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Champion Drives Strong Results for Hanesbrands

Timothy Green, The Motley Fool

Following a strong holiday quarter, apparel manufacturer Hanesbrands (NYSE: HBI) has produced even better results in the first quarter of 2019. While the U.S. innerwear business declined, strong sales in the activewear and international segments drove a 10% increase in constant-currency organic sales. Profit didn't grow quite as fast due to rising costs, but the company remains on track to hit its full-year guidance.

Starting off the year with a bang

Here are the key metrics that sum up Hanesbrands' first quarter:

Metric

Q1 2019

Q1 2018

Change (YOY)

Revenue

$1.59 billion

$1.47 billion

7.9%

U.S. innerwear segment sales

$475.9 million

$491.1 million

(3.1%)

U.S. activewear segment sales

$405.3 million

$346.1 million

17.1%

International segment sales

$646.2 million

$569.9 million

13.4%

Operating expenses

$472.8 million

$432.9 million

9.2%

Gross margin

39.1%

39.3%

(0.2 percentage points)

Operating margin

9.3%

9.9%

(0.6 percentage points)

Non-GAAP earnings per share

$0.27

$0.26

3.8%

Data source: Hanesbrands. YOY = year over year. GAAP = generally accepted accounting principles.

The U.S. innerwear segment has been a weak spot for Hanesbrands, and that continued in the first quarter. However, the segment performed better than the company was expecting, and segment operating income increased slightly despite the sales decline. Sales of innerwear basics grew by 2%, but a decline in intimates sales dragged down the segment's results.

Global sales of Hanesbrands' Champion brand of activewear increased by 75% year over year outside the mass channel and adjusted for currency. This growth was driven by an expansion in the U.S. across retail and online channels, wholesale growth in Europe, wholesale and direct-to-consumer growth in Asia, store openings in China, and the start of distribution expansion in Australia.

The international segment, which contains both innerwear and activewear, posted double-digit growth despite currency headwinds. Sales of both categories increased in international markets in the first quarter, and the segment became more profitable. Segment operating profit jumped 20% year over year, outpacing sales growth.

While sales are booming for much of Hanesbrands' business, that growth doesn't come free. Operating expenses were up more than 9% in the first quarter, driven by investments to support the company's growth. In addition to increased marketing spending, Hanesbrands invested in distribution to fulfill accelerating demand for its Champion brand.

Those higher costs led to sluggish earnings growth in the first quarter. The company also took an unexpected bad debt charge of $4 million related to the insolvency of Heritage Sportswear. That charge knocked down non-GAAP EPS by $0.01.

A Hanesbrands facility, a four-story building with a sculpture of the letters HBI in front.

Image source: Hanesbrands.

A cautious outlook for growth

Hanesbrands expects full-year revenue to grow by just 2% compared to 2018, with organic sales expected to be up about 3%. One thing driving this conservative outlook is a cautious view of the U.S. brick-and-mortar retail industry. Hanesbrands is expecting more store closures, and more retailer bankruptcies are certainly possible.

Non-GAAP EPS is expected to increase by 3% this year, to a range of $1.72 to $1.80. That guidance includes a negative impact from currency, as well as increased marketing spending. But that spending should keep driving strong sales of Champion outside the mass channel.

One big headwind for Hanesbrands this year is the mass-channel Champion business. The company is expecting a low-teens percentage decline in 2019, with particularly weak sales in the second half. One reason is Target's decision to drop an exclusive line of Champion merchandise from its stores starting in 2020. As those products are de-emphasized, the mass-channel Champion business will take a hit.

However, Hanesbrands expects the overall activewear business to see improved profitability as a result of this shift away from lower-margin products.

Although growth will slow throughout 2019 due to the headwinds laid out by the company, the long-term growth prospects of the Champion brand and the international business remain intact.

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Timothy Green owns shares of Hanesbrands. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.