Professor Mike Lord Comments on Hanesbrands Inc. Branded Imagewear Strategy

Reposted from Winston-Salem Journal | by Richard Craver

Hanesbrands Inc. took a “less bad is better” approach to its first-quarter earnings report Thursday.

The company warned in January that historically high cotton costs and “hypercompetitive pricing” in the wholesale screen-print market would contribute to as high as a 35-cent earnings loss in the first quarter.

On Thursday, the company reported a $26.8 million loss and an earnings loss of 27 cents. Sales were down 2.7 percent to $1.01 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,” said Richard Noll, the company’s chairman and chief executive officer.

Noll said its sales, profits and cash flow “are running consistent with, or better than, our plans.” He said the company’s cotton prices are set through December.

“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,” Noll said.

Hanesbrands confirmed Thursday its fiscal 2012 earnings range of $2.50 to $2.60 a diluted share compared with $2.69 from fiscal 2011.

Although part of Hanesbrands’ response to the higher cotton prices was to raise prices in several product categories, it didn’t appear to affect sales too much at retail.

The company said its men’s underwear sales rose in the mid-single digits, while panty sales were up in the high teens and Champion activewear sales increased in the mid-teens.

Hanesbrands said it experienced a loss of 18 cents a share related to the wholesale imagewear screen-print category. It expects a fiscal 2012 loss of 30 cents a share.

In response to the competition, Hanesbrands is focusing on branded imagewear product categories, which Noll said would result in a smaller, more profitable and less volatile operation.

Innerwear sales rose 1.3 percent during the first quarter to $509 million. Outerwear sales were down 9.2 percent to $294.2 million. International sales were down 5.2 percent to $120.4 million.

Michael Lord, an associate professor of management at Wake Forest University, said Hanesbrands has to carefully monitor its imagewear sales as it shifts away from more promotional apparel.

“It’s a big drop in gross profits and gross margins,” Lord said. “That’s where most of the hit was versus last year. Otherwise, operating costs and most other measures didn’t change much.

“It looks like the combination of higher input costs and lower sales in several categories put a significant squeeze on their gross profit margins. It’s tough when you’re getting squeezed on both sides.”

Hanesbrands highlights

Here are highlights of the first-quarter report for Hanesbrands Inc.

Net income: Loss of $26.8 million compared with net income of $48.1 million a year ago.

Diluted earnings: Loss of 27 cents compared with earnings of 49 cents a year ago.

Average earnings forecast: Loss of 33 cents a share by analysts surveyed by Zacks Investment Research.

Share price: Fell 27 cents to close at $26.94. Hanesbrands released its earnings after the stock market closed Thursday.