] Q&A Session Summary Question: How is sell-in versus sell-through and the state of retail inventory? - Management noted that retail inventory for Innerwear is down from last year, but replenishment orders are affected by retailers managing their overall inventory [47] Question: Can you provide details on the Champion brand's revenue makeup and cancellations? - Management indicated that Champion is facing market challenges, but there is strength in the collegiate and European channels [60] Question: What is the outlook for refinancing upcoming debt maturities? - Management plans to be opportunistic in refinancing approximately $1.4 billion of debt maturing in the second quarter of 2024 [65] Question: Will there be increased promotional activity to clear inventory? - Management expects the market to be more promotional in Q4, but they are focused on maintaining high-quality inventory levels [66] Question: How did the men's and women's Innerwear segments perform? - There has not been a significant difference in performance between men's and women's segments, with both facing similar challenges [70]

Financial Data and Key Metrics Changes - Net sales for Q2 2022 were $1.51 billion, a decrease of 14% compared to the previous year, with constant currency sales down 11% [36][39] - Adjusted gross margin declined 120 basis points to 37.8%, impacted by lower sales volume and input cost inflation [39] - Adjusted operating margin was 10.2%, in line with forecasts despite challenges [41] - Cash flow from operations was a use of approximately $210 million, primarily due to working capital used for inventory [42] Business Line Data and Key Metrics Changes - Innerwear and Activewear businesses faced pressure from point-of-sale trends and product availability challenges, exacerbated by a cyber event [37][10] - International business performed relatively better, with constant currency sales declining approximately 3% [38] - The Champion brand is a significant part of the growth strategy, with plans for expansion in women's and kids' segments and new markets [22][66] Market Data and Key Metrics Changes - Consumer demand slowed due to inflation, impacting sales across the US, Australia, and Europe, with ongoing COVID pressures in Asia [72][10] - Retail inventory levels are being rebalanced, with some retailers experiencing excess inventory [105] Company Strategy and Development Direction - The company is focused on transforming into a consumer-centric growth company, with ongoing investments in brands and technology [31][32] - Plans to reduce inventory levels and SKU counts to improve working capital management and service levels [44][90] - The company is committed to innovation, with a robust pipeline of new products expected to drive growth [21][52] Management's Comments on Operating Environment and Future Outlook - The global operating environment remains challenging, with inflation and consumer demand pressures expected to continue [52][29] - The company has reduced its sales and profit outlook for the second half of the year, reflecting macroeconomic conditions [45][16] - Management remains confident in the long-term strategy and believes it positions the company for revenue and profit growth [53][29] Other Important Information - The cyber event in late May negatively impacted Q2 performance, estimated to have caused a $100 million sales loss [35] - Inventory levels increased by 19% in units and 37% in dollar terms, primarily due to inflation and lower sales [42][43] Q&A Session Summary Question: Impact of the cyber event on Champion sales - Management indicated that the cyber incident impacted all business lines similarly, and they are confident in Champion's future growth potential despite recent challenges [60][66] Question: Trends in point-of-sale and back-to-school performance - Management noted that consumer demand has shown slight improvement week-over-week, particularly in the back-to-school segment [74] Question: Impact of Walmart and Target announcements - Management refrained from commenting directly on specific retailers but acknowledged a macro environment change affecting consumer behavior [81] Question: SKU reduction strategy - The company plans to reduce SKUs by an additional 30%, which is expected to improve working capital and service levels [88][90] Question: Performance of Innerwear vs. Activewear - Both segments performed consistently, with no significant difference in performance between men's and women's apparel [100] Question: Retail inventory levels and planned price increases - Management indicated that retail inventory levels are being rebalanced, and price increases have been implemented as planned, with consumer response within expected ranges [105][110]

Financial Data and Key Metrics Changes - Hanesbrands reported first quarter sales of $1.58 billion, a 5% increase year-over-year, with a 7% increase on a constant currency basis [35] - Adjusted gross margin declined 305 basis points to 37.1%, impacted by inflation and strategic investments [41] - Operating profit was $175 million with an operating margin of 11.1%, both exceeding expectations [34][43] - Cash flow from operations guidance lowered to approximately $400 million due to inventory investments and inflation impacts [47] Business Line Data and Key Metrics Changes - Champion brand sales increased 6% in constant currency, with a two-year growth rate of 28% [36] - Innerwear sales in the U.S. increased 1.5%, positively comping last year's strong growth [38] - International Innerwear sales grew at a mid-single digit rate, driven by brands like Bras N Things in Australia [40] Market Data and Key Metrics Changes - Champion sales in the U.S. were up 2%, primarily due to strong growth in the collegiate channel, despite supply challenges [37] - Internationally, Champion sales increased 10% in constant currency, driven by growth in Europe and Latin America [36] Company Strategy and Development Direction - The company is focused on its "full potential plan," aiming for a 6% CAGR to reach $8 billion in total revenue by 2024 [13] - Investments are being made to simplify the business and drive growth, including a $90 million increase in brand marketing over the past five quarters [22] - The company is committed to product innovation and expanding its market presence, particularly in the Champion brand [19][20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenging global operating environment, including inflation and supply chain issues, but remains confident in the company's strategies [11][12] - The company expects to achieve its 2024 financial targets despite short-term challenges, with a robust product pipeline for Innerwear and Champion [31][32] Other Important Information - The company has realized approximately $60 million in cost savings through various initiatives [27] - A new President of Global Activewear, Vanessa LeFebvre, has been appointed to drive growth in the Activewear segment [28] Q&A Session Summary Question: Insights on revenue guidance and Innerwear business strength - Management expressed confidence in the Innerwear business, noting strong consumer demand and retail space gains, with expectations for continued growth [60][64] Question: Champion brand opportunities with new management - Vanessa LeFebvre's experience in merchandising and e-commerce is expected to enhance the Champion brand's growth strategy [66] Question: Impact of inflation on consumer behavior - Management indicated that consumer demand remains strong, with no significant impact from inflation observed yet [70] Question: Growth rates and visibility for Champion in the second half - Management is optimistic about the back half of the year, citing improved service levels and inventory management [75][78] Question: Performance in the digital business - The company sees significant growth potential in its digital channels, with plans to enhance consumer experience and product visibility [95]

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