Sales declined 2% during the third quarter

Sales declined 2% during the third quarter

This year’s back-to-school retail selling season wasn’t the most lucrative on record, but that doesn’t seem to be bothering Hanesbrands too much.

The apparel business shrugged off a 2% sales decline in the third quarter, buoyed by a new focus on improving margins, and by its own bit of retail therapy – the US$583m acquisition of rival Maidenform Brands earlier this month.

If revenues were a little disappointing in the three months to 28 September, every other measure was in Hanesbrands’ favour: net income up 14%, a 240 basis point improvement in gross margin and higher earnings forecasts for this fiscal year and the next.

Drilling into the detail, the company highlighted the ongoing effects of its Innovate-to-Elevate strategy – described as a combination of brand power, supply chain savings and product innovation.

All three components, it said, had combined to drive most of the margin improvement during the quarter.

Market share is moving up too, thanks to new products such as Hanes X-Temp underwear and socks, ComfortBlend underwear and Smart Size bras, all of which enjoyed a strong quarter.

Meanwhile, Hanesbrands’ predominantly self-owned supply chain made it easier for the business to generate savings and improve margins across its four major business segments.

Looking at those segments individually, innerwear achieved an operating profit comparable to last year, despite increased media investment and a 3% net sales decline from that less-than-spectacular back-to-school season.

Most of the declines occurred during the key August period, but retail sell-through improved somewhat in September, and the company’s Innerwear brands managed to increase market share.

It was a broadly similar picture with activewear (or outerwear as it was previously known): sales down 2%, strong profitability, and double-digit operating margins for retail activewear and Gear for Sports.

The lower sales, Hanesbrands maintained, were largely the result of planned declines in sales of lower-margin printwear products to screen-print wholesalers, while revenues from Gear for Sports and Champion were up in double digits.

Only in international was the trend reversed, with constant currency sales up 10% but operating margins inching up by only 1%, while direct-to-consumer reflected the broader picture, with a 1% sales increase and a 29% hike in operating profits.

A mixed picture which nonetheless left Hanesbrands chairman and CEO Richard Noll in a mainly positive mood when he spoke to analysts yesterday (30 October): “Even though we gained share, the overall retail environment during back-to-school was weak, ultimately impacting our third-quarter sales,” he said.

“This retail weakness is causing many retailers to feel cautious about the upcoming holiday season.

“Therefore, we are going to be prudent and take a very conservative sales view in the fourth quarter.

“But even in spite of this prudent macro view, we are raising our operating profit and earnings guidance for the second consecutive quarter based on the improved profitability and the continued momentum in our business.”

Maidenform a work in progress
Noll’s list of reasons to be cheerful would doubtless also feature the company’s recent acquisition of Maidenform, despite that company’s less than stellar performance prior to takeover.

Yes, acknowledged Noll, Maidenform had continued to “deteriorate” all year long – as expected – with full-year revenues likely to hit $550m and operating profit in the low $30m range.

“But don’t focus on these current trends, it’s what we can do with the business that counts,” he insisted.

“And the closer I get to their business, the more confident I feel about achieving our long-term profit goal.

“We knew exactly what needs to be done to cut costs and to drive profitable sales.”

The synergies, he explained, would come mainly from the elimination of Maidenform’s corporate overhead and the absorption of its distribution functions into Hanesbrands’ own, existing network.

Much of the integration would be done by the middle of next year, and all of it should be finished by the end of 2014, at which point the company’s headquarters and distribution centre would both be closed.

The anticipated smoothness of the transition leaves Noll positive about the future, and about Hanesbrands’ ability to make the most of its most recent buy: “The simplest way to conceptualise this integration is that we bought the brand and the business, but we’re going to close the company,” he said.

“We will keep the things they do well, particularly intimate sales, design and merchandising, but we will rationalise where we have a competitive advantage.”