Hanesbrands (HBI) Lowers '23 Guidance Despite Q2 Earnings Beat
Hanesbrands Inc. HBI reported mixed second-quarter 2023 results, with the bottom line beating the Zacks Consensus Estimate and the top line missing the same. Both metrics declined year over year. Considering the challenging apparel market, mainly in Australia, along with softness in the U.S. activewear category, management lowered its view for the back half of the year.
Q2 in Detail
The company posted an adjusted loss from continuing operations of 1 cent a share, surpassing the Zacks Consensus Estimate of 2 cents loss. The metric declined from 28 cents per share earned in the year-ago quarter.
Net sales from continuing operations declined 4.9% to $1,439 million and came below the Zacks Consensus Estimate of $1,453.8 million. The metric includes an $18 million negative impact from foreign exchange rates. On a constant-currency (cc) basis, net sales fell 4%. The downside was caused by declines in U.S. Activewear and a persistent macro-driven slowdown in consumer spending affecting Australia. These factors more than offset growth in U.S. Innerwear and Champion across Asia.
Global Champion brand sales tumbled 16%, with a decline of 25% in the United States and a 1% decrease internationally. Global Champion brand sales fell 15% at cc, while international brand sales were in line with the year-ago quarter.
Hanesbrands Inc. Price, Consensus and EPS Surprise
Hanesbrands Inc. price-consensus-eps-surprise-chart | Hanesbrands Inc. Quote
Adjusted gross profit came in at $483 million. We had expected adjusted gross profit to be $506.7 million. The adjusted gross margin was 33.6%, down nearly 425 basis points (bps). We had anticipated adjusted gross margin of 35.1%. The downside can be attributed to commodity and ocean freight inflation, which represented almost 245 bps of margin headwind as it continues to sell through higher-cost inventory. In addition, unfavorable business mix and increased labor rates were hurdles. Yet, reduced air freight expenses and cost savings initiatives offered respite.
Adjusted operating profit came in at $87 million, down from $154 million in the second quarter of 2022. Adjusted operating margin stood at 6.1%, down nearly 405 bps. We had expected adjusted operating profit and margin to be $84.3 million and 5.8%, respectively.
Segmental Details
Innerwear: The segment’s sales grew 3% year over year on gains from Full Potential strategy. The upside was driven by growth in the Basics business, greater space for back-to-school, better on-shelf availability and consumer-centric pricing philosophy. The segmental operating margin was 17.6%, up 440 bps.
Activewear: Sales decreased 19% from the year-ago quarter’s level due to soft consumer demand and excess channel inventory. The company’s strategic brand-related actions continued to affect Champion sales in the U.S. The segmental operating margin contracted nearly 810 bps.
International: Revenues in the International business declined 4% year over year. This included $18 million of unfavorable currency headwinds. We note that Innerwear growth across the Americas and Champion growth in Asia offset softness in Australia stemming from a tough macroeconomic environment. The segmental operating margin stood at 8%, down 520 bps.
Other Financial Details
The Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $191.8 million, long-term debt of $3,504.3 million and total stockholders’ equity of almost $348 million. It had roughly $773 million of available capacity under its credit facility at the end of the quarter.
For the quarter that ended Jul 1, 2023, the company provided $87.7 million in net cash from operating activities. Free cash flow was $78.4 million in the second quarter.
2023 Guidance
For 2023, net sales from continuing operations are now anticipated to be $5.80-$5.90 billion, including an anticipated currency headwind of nearly $37 million. The midpoint of the guidance suggests a nearly 6% year-over-year decline on a reported basis and cc basis. The metric was expected to be $6.05-$6.20 billion earlier.
Adjusted operating profit from continuing operations is now likely to be in the $425-$475 million range, including a currency headwind expectation of roughly $5 million. Earlier, management had anticipated the metric to be in the $500-$550 million range. In 2023, Hanesbrands expects to incur charges associated with the Full Potential plan of nearly $56 million.
Adjusted earnings per share (EPS) from continuing operations is envisioned to be in the 16-30 cents range compared with the 31-42 cents projected earlier. Cash flow from operations is forecast to be nearly $500 million, while capital investments are estimated to be almost $10 million.
For third-quarter 2023, net sales from continuing operations are expected to be $1.52-$1.57 billion, including a projected tailwind of nearly $3 million from currency rates. At the midpoint, the guidance reflects less than 8% year-over-year net sales decline on a reported and cc basis.
Adjusted operating profit from continuing operations is expected in the range of $130-$150 million. Adjusted EPS from continuing operations is envisioned in the 7-13 cents range. Hanesbrands expects to incur charges associated with the Full Potential plan and other items of nearly $100 million in the same quarter.
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HBI’s shares have increased 29.4% in the past three months against the industry’s 1.2% decline.
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