Hanesbrands' EPS Beats; Ups View - Analyst Blog

Hanesbrands Inc. (HBI) reported third quarter 2012 earnings per share of $1.11, up 31% from the prior-year quarter, on strong sales. Earnings outpaced the Zacks Consensus Estimate of $1.05 per share.

Revenues and Operating Profits

Quarterly revenues inched up 2.5% to $1.219 billion, driven by sales growth in both Innerwear and Outerwear segments. This was almost in line with the Zacks Consensus Estimate of $1.224 billion.

Gross profit went down 3.4% year over year to $399.9 million and gross profit margin shrank 210 basis points to 32.8% during the third quarter. The decline in profit resulted from inflation in cotton prices. However, operating profit in the quarter climbed 8% to $156.5 million, driven by lower selling, general and administrative expenses. Operating profit margin expanded 60 basis points to 12.8%.

Segment Details

Innerwear Segment: Net revenue at the Innerwear segment increased 2.8% year on year to $574.3 million in the reported quarter. The increase came on the back of decent performance of men’s underwear and women’s panties. The company introduced new products like Hanes ComfortBlend men’s underwear, Hanes Classics slim fit and stretch premium underwear T-shirts, and Bali and Barely There Smart Size seamless bras. Operating profit in the segment went up 9.6% year on year to $96.8 million.

Outerwear segment: Outerwear segment sales climbed 5.2% from the year-ago period to $41.0 million, driven by strong sales of Champion activewear and Gear for Sports apparels, partially offset by higher cotton prices. Outerwear segment’s operating profit reported a decline of 4.2% to $46.3 million in the quarter.

International segment: Net sales at International segment slipped 3.2% to $132.3 million in the quarter. The reason for decline in revenue was foreign exchange headwinds. Excluding currency, revenue in this segment increased 2% in the quarter. Operating profit, however, jumped 18.8% to $17.6 million in this segment.

Direct to Consumer segment: Direct to Consumer segment sales went up 1.6% to $99.1 million and operating profit increased 17.5% to $14.4 million in the quarter.

Other Financial Updates

The company exited the third quarter of 2012 with cash and cash equivalents of $182.3 million compared with $29.7 million in the previous quarter. Long-term debt was $1.5 billion compared with $1.7 billion in the second quarter of 2012. Free cash flow was $287 million in the quarter. The company completed the retirement of approximately $300 million of floating-rate bond debt as planned in 2012.

Guidance

For the fourth quarter, the company expects net sales in the range of approximately $1.13 billion to $1.17 billion and earnings per share (EPS) of $1.00 to $1.06. The company expects gross margin percentage in the mid-30s and an operating profit margin of slightly more than 13%. Interest expense is expected to be approximately $33 million and the effective tax rate is expected to be in the mid-teens.

For fiscal 2012, the company has upped the lower end of its earnings guidance range to $2.54 – $2.60, compared with $2.50 - $2.60 anticipated previously, thereby narrowing the range. The company expects to increase its sales by approximately 2% compared to previous guidance range of $4.52 billion –$4.57 billion. For 2012, the company now expects free cash flow to be toward the higher end of the previous range of $400 million to $500 million. The company’s near-term priority for the usage of free cash flow is to reduce long-term debt and de-leverage its balance sheet.

Currently, Hanesbrands, which competes with Limited Brands Inc. (LTD), carries a Zacks #3 Rank (short-term Hold rating).

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