T-shirt and underwear maker HanesBrands says its decision to raise prices three times over the past year in response to rising input costs "worked well" in its core business, and that retailers "have come to appreciate that price increases are driving their comp sales and profitability." 

"We led the price increases with weaker competitors initially trying to gain an advantage by delaying by roughly a quarter," co-COO Gerald Evans said on a call with analysts earlier this week as the firm reported a 25% jump in full-year profit.

CEO Richard Noll added: "Price gaps are now closing to what we believe are appropriate long term levels. Both male underwear and socks increased sales and profit in 2011, a trend we expect to continue in 2012."

With overall pricing in the industry reaching levels for the average cost of cotton in 2012, the company has worked with retailers "to selectively adjust prices or increase pack sizes that optimise our competitive gap."

"In fact, even after three price increases in 2011 we continue to earn new shelf space at retail in 2012," emphasised Evans. Some of the largest gains are coming from Hanes Comfort Blend underwear and socks, he said.

However, the company has faced increasing challenges in its image wear division, where competition between suppliers in the most promotionally driven sectors, led to rapid price declines - leading to a "perfect storm" as the industry faced the "highest cotton prices in history".

While positive that the premium and core sectors are “appropriately priced” for the longer term cost of cotton and should return to historic levels of profitability as inflation unwinds, it is a different story as far as the market for promotional T-shirts is concerned.

“Here, competitors are fighting for unit volumes…where share could easily shift based on the lowest price of the day,” Evans said. “Our business model is about brands not the deal of the day.”

In response the company has decided to focus on the premium and core sectors and let units and sales of promotional items fall.

“For us, this is a business model decision, because we are all about brands. As we make this transition, image sales will be smaller, but we believe we will be more profitable and less volatile,” said Evans.

Fourth quarter shortfall
Despite a stellar full-year result, Hanesbrands recorded a disappointing fourth-quarter and said 2012 guidance was "below our expectations."

Fourth-quarter profit dived 31.5% to $28m, as sales declined slightly to $1.1bn. The company attributed the drop to an "unexpected and substantial" slowing of orders in December as retailers cut back their inventories.

Noll said the shortfall was down to retailers slowing their pace of ordering as they became "rather nervous about mounting inventories throughout their apparel departments".

He said that as retailers clear out their cold weather apparel, the company expects the order pace to return to normal and equal its sell-through rates.

For the full-year, the company saw net income rise 25% to US$266.7m as sales rose 7% to reach $4.64bn.

Looking to the year ahead, it is forecasting that its imagewear division will lose around US$0.30 per share due to "hypercompetitive" pricing. As a result, full-year earnings are expected to be $2.50-2.60 per share, with net sales rising 2-4%.