Hanesbrands (HBI) Q1 Earnings Top, Revenues Lag; View Intact
Zacks Investment Research | May 03, 2017 02:52AM ET
After reporting a negative earnings surprise of 8.6% in the final quarter of 2016, Hanesbrands Inc. (NYSE:HBI) made a sharp come back delivering a positive earnings surprise of 3.6% in the first quarter of 2017. Though the company’s top line increased year over year, it lagged our estimate. Notably, management launched Project Booster, a multiyear program to drive investment for growth, minimize costs as well as increase cash flow.
Shares of Hanesbrands fell 2.5% during after-market trading hours. However, we note that this Zacks Rank #3 (Hold) stock gained 8.5% over the past three months, outperforming the Zacks categorized Textile – Apparel Manufacturing industry’s rise of 4.4%.
The company posted adjusted earnings of 29 cents per share that came a penny ahead of the Zacks Consensus Estimate and improved 11.5% from 26 cents earned in the prior-year quarter. Higher sales and gross margin expansion favorably impacted the bottom line.
Including one-time items from continuing operations, earnings came in at 19 cents per share, down 9.5% from 21 cents reported in the year-ago period.
Q1 Highlights
Net sales of $1,380.4 million grew 13.2% from the year-ago period but came below the Zacks Consensus Estimate of $1,386 million. The year-over-year increase was driven by the recent acquisitions and rise in online sales, partly offset by the decrease in organic sales.
Though cost of sales increased 10.4% to $840.8 million, Hanesbrands' adjusted gross profit improved 20% to $555 million on the back of higher sales. Adjusted gross margin expanded 230 basis points (bps) to 40.2%.
Adjusted operating profit increased 8.5% to $159.6 million in the reported quarter. However, operating margin contracted 50 bps to 11.6%.
Segment Details
In the quarter under review, management realigned the reporting segments. The company will no more report its Direct to Consumer segment that comprised outlet stores, legacy catalog operations as well as retail Internet business in the U.S.
Now, Hanesbrands’ U.S. retail Internet operations are reported in the respective Innerwear and Activewear divisions. The Other category comprises the U.S. businesses for outlet stores, hosiery (earlier reported in the Innerwear division), along with legacy catalog business.
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Further, management informed that nearly $7 million was incurred in relation to the Project Booster program. The allocation has been made in the segment operating profits.
Innerwear: Sales declined 5.9% year over year to $505.2 million due to lower consumer traffic, store closures coupled with cautious retailer inventory management. These were somewhat offset by an increase in online sales and men’s underwear sales. Further, the segment’s operating profit fell 6.4% to $102.7 million.
Activewear: Sales rose 3.4% to $327.3 million owing to double-digit U.S. Champion revenue growth that offset the soft retailer store traffic as well as inventory management that hurt the overall segment. Also, the segment’s operating profit grew 4.1% to $33.4 million.
International: Sales soared over 71% to $477.4 million driven by the acquisitions as well as Champion Asia space gains. These offset the unfavorable impact from currency translation and sluggish consumer traffic trends. Notably, the segment’s operating profit more than doubled to $50.5 million.
Other: Sales declined 18.6% to $70.4 million in the quarter.
Project Booster Initiative
Hanesbrands launched a multiyear program to drive investment for growth, minimize costs as well as increase cash flow. This program is likely to boost the company’s Sell More, Spend Less, Generate Cash strategy for additional gains, mainly from the global commercial and supply chain scale through acquisitions.
Moving ahead, this project is anticipated to produce nearly $150 million of annualized cost savings, out of which roughly $50 million will be reinvested in targeted growth opportunities. This reinvestment is expected to generate approximately $100 million in a run rate of net annualized savings that will begin by the end of 2019.
Further, the Project Booster cost savings, along with working capital initiatives are estimated to produce an additional annual run rate of $300 million of cash from operations beginning by the end of 2019. Moreover, this program, including the headcount reductions, is anticipated to be cost-neutral for 2017.
The company is expected to continue increasing market penetration for Champion worldwide, along with investment in the global brand platform, product development and design. Evidently, management anticipates to lower overhead, which includes headcount reduction, optimize the supply chain and focus on inventory as well as working capital improvements.
Moreover, Hanesbrands plans to utilize its size and scale to boost supply chain optimization, along with the investment in its domestic distribution center network in order to cater to the online channel efficiently, gaining procurement and product development savings, using global fabric platforms and silhouettes along with continuous internalize production.
Other Financial Details
Hanesbrands ended the quarter with cash and cash equivalents of $463.6 million, long-term debt of $3,763.1 million and equity of $958.1 million.
During the quarter, the company paid $55.9 million as cash dividends and bought back shares worth $299.9 million. In 2017, management continues to anticipate capital expenditures of roughly $90–$100 million.
2017 Guidance
Hanesbrands reiterated its guidance issued in April for 2017. The company continues to project net sales in the band of $6.45–$6.55 billion, GAAP operating profit in the $845–$895 million range. Further, its adjusted operating profit (excluding actions) is expected in the band of $935–$975 million.
The company’s GAAP EPS for continuing operations is projected in the band of $1.70–$1.82 and adjusted EPS is estimated in the $1.93–$2.03 range. The Zacks Consensus Estimate for 2017 is currently pegged at $1.97.
Moreover, its net cash from operations is anticipated in the band of $625–$725 million.
In comparison with 2016 results, the midpoint of 2017 outlook reflects growth of 8% in the net sales, 12% in GAAP operating profit, 5% in adjusted operating profit, 26% in GAAP EPS from continuing operations, 7% in adjusted EPS and 11% in the operating cash flow.
Further, net sales guidance for 2017 includes anticipated additional sales from acquisitions of approximately $420–$430 million, mainly in the first half of 2017. Organic sales are projected to be flat to up 2%.
Moreover, management expects nearly $15 million as synergy cost benefits in 2017, driven by the acquisitions of Hanes Europe Innerwear and Knights Apparel. Also, it estimates synergies from the Hanes Australasia (Pacific Brands) and Champion Europe acquisitions to substantially start in 2018.
Q2 Outlook
For the second quarter, management projects total net sales to be roughly $1.65 billion and acquisitions are anticipated to add nearly $200 million in net sales. Further, organic sales are estimated to decline due to current retail sales scenario coupled with a timing shift of back-to-school shipments. More back-to-school shipments are anticipated to fall in the third quarter versus a year ago.
While GAAP earnings per share for continuing operations are projected in the band of 45–49 cents, adjusted earnings per share is expected in the range of 51–54 cents. The Zacks Consensus Estimate for the second quarter is currently pegged higher at 55 cents.
Key Picks
Some better-ranked stocks in the broader Consumer Discretionary sector include Rocky Brands, Inc. (NASDAQ:RCKY) , Central Garden & Pet Company (NASDAQ:CENT) and Nutrisystem, Inc. (NASDAQ:NTRI) .
Rocky Brands jumped 25.3% in the past one year. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here .
Central Garden & Pet, a Zacks Rank #1 stock soared 110.2% in the past one year. Also, it has a long-term earnings growth rate of 10%.
Nutrisystem, which carries a Zacks Rank #2 (Buy), surged 99.7% in the past one year. Also, it has a long-term earnings growth rate of 17.5%.
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