Hanesbrands (HBI) Lags Q2 Earnings, Sales; Keeps '16 View

Hanesbrands Inc.’s (NYSE:HBI) second-quarter 2016 earnings per share of 51 cents missed the Zacks Consensus Estimate of 52 cents by 1.92%. Earnings, however, improved 2% year over year on higher sales due to the Innovate-to-Elevate strategy.

The strategy focuses on value-added, high-priced and higher-margin items that can be supplied at lower costs. Benefits from the company’s back-to-back acquisitions also contributed to earnings growth.

The adjusted earnings exclude $25 million and $72 million of pre-tax charges related to acquisitions and other actions in the fourth quarter of 2016 and 2015, respectively.

Revenues and Operating Profits

Quarterly revenues inched up 3% to $1.47 billion backed by higher sales in Innerwear and Activewear categories and contributions from the Knights Apparel business. On a constant currency basis and excluding the effects of acquisitions and exit of a retailer in Canada, sales were up 2%. Revenues missed Zacks Consensus Estimate by 3.92% during the quarter.

Gross profit declined 1.9% to $557.3 million backed by higher cost of sales. Gross margin, however, expanded 50 basis points (bps) to 37.8% due to lower cost of sales. Adjusted operating profit slipped 7.3% to $245.6 million due to higher selling, general and administrative expenses. Operating margin contracted 70 bps to 16.7%.

Segment Details

Following the changes made at managerial level, the company shifted its wholesale e-commerce business from the Direct-to-Consumer segment to the respective Innerwear and Activewear segments in the first quarter of 2016.

Innerwear: Sales slipped 4.7% year over year to $749.22 million due to lower sales at the mass channels. Operating profits declined 10.2% due to higher operating expenses.

Activewear: Sales were down 3.6% from the year-ago quarter to $367.39 million due to lower sales at the Hanes Activewear business as well as sporting goods, mid-tier and department store channels, which were impacted by bankruptcies and a tough year-over-year comparison. Operating profits slipped 7% on higher administrative expenses.

International: Sales went up almost 2% on a constant currency basis to $269.66 million owing to higher sales in Europe and Asia. Operating profit jumped 14%, while operating margins expanded 90 bps.

Direct to Consumer: Sales decreased 3.7% to $86.45 million and operating income plunged 6.3% to $8.3 billion.

2016 Guidance

In May 2016, Hanesbrands raised its full-year earnings and sales guidance based on expectations of increased synergies from the Champion Europe and Pacific Brands acquisitions and debt refinancing. The company maintained its full-year guidance during the second-quarter earnings conference call.

For 2016, Hanesbrands expects adjusted earnings in the range of $1.89–$1.95 per share. The company anticipates sales between $6.15 billion and $6.25 billion. Hanesbrands expects operating profit in the range of $940 million to $975 million. Apart from synergies from buyouts, the guidance reflects contributions from debt refinancing and the tax-rate effect of the new FASB Accounting Standards Update related to accounting for stock compensation.

Hanesbrands has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader consumer discretionary sector include Apollo Group Inc. (NASDAQ:APOL) , Pool Corporation (NASDAQ:POOL) and Wynn Resorts Limited (NASDAQ:WYNN) . All these stocks hold a Zacks Rank #2 (Buy).