Hanesbrands Q2 2024 Earnings Call Transcript

Sure. Good morning, Jay. Thanks for the questions. In terms of the portfolio, the shorter answer is yes. I really like the portfolio that we have today on a go-forward basis. When you look at the brands that we have, the markets that we're in, I think we're in the right places. There's opportunity to grow in those markets. And the power brands that we have Hanes, Bonds, Bali, Maidenform, they're all top tier brands in their segments, number one, number two position. And I think they all represent growth opportunities, both in their core segments and opportunities to expand beyond. So we have nothing planned beyond what we've just done. We like the portfolio, we like the growth opportunities and importantly, the margin opportunities that come along with it.

Yes. Good morning, Jay, and thanks for your questions. On the full year guide, it's a great, great question. And let me first say. we're really pleased with Q2 results, right? We delivered strong results in a tough environment, and we feel good about the second half. As you think about the full year outlook and we talked about this in our earlier remarks with the reclassification of Champion in the U.S. stores to discontinuing operations, our prior full-year guidance that is based on total Company is not comparable when you look at our updated guidance, that's based on continuing operations. And let me walk you through that and kind of walk you through how that reconciles and how we think about the full year now. So for sales, we're essentially holding sales flat to our prior guide, no change there. If you consider our midpoint of our guide for sales was $5.41 billion, we had about $1.8 billion of sales between Champion and the U.S. stores. So when you back that out, you'd pretty much arrive right at the midpoint of our, our current guide of $3.61 billion.

For operating profit and EPS, we've actually raised our full year outlook. Our previous guide, the midpoint was $510 million, and it included around $120 million of operating profit for Champion and the U.S. stores. So with the midpoint and you factor that in, you arrive about $390 million backing out that profit. Our updated guide for op profit is $405 million. And so we're essentially flowing through the Q2 deep and factoring in some incremental upside in the second half. So then you also asked about leverage, and we also feel really good about that continued focus on debt reduction, we talked about in the earlier remarks. In the back half, we're going to pay down $1 billion of debt. And when you look at that, by the end of the year, we're going to be down a turn and a half year over year by the end of this year. And then looking forward, now we're not guiding for '25. But as you think about next year, the margin expansion that we're expecting, the continued debt pay down, we expect to end next year around about three times on a leverage basis.

And Jay, just one more thing, kind of beyond 2025. You know, we said previously that our range guide is two to three times. And, you know, we've gotten asked the questions previously, you know, is that too high? And what I would say is, you know, we're going to get back to the two to three times and then we'll step back and evaluate, is that the right measure going forward. I think you can probably anticipate, it'd be towards the lower end of two to three times, if not lower going forward. But we'll get back into that range and then we will evaluate and talk about where we're going to be.

Thank you.

Sure. Good morning, Ike. Thanks for the questions. In terms of gross margin, I think, again, we're not officially guiding for next year, but as we said, we think this business over time will operate in the low 40% range, so there's continued growth to be had there. And that'll come from some really strong cost actions that we have been taking and will continue to take.

Obviously, there's still some natural recovery of our gross margin based on input costs, that we will continue to benefit from. We've also been very focused on cost savings initiatives that continue to perform for us. And with the inflection point of the divestiture, it creates opportunity to go further and for us to look at the business differently.

And we have some new savings programs that we're putting in. Some of them are powered by the technology platforms that we're going to be putting in, and we slowed down that process. We're re- energizing that. We have opportunities to get better on our analytics, our forecasting, more automation in our business that continue to help us drive costs.

Our supply chain -- we're going to take some actions, and that's some from the changing the portfolio, but it's also all the hard work we've been doing on inventory management. Our SKU program enables us to move capacity around and take some facilities offline, but still have room to grow. So we're attacking cost on all fronts that are going to continue to help us grow our gross margin, and our op margin over time as we go forward. In terms of growth, I think the way you should think about this business is a more stable, more consistent growth business as we go forward. And obviously, today, as we sit here, huge headwinds out there. It's a tough business to operate in. But we see this business growing in the low single digits as we go forward. We think we have lots of different growth opportunities that we can go after, including just our core business and getting better at that business.

And ultimately, when we -- when we have that level of growth, we're still going to have our operating profit growing faster than our sales. We think our profits grow at double digits and then EPS will grow faster than our profit at double digits. So there's a flywheel here that we continue to generate. The P&L is going to continue to generate cash. We're going to continue to invest in the business. We're going to continue to be able to pay down debt so our interest costs go down. So we like the shape of the P&L as we go forward and what that looks like. What I would tell you, and I think it's really important with all the challenges in the economy right now, with the consumer, just the broader markets, the margin improvement that we're forecasting is going to happen whether the consumer turns around or not. And I think it's a really important point for us now. We've been talking the last couple of quarters around margin improvement, and you're going to continue to see margin improvement from us. You've seen that the last couple of quarters, you're going to see that in the quarters going forward.

So when we start to talk about gross margin improvement, op profit improvement, you're -- is this not a hockey stick idea? This is quarter-over-quarter, you're going to see improvement on the margin line of things.

Yes, sure. Happy to talk about it. When you think about cotton and you think about how it flows through for us, we're -- as you look in to next year, we're call it roughly 60% fixed on cotton going into next year. So, you know, cotton is relatively low right now. So we're estimating that would definitely be a tailwind for us as we go into next year. So if, you know, some of the other commodities stay all flat, we think we're going to have some cost tailwinds as we go forward based on cotton. So we're feeling pretty good about our position right now.

Thank you.

Yes, when you think about SG&A Brandon, there certainly is opportunity, and it comes in different fronts. One, there's just, we can continue to get better in SG&A there's no doubt about that. But it's also tied to the transaction and how we look at the business in total. There's costs that on a company our size, they're kind of in between different businesses. And we are tackling these costs right now. And there is cost that is going to be coming out a large chunk of cost in the back half of '24. But it's also going to continue in by the first half of '25. That's going to be a tailwind for us in the margin all the way through 2026. So we've got very clear actions. We're starting those actions. We've got very good focus on where the cost is, and that's on a global basis.

Yes. And just one point to add to that, you know, we've clearly talked about the cost savings, right? We're really laser-focused on that. But one thing to consider, as you look at our SG&A this year, we are already investing in brands, right? So when you think about our SG&A structure, we're taking cost out, that we have an incremental layer of investments from brands. We're already at 5% of sales this year for our brand investments. So we've already got that in the P&L this year. And then as you think about going forward, as Steve mentioned, cost savings is going to be able to drive SG&A down further.

Yes. So whether it's headcount, whether it's reducing tech applications, consolidating other vendor headcount, we're attacking every aspect of it. And again, you'll start to see that in the back half of this year and it'll flow through into next year.

Sure. The short answer is, yes. We are continuing to gain shelf space, both on a permanent basis and on a promotional basis. So when you think about promotions for back-to-school holiday share of displays on the floor, we've done very well from a share perspective at back-to-school, and proud of the team and how the selling actions happen there. Retailers are being cautious on inventory. There's no doubt about that, as is everybody. So we think that we're in good shape. POS is tracking relatively along with shipments, or say shipments are tracking along with POS. But the important thing is we continue to take share and we continue to outperform the market across all our brands, across all the categories and segments that we operate in. And we see that continuing as we go forward.

Thanks, Brandon.

Sure. Clearly the category has been challenged for a while. It's interesting when you look at the category over time. Historically, this has been a roughly 1% growth category. And if you look at the business over the last three years, while it has certainly been highly volatile, it's still averaged around 1% if the issue is that 2021 was so high. So that's extended the purchase cycle a bit. We anticipate in the long-term that the category will return to that 1% roughly growth rate as we go forward. When exactly that's going to happen, I'm not sure. I can't give you a great answer on that. But the good news is we are seeing POS slowly getting better which is encouraging. And we're also seeing, you know, our consumers and retailers are still responding to newness, with our innovation continues to work, our media is working, we continue to gain space. Retailers are taking in incremental holiday events. So I think people still believe in this category and, you know, we're leaning in as hard as we can to drive it.

But I think it's going to take some time before it rebounds. Just like the rest of apparel, things are challenging. So I think it'll take a couple of quarters for this category to normalize. But in the meantime, we are very confident that we're going to continue to take share we're going to continue to lean in. And we're going to continue to act like the category brand leaders that we are.

Sure. It has not really been used to clear excess inventory. There's a little bit that goes through there, but the -- taking those out of our portfolio is not going to create A, how do we clear inventory problem for us going forward. So I'm not worried about that at all. In terms of the overall, we've been looking at this for some time and quite frankly, we've been reducing the number of stores the last couple of years.

So we've taken probably 20% -- 10%, 20% of our stores out over the last couple of years anyway. But the way I look at it domestically, we're predominantly a wholesaler. That's what we do really, really well. These stores do not have a lot of volume. They're not profitable. And as you go forward without Champion as part of our portfolio, that takes an additional part of the higher AUR product and profitability out of the network, and that kind of becomes a tipping point. They were already very profit-challenged and they become significantly profit-challenged with that Champion. So we thought it was the right time to make this move and to focus on the parts of the business where we're really strong.

Sure. I think you should think of it as driven by a number of things. Do I think we can continue to just take shelf space and out operate the competition from a service perspective? Yes, we expect to continue to do that. We are going to continue to innovate. I've been really proud of the team and the innovation that we've delivered over the last couple of years. We have a new innovation process that operates globally and products like Hanes Originals and SuperSoft, Maidenform M have all come from this, and they're working really well and we're doing it globally. We're moving product back and forth between the U.S. and Australia, and it's making a difference in our business here, it's [Technical Issue]. And you're going to see a very robust pipeline of innovation coming from us going forward. We have visibility after 2026 right now, of our big launches.

The other thing you're going to see is us expanding our portfolio. We have great brands. So where can we take these brands? What adjacent categories can we play in that we're not in today? You know, one small example of that is what we're doing in medical scrubs right now. We have a early but nice building business of Hanes and the medical scrubs business. The Hanesbrands can play in a lot of different places and we're going to be smart about adjacent categories that we can go into that are going to be highly incremental. There's also growth globally. We have -- I think we're in great markets, but some of them maybe are more underdeveloped than they should be. So we're going to attack growth from multiple vectors and we think there's a lot of different areas that can help us get there.

You know, I'm not going to get into what 2025 guide looks like by segment and do that. I would tell you I'm confident there's growth around the globe for us. The consumers certainly challenge, you know, our Australia business, which is an important business for us, that, that economy is really struggling right there right now. Do I think that's going to rebound and continue to be a good growth business for us? Yes, I do. So I think it's going to be balanced around the globe. Some years will probably be higher in one market than others, but we're thinking about the portfolio we have right now, the footprint we have right now, as able to drive growth pretty consistently in each location.

Sure. Clearly the consumer is under pressure right now. And what we're seeing is consumers are buying around events, so they are looking for promotional pricing right now. Nothing though that's outside of the scope of our guide and outside of the scope of our plans and our P&L. But we are being smart about how we go to market for key events like back to school, what we're going to do at holiday to make sure that we're meeting the needs of consumers. But it's not a overly pressure packed promotional environment right now.

It's more everyone's being smart about how we can drive volume, and how we can meet consumer needs as we go forward. In terms of growth, as I was talking about a couple of minutes ago, I think there's growth across the board in this business. We can continue to take share and take, you know, space. We're going to out innovate the competition. We've got great global footprint and brands. We're going to expand into new adjacent categories and make our brands work harder for us. So we think there's a broad growth opportunity for us.

And the key for us is the measure that we're going to hold ourselves to, certainly in the short term and probably in the long term as we're going to grow twice the rate of the category. So that's what a category leader should do. That's how we're going to take share. So when the category gets back to that historical 1% growth, you should see us growing at twice the rate of the category.

Yes. Good morning. Thanks for your question. Let me kind of take that from a couple of different angles. So, cash flow, you mentioned the $400 million and let me just kind of speak about cash flow in general. As you think about 2024, our guide is $200 million, and you've got some, the moving parts here, you have around $100 million of cash charges for the transaction cost as well as restructuring.

So as you look forward, I think a good baseline to think about our operating cash flow going forward is around $300 million. And already talked about before, you got to think about that as a good baseline when you layer in the margin expansion from the cost savings. You got lower interest from debt pay down. It's going to grow from there.

You're going to see, and we expect to be in the mid-$300 million operating cash flow range for next year, and we're going to be able to grow from there. You saw what we said, we have a good degree of confidence, high degree of confidence that we're going to have $400 million plus of operating cash flow going forward. As you think about capex, it's going to be up a little bit. You're going to have the technology that we talked about earlier. We feel really good about being able to, like we talked about, we're going to invest in the business and we can easily, with that cash flow support, the capex levels we need going forward.

Yes, we don't think it's impacting us. We are seeing it. We watch it closely. And I know exactly what you're talking about. Our brand is remaining really strong and continue to gain share in all the channels that we're participating in. So we compete broadly with those products, and consumers continue to choose our brand. And I think that's the media that is working. The innovation that we're bringing to market is working. So we're competing in our game and how we compete, and that model is working for us right now.

We'd like to thank everyone for attending our call today, and we look forward to speaking with you soon. Have a great day.