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Cotton inflation hurts HanesBrands in Q1
Apr '12
HanesBrands reported financial results consistent with its guidance for the first quarter ended March 31, 2012. The company had a net loss for the quarter of $0.27 per diluted share, compared with EPS of $0.49 in the year-ago first quarter. Net sales were $1.01 billion, a decrease of 3 percent compared with $1.04 billion a year ago. The results were better than the company's guidance for an EPS loss of up to $0.35 and net sales of approximately $1 billion.

"We are tracking consistent with our expectations, and now with the worst of the cotton inflation behind us, our operating profit margin for the remainder of the year should average in the low double digits," Hanes Chairman and Chief Executive Officer Richard A. Noll said. "Sales, profits and cash flow are running consistent with, or better than, our plans. When coupled with the visibility of our pricing and costs for the rest of the year, we feel very good about our momentum and are confident in our ability to achieve our full-year financial goals."

Several of the company's product categories, especially those that sustained the largest price increases to offset cotton inflation, generated solid sales growth and better than expected retail point-of-sale growth in the quarter.

On a percentage basis, Hanes men's underwear sales increased mid-single digits, Hanes women's panty sales increased in the high teens, and total Innerwear segment sales, including sheer hosiery, increased 1 percent. In the Outerwear segment, Champion activewear sales increased in the mid-teens.

As expected, the dynamics in the wholesale imagewear screen-print category in the United States significantly impacted results. The imagewear loss in the quarter was the equivalent of $0.18 per share, and the company continues to expect a full-year imagewear loss of approximately $0.30.

The company is slightly ahead of its plan to reposition domestic imagewear to focus on branded product categories and de-emphasize the highly promotional sector, which is expected to result in a smaller, more profitable and less volatile operation in the longer term.

As anticipated, cotton inflation also negatively affected margins in the quarter, as did supply chain actions of $13 million to balance capacity with unit demand. Supply chain operations are performing well, and continued optimization is expected to yield substantial cost savings.

Hanes will benefit from declining inventory levels for the rest of the year. Inventory reached its peak for the year in the first quarter and ended the quarter slightly lower than originally expected. Free cash flow was slightly better than a year ago.

The company has good visibility to product pricing and costs for the remainder of the year. Product pricing has been confirmed with retailers for more than 95 percent of the company's domestic unit volume. Cotton costs are locked in through December.

Hanes has reconfirmed its 2012 guidance of 2 percent to 4 percent net sales growth and EPS of $2.50 to $2.60. Consistent with these expectations, gross profit as a percent of sales is expected to reach the high 20s in the second quarter with an operating profit margin in the mid- to high single digits. In the second half, gross margins are expected to improve to the low 30s, while the operating profit margin is expected to average in the low double digits.

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