Hanesbrands Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 10 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Hanesbrands Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised today's conference is being recorded.

Operator

I'd now like to hand the conference over to your speaker today, T. C. Robillard, VP of Investor Relations. Please go ahead.

Speaker 1

Good day, everyone, and welcome to the Hanesbrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress After the Q3 of 2023. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, Updated FAQ document and a replay of this call can be found in the Investors section of our hanes.com website. On the call today, We may make forward looking statements either in our prepared remarks or in the associated question and answer session.

Speaker 1

These statements are based on current expectations or beliefs and are subject to Certain risks and uncertainties that may cause actual results to differ materially. These risks include those related to current macroeconomic conditions, consumer demand dynamics, Our ability to successfully execute our strategic initiatives, including our full potential transformation plan, the Champion Performance Plan and our evaluation of strategic alternatives for our Global Champion business, our ability to deleverage on the anticipated timeframe and the inflationary environment. These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to Additional information, including a reconciliation of these and other non GAAP performance measures to GAAP, can be found in today's news release.

Speaker 1

With me on the call today are Steve Bratsby's, our Chief Executive Officer and Scott Lewis, our Chief Financial Officer. For today's call, Steve and Scott will provide some brief remarks and then we'll open it up to your questions. I'll now turn the call over to Steve.

Speaker 2

Thank you, TC. Good morning, everyone, and welcome. Last quarter, we walked through an assessment of our strategy and how we are continually pressure testing it, looking at what's working, where we need to improve, adapting our plan to match the near term realities of the operating environment, as well as looking at additional options to enhance shareholder value. As we assess our progress to date and look at the path forward, We've outlined 4 drivers to unlock shareholder value creation. 1, return gross margin and operating cash flow to historical levels 2, Pay down debt 3, reignite our Innerwear business and 4, regain momentum and refocus our Champion which now includes an evaluation of strategic alternatives.

Speaker 2

As it relates to the first three drivers, When we came into the year, we spoke about our expectations for a muted consumer demand environment, which we've seen pressure the top line. However, despite this expectation, we laid out several key performance metrics with specific goals to track our progress throughout the year. In the Q3 year to date, as a result of the team's ongoing focus and efforts, we have made meaningful progress across each of these metrics. And we remain on track to achieve our year end goals despite the increasingly challenged sales environment. Specifically, adjusted gross margin increased 190 basis points sequentially and 100 basis points We reduced inventory 17% sequentially and 29% We've generated nearly $290,000,000 of operating cash flow year to date and remain on track to deliver approximately $500,000,000 We paid down another $144,000,000 of debt in the quarter and nearly $270,000,000 year to date, keeping us on track to pay down more than $400,000,000 of debt for the full year.

Speaker 2

And in terms of our Innerwear business, We've regained momentum as we continue to execute our strategy. We're delivering consumer led innovation, investing behind our iconic brands and leveraging our competitive advantages to gain market share. While the total Innerwear market was down 3% in the quarter, Our Innerwear sales were consistent with the prior year period as we gained market share, driven by younger consumer focused innovation, Permanent retail space gains, a successful back to school campaign and better on shelf availability as we leverage our data analytics capabilities to help our retail partners improve sales and working capital efficiency. Touching on our innovation, we're seeing strong consumer response to our new products and our pipeline is now full, providing us visibility to new product launches through 2025. In the quarter, we saw continued success of our Hanes Originals line, which is not only driving market share gains, it's also increasing our penetration with younger In Australia, we launched an anti chafe innovation within our Bonds brand, which is off to a strong start, particularly in women's.

Speaker 2

And last month, we launched m by Maidenform across channels to again capture younger consumers with new modern designs and colors. We're encouraged with the momentum in our Innerwear business and we believe we're well positioned to continue to gain market share and improve margins. Turning to our Global Champion business. While we continue to experience near term top line challenges, Including the difficult consumer environment, we are progressing on a number of strategic initiatives designed to build brand health, We've made significant structural improvements to Champion such as segmenting and streamlining our supply chain, establishing globalized product design, as well as implementing a new disciplined channel segmentation strategy. These improvements have highlighted an even greater distinction between our Innerwear and Activewear businesses.

Speaker 2

This has created the opportunity for us in conjunction with the Board to evaluate options for the Global Champion Business that could accelerate shareholder value creation. While still very early in the process, we continue to evaluate the right path forward as we receive strong initial interest from a broad group of global partners. We do not intend to provide continual updates on this process. However, as always, we'll be transparent and update you as appropriate when there is news to share. Irrespective of the outcome of this evaluation, We are leaning into and executing our detailed champion plan for product, marketing, distribution and operations.

Speaker 2

We remain highly confident and committed to reaching the significant global potential of the brand. During the quarter, we completed several strategic actions in the Champion business Related to inventory cleanup, store exits and operational streamlining that Scott will speak to in more detail. In addition, we continued our efforts Position Champion for growth by improving our product offering and channel mix, driving our channel segmentation strategy and working to strengthen Champion's brand position With new marketing ahead of the launch of our fallwinter 2024 product line, which is our first global line from the new team. In fact, as we conduct our account meetings for our fallwinter 2024 line, we received consistent positive reviews, particularly around the elevation of the product and our focus and connectivity to the brand's heritage. And we believe we have opportunities to further increase We're also successfully reigniting brand heat, driven by our good progress with Pinnacle product offerings and accounts.

Speaker 2

While small in volume, these programs can generate a big and meaningful brand halo effect. Success in this channel is a leading indicator. Ultimately drives distribution opportunities in larger volume accounts. To that end, we launched successful colabs with key accounts, Driving brand awareness and increased brand interactions with consumers. And we're encouraged by our robust calendar for additional future collabs.

Speaker 2

Small back to school product offerings at 2 key specialty accounts in the U. S. Drove strong double digit sell through rates, an indication that our new product direction is resonating with consumers. We're seeing space gains and increased order backlogs Within Pinnacle accounts around the world, driven by our new brand and product vision. And we're seeing a meaningful uptick In brand consideration, among the key 18 to 24 year old demographic driven by our new brand campaign.

Speaker 2

We're confident we're taking the right steps to drive the long term success of Champion and the initial green shoots we're seeing within our Pinnacle accounts are encouraging. However, as previously discussed, it's going to take some time for these strategic actions to translate to the P and L. So in closing, We continue to make progress despite the challenging sales environment. We're seeing improvement across our total company and key performance metrics. Gross margin and operating cash flow are returning to more historic levels.

Speaker 2

We're reducing inventory and costs and we're paying down debt. In Innerwear, we are gaining share. Our innovation is resonating, especially with younger consumers. And we're taking the right steps to drive Champion's long term While we continue to evaluate alternative value creation opportunities. And with that, I'll turn the call over to Scott.

Speaker 3

Thanks, Steve. I'm proud of our global team as they delivered further improvement on our key performance metrics while simultaneously continuing to transform the business. And to be able to do this given the prolonged consumer headwinds in the apparel category demonstrates their ability to adapt to near term challenges and take action by controlling the things that are within our control. We're making structural changes to our business model. We're positioning our brands for long term growth.

Speaker 3

We're taking out cost and driving efficiencies that help free up growth related investments and we're strengthening our balance For the progress we've made to date and our increased financial flexibility, we're confident in our ability to deliver continued margin and cash flow improvement and pay down debt. For today's call, I'll touch on the highlights from the quarter, our improved financial position, including the amendment to our credit facility, and then I'll provide some thoughts on our Q4 outlook. For additional details on the quarter's results and our guidance, I'll point you to our news release and FAQ document. As expected, the global macroeconomic environment remained challenging, which continued to pressure For the quarter, net sales were $1,500,000,000 a decline of 9.5% versus prior year or 9.3% on a constant currency basis. Touching briefly on sales by segment, In U.

Speaker 3

S. Innerwear, segment sales were consistent with prior year and in line with our expectation. Despite continued softness In apparel spending, we continue to gain market share across the men's, women's and stocks categories. In particular, We saw strong performance in our women's business in the quarter. This strength was led by the continued positive consumer response, particularly younger consumers to our Hanes Originals products as well as the launch of our Ann Buy made in form innovation.

Speaker 3

Looking at U. S. Activewear, 3rd quarter sales decreased 17% compared to last year, which was essentially in line with our outlook This was driven by continued category headwinds in the quarter, including soft consumer demand and excess channel inventory. In addition, Champion sales performance reflected the expected short term impact from the continued strategic actions we're taking To drive stronger brand health through a more disciplined product and channel segmentation approach, a shift in mix and changes to our assortment. We continue to improve Champion's operations globally.

Speaker 3

And as Steve highlighted, we're encouraged by the initial green shoots. We're also recognized that given the retail calendar lead times within the activewear category, it will take a few more quarters before we begin to see The impact of our strategic actions translate to the P and L. With respect to our international segment, constant currency sales decreased 11%. In Australia, which is our largest international market, the previously discussed macroeconomic headwinds continue to pressure consumer demand in the quarter. The segment sales performance was below our outlook for a high single digit decline driven primarily by 2 markets.

Speaker 3

In Europe, Wholesale ordering was even more cautious than expected. And in Japan, while sales increased at a low double digit rate, The growth was below our expectation as travel and tourism in the region recovered at a slower pace than expected. Turning to margins. Adjusted gross margin of 35.5 percent was above our expectation. This represents an increase of 190 basis points sequentially 100 basis points over prior year.

Speaker 3

The year over year improvement was driven by the combination of factors including the overlap of last year's manufacturing time out cost, Benefits from select pricing actions and our cost savings initiatives, which more than offset the impact of product mix As well as the continued but diminishing headwind from input cost inflation. With respect to adjusted SG and A, Expenses decreased $15,000,000 as compared to last year. The lower expense was driven by the combination of cost Savings initiatives, disciplined expense management and lower variable expense. As a percent of sales, SG and A expense increased 160 basis points over prior year as the benefits from our cost savings and cost control initiatives were more than offset 9.5% for the quarter, which was near the high end of our outlook. Looking at the remainder of the P and L, interest and other expenses, Tax expense and earnings per share were all broadly in line with our outlook for the quarter.

Speaker 3

And in terms of restructuring charges in the quarter, The $3,000,000 of cost associated with our transformation strategy was below our outlook at $10,000,000 In addition, Given the continued headwinds in the Activewear category and our evaluation of the global Champion business, we accelerated and enhanced Several strategic actions geared towards improving Champion's brand position, regaining momentum ahead of the launch of our first global product line from the new team and positioning the business for long term profitable growth. In the quarter, the $74,000,000 of Champion Performance Plan related actions included Inventory write downs. With a new brand direction, we're executing a more disciplined channel and product segmentation strategy, shifting our mix And improving our assortment, which is driving the decision to clean up discontinued programs. The actions also include store exit costs as we Work to elevate our international retail experience and profitability and initiatives we're taking to further streamline operations, Lower cost and position the brand for a higher level of growth related investment. Turning to the balance sheet and cash flow.

Speaker 3

We continue to strengthen our balance sheet and increase our financial flexibility as we reduced inventory, Pay down debt, increase liquidity as well as amended our credit facility. We saw further improvement our inventory position as we continue to implement and build our capabilities around inventory management. For the quarter, inventory decreased 17% sequentially and decreased 29% or $620,000,000 as compared to last year. We're on track to achieve our goal and end the year with inventory below $1,500,000,000 We generated $155,000,000 of operating cash flow in the quarter, Bringing year to date operating cash flow to $287,000,000 we're on track to generate approximately $500,000,000 of operating cash flow For the full year, we paid down $144,000,000 of debt in the quarter $270,000,000 year to date. Our leverage was 5.5 times on a net debt to adjusted EBITDA basis, which was below our Q3 covenant of 6.75 times.

Speaker 3

We remain committed to using all of our free cash flow to pay down debt and we're on track to pay down more than $400,000,000 of debt this year. All of this has led to our liquidity position increasing to approximately $1,200,000,000 at the end of the 3rd quarter. Touching on our credit facility, we proactively amended the terms of our credit facility through the Q3 of 2025 To provide greater strategic financial flexibility as we remain focused on improving the core fundamentals of our business in a volatile High interest rate economic environment. I want to be very clear. This action does not foreshadow EBITDA declines going forward, Quite the opposite.

Speaker 3

Given our input cost visibility and cost savings initiatives, we expect EBITDA recovery and growth in the coming quarters. And now turning to guidance. We updated our full year outlook to reflect the ongoing macroeconomic headwinds continue to weigh on sales as well as our visibility to gross margin improvement, our strong cost discipline and the progress Our inventory reduction initiatives. With respect to sales, we now expect full year sales of $5,700,000,000 Of the $100,000,000 adjustment to the low end of our prior outlook, approximately $40,000,000 reflects a mark to market of 3 items. 1st, 3rd quarter actuals account for $10,000,000 2nd, FX for the second half of the year flipped from a tailwind in our prior guide to a headwind Which accounts for $15,000,000 And 3rd, our prior guide included a full year of sales from U.

Speaker 3

S. Hosiery. For the sale of this business at the end of the 3rd quarter, It is no longer in our outlook, which accounts for $15,000,000 We updated our full year adjusted operating profit to approximately $425,000,000 which is the low end of our prior guidance range. We continue to expect year over year gross margin improvement In the Q4 and expect to exit the year in the high 30% range as we begin selling lower cost inventory and we anniversary last year's manufacturing time out cost. We are also remaining vigilant with respect to SG and A expense given the challenging environment.

Speaker 3

We reiterated our full year operating cash flow guidance of approximately $500,000,000 given our profit outlook and our strong working capital performance, particularly Within inventory, and we continue to expect to pay down more than $400,000,000 of debt in 2023. With respect to other components of our full year guidance, we expect interest and other expenses of approximately $310,000,000 Tax expense of approximately $75,000,000 and adjusted EPS of approximately $0.12 So in closing, let me end With where I began, the team is doing a tremendous job. Over the last few years, we've accomplished a lot despite an Extremely challenging apparel environment. Our Innerwear business has returned to gaining market share. We're working to position our brands for long term profitable growth.

Speaker 3

We've made structural changes to our business, including segmenting our supply chain. We're taking out cost and driving efficiencies To help free up growth related investment, we turned the corner on gross margin and are on track to return to historical level As the inflation related headwinds are behind us, operating cash flow is returning to historical levels driven by a much improved inventory position. We're paying down debt and strengthening our balance sheet and we're exploring alternatives for our Global Champion business, All of which we believe positions us to drive shareholder value creation over the next several years. And with that, I'll turn the call over to T. C.

Speaker 1

Thanks, Scott. That concludes our prepared remarks. We'll now begin taking your questions and we'll continue as time allows. I'll turn the call back over to the operator to begin the question and answer session. Operator?

Operator

Our first question will come from the line of Jay Sole with UBS.

Speaker 4

Great. Thank you so much. Maybe first question, Scott, you touched on what changed in the guidance. You talked about macro. But if you could just dig in a little bit more and maybe elaborate on What the difference is between where you were guiding before and where you're guiding now, that'd be helpful.

Speaker 3

Yes, sure, Jay. Good morning. Appreciate your question. As you look at our Q4 guide, I think there's a few key takeaways. The important things we look at as we go into the Q4 We're holding operating profit to the low end of the prior guide.

Speaker 3

We also reiterated the gross margin extra rate in the high 30% range. It was going to be about 200 basis points over 3rd quarter and around 300 basis points over last year. We reiterated our cash flow of $500,000,000 and we're reiterated that we pay we're going to pay down over $400,000,000 of debt. So we I feel really good about the progress that we're making for the 1st 3 quarters of the year and we continue to expect those key metrics for the full year. We did adjust sales down to for the full year $5,700,000,000 Around half of that is Points I mentioned in my prepared remarks about just truing up for Q3 sales.

Speaker 3

FX, we were initially anticipating A tailwind that turned into a headwind for the Q4. And then the U. S. Surgery business, we sold that business at the end of the 3rd quarter. So we had previously had that in the full year guide, so we took that out.

Speaker 3

So I guess about half of that declined.

Speaker 5

Okay. And I'm going to

Speaker 4

ask one more, Steve. Just curious if you can elaborate on how you're thinking about the strategic alternative strategy for the Champion business. I mean, at what level do you think it's just worth to keep Following the strategy and trying to improve the fundamentals versus maybe going in other direction and what it would take you into another direction, that'd be helpful to know. Thank you.

Speaker 2

So good morning. In terms of the assessment, it's early. So we're really just getting started. I would tell you there's been a lot of interest from a lot of different global partners, but more to come on that and we'll keep you up in the loop as we go forward. In terms of the strategy, we feel good about the work that we're doing and where we're going.

Speaker 2

And we're confident that we're taking the right steps Moving forward. And we've made a lot of progress in terms of positioning the brand for growth, whether that's product segmentation, channel segmentation work we're doing, Rebuilding brand heat, we're starting to get a lot of momentum behind the Co Labs. We just did one with KISS the other night At Madison Square Garden with The Knicks, so things like that are making a difference in the business. Pinnacle accounts are responding. We're getting good feedback on our fall Sell in for next year.

Speaker 2

So we're building the fundamentals. It's not coming fast enough and we want to get to the P and L faster and we realize that. But We think we have a really good handle on how to build this global brand and the actions to take. And I think we're doing the right things. I think the team is moving quickly.

Speaker 2

So we're going to continue on the journey that we're on. We expect it to deliver results. We expect fallwinter next year to start Turn the corner on the business. So, we're still going to have headwinds for a period of time, but we like what we're doing and we think we're following the right approach.

Speaker 4

Okay, sounds great. Thank you so much.

Speaker 2

Thanks, Jeff. Thanks, Jeff.

Operator

Our next question will come from the line of Ike Boruchow with Wells Fargo.

Speaker 6

Hey, good morning, everyone. Two questions from me. Just On the Innerwear business, when you look out into next year, are there any potential retail partners that you guys have where besides destocking, there's any potential risk To more of a structural destock, there's been some chatter out there of certain types of Retailers out there based on shrink and issues that are out there that might be thinking about that. So I'm just kind of curious what your comment there would be. And then just on the balance sheet, so 5.5 times leverage today.

Speaker 6

I'm trying to go through the numbers for guidance, but the covenant does Step down from I think 6.75 this quarter to 5.25 and then 5 in the next two quarters. Like how are you guys thinking about How are you thinking about that and your ability to kind of remain below the covenants that you guys have? Thank you.

Speaker 2

Sure. Good morning, Ike. Thanks for the question. In terms of your first one around structural destock or change in the industry, my short answer is no. I don't see that coming.

Speaker 2

And actually, As I think about our business and the innovation that we're putting out into the market, the acceptance of that innovation has been really strong. And our customers have really leaned in with us and are taking that innovation on time at scale. We're also gaining space even for our core base business. So we're continuing to ship to that rate. Obviously, we need to manage POS with shipments and we work very closely With our partners to do that, but I feel like we've got really good momentum in this business.

Speaker 2

And there's headwinds in the category. There's headwinds in the broader macroeconomic market. But as I think about the key initiatives that we're doing here around innovation, aggressively going to market and gaining space, I I think we're in good shape and I think we're going to continue to see this business grow. I think our start from the beginning was reignite the brand, reignite Innerwear and I think we're starting to see that happen.

Speaker 3

Yes. Good morning, Ike. Thanks for your question. So on the covenants and we actually just completed a new amendment of our covenants, just in the last week. Some of the details are on the filing this morning, in our earnings release.

Speaker 3

We'll also have more details in our 10 Q filing later today. So with that factoring in that new amendment, we have plenty of cushion. And just a little bit of background on kind of our approach and thoughts around the amendment. The amendment was a proactive move, given the challenging and dynamic environment and market that we're in. Really, As we were thinking about it, really three things drove the decision.

Speaker 3

1 is about financial flexibility. Our number one priority continues is to invest in the business. We recognize the external environment is challenging. We want to make sure we have the flexibility to make prudent investments behind the brands, technology, To make sure it allows us to go on the right path for growth. And then the other thing to remember is important with the covenant calculation is the last 12 months calculation, right, which means We're dragging the inflation driven margin pressure from this year into the next few quarters in the last 12 months calculation for EBITDA.

Speaker 3

And then just the last point on it, I would comment on is the we just make sure that we are protected. Given the uncertainty around the interest In the consumer environment, we want to make sure we had plenty of cushion to navigate through the environment.

Speaker 7

Great. Thank you. Yes. Thank you.

Operator

Our next question will come from the line of Paul Kearney with Barclays.

Speaker 8

Hey, good morning. Thanks for taking my question. Two questions. My first one is, I was hoping you can give Some guidance into the cash flow outlook for into next year, just trying to normalize given the significant working capital Inflow that you had this year, how do we think about working capital next year? And I have a follow-up.

Speaker 3

Yes, sure. Paul, good morning. On cash flow, I can let me just step back and kind of talk about what we're seeing in 2023. To your point, Really seeing great working capital benefit this year. Like I mentioned earlier, we reiterated our $500,000,000 cash flow guidance for the year.

Speaker 3

Around 2 thirds of that was working capital driven, making great progress on inventory, down over $600,000,000 year over year. We continue to expect in fact be a little bit below $1,500,000,000 as we finish the year on inventory. But there's more upside beyond that. As we go into next year, we anticipate We have additional working capital benefit that we can drive. And it's also important to remember from a margin perspective as you go into next year, Again, just using that exit rate of gross margin in that high 30% range, just using consistent sales year over year, We're going to take $200,000,000 of cost out this year over year.

Speaker 3

So it will be a much more of a mix on the profit side than the working capital benefit. But again, we see both Really driving that.

Speaker 8

Okay. Thanks. And my second question is on the Champion business. And I know You've touched on the strategic actions, but I'm hoping for a little more detail on that. I guess, specifically, what are the changes within the product You're making within the channel segmentation and what are the changes within the assortment?

Speaker 8

Thank you.

Speaker 2

Sure. Yes, thanks. Thanks for the question, Paul. So a little more detail on where we're going and how we're doing it. We have a new team, new roadmap and a new brand purpose, which are all kind Overlaying all this, the key in the areas you're talking about, so product segmentation, channel segmentation.

Speaker 2

In a brand like this, you need to be really thoughtful about Which product goes into which channels and how you manage that? We didn't do that particularly well in the past, okay? And we're cleaning that up and we're fixing that, Meaning, there's certain product that has to go to certain accounts and there's other product that goes to other accounts. It sounds simple, but we weren't doing that particularly well and that hurt us The other thing with product is tying it more closely to the brand position, particularly the brand heritage And you're starting to see a lot more of that. That's one of the real clear comments we've gotten in our fall in our selling is you're going to see product That's more tied to the heritage of the brand, more uniquely champion that goes to market.

Speaker 2

And that's going to be different than it's been recently. And it's being well received and it's going to be a big difference. The other thing we're working on is global product, building global platforms. This is a global brand Between Europe and Asia and domestically, we have a really strong footprint around the globe and we have a huge opportunity To build global platforms, whether that's product design, whether that's fabric platforms, which we're consolidating, reducing Speed to market, all those things are making a really significant difference in how we're going to show up in the marketplace. We're going to manage this like a brand.

Speaker 2

We're going to manage it Leica Global brand and we're going to lean in with marketing behind it. Our campaign of Champion, what moves you is being well received. We're just getting started, But we're seeing traction with younger consumers and the product is going to match that campaign. So we're excited about where we're going. Lots of work to do.

Speaker 2

The team is grinding away, but we think we're working on the right thing. So we think it's going to make a difference for us as we go forward.

Speaker 4

Thank you. Thanks, Paul.

Operator

Our next question will come from the line of Tom Nikic with Wedbush Securities.

Speaker 7

Hey, good morning, guys. Thanks for taking my question. I wanted to ask about the strategic alternatives for Champion. I guess, I'm curious how intertwined is Champion with the supply chain, the manufacturing base, the systems and processes at Company, etcetera. Essentially, how easy or difficult would it be to kind of detach Champion from the rest of the operation?

Speaker 2

Sure. Good morning, Tom. Thanks for the question. It's really early in the process, obviously. So we'll see how it plays out over time and obviously we'll keep it looped in.

Speaker 2

The thing I would tell you is we've been doing a lot of work over the last couple of years on segmenting our supply chain. I've been talking about that And that's both by product line, by brand, by type of flow is really important, whether it's a fast term product or it's a long term replenishment product. We've been doing a lot of work on dividing that up, segmenting it, creating new capabilities as we go forward. So a lot has been done there. Fundamentally, we do not anticipate a lot of dis synergies, if we were to move ahead with this type of process, but it depends Whether we choose to go forward or not, but we feel like we can manage this very clearly.

Speaker 2

There's not a lot of dis synergies in the business and the supply chain is set up to manage Any choice that we decide to make going forward.

Speaker 7

Understood. And a follow-up on gross margins. I know it sounds like you were pretty confident in exiting the year at the high-30s. I guess, when we kind of think about like the puts and takes of gross margin, like are there other Factors that could cause gross margin to come in worse or better than that, Discounting or currencies or anything like that that would cause the gross margin to deviate from that high-30s run rate?

Speaker 3

Yes. Thanks for your question on the gross margin. So we have a lot of good visibility with gross margin into the 4th quarter. Again, we talked about this earlier that what's running through our supply chain today is those lower cost products In line with pre pandemic gross margin levels. When you look at the Q4, there was a couple of things to factor Yes.

Speaker 3

One is from the inflation side. We expect that going from a tail going from a headwind to a tailwind It's the inflationary cost. It's been a headwind for the 1st 3 quarters of the year that actually flips over to a tailwind of about 150 basis points In the Q4, so that's a big driver of the expansion in the gross margin. We also have to factor Doreen, if you remember last year we took time out of our manufacturing facilities. In the Q4, it was around a 2 20 basis Headwind last year, so that's a year over year benefit to us.

Speaker 3

So, filling those 2 again gives us that confidence. You're going to see a really Significant expansion in our gross margin from year to year. And then the last thing just as the puts and takes again volume and mix will play into that, but All of that combined would kind of get you to a really good confident that we're going to be about again 200 basis points over the Q3 and 300 basis points over the last year.

Speaker 7

Thanks very much and best of luck for the rest of the year. Thanks, Scott. Thank you.

Operator

Our next question comes from the line of Carla Casella with JPMorgan.

Speaker 9

Hi. Thank you for taking the question. I had some questions around the international business and specifically Australia. Can you just talk about, is the international business almost all Australia at this And, just kind of the trends in the market there?

Speaker 2

Sure. Good morning, Carlos. Thanks for the question. Yes. So let me just do a quick tour around the globe real quick and then I'll talk about Australia specifically.

Speaker 2

When you think about Q3, The market is tough around the globe, similar to the way it is here. Europe came in a little bit less than we thought. LatAm continues to be a strong growth opportunity for us. Asia's mix, Japan is growing really well, Not actually as high as we thought it was going to grow, but we're seeing good growth in Japan. In Australia, they are really being pressured by inflation And the pressures of interest rates right there.

Speaker 2

It's a society where consumers are very highly leveraged individually, so that impacts consumer spending. It drove lower traffic in our stores as well as there was a mix shift towards wholesale, which creates a headwind for us. But international is 1 of our largest international market sorry, Australia is one of our largest international markets. I feel really good about that business. We have leading brand positions there with Bonds and Bras and Things.

Speaker 2

Those businesses performed extremely well. The brands are strong, strong consumer response, strong go to market capabilities. Once we clear the macro headwinds there, which are primarily, as I said, I expect that business to recover very strongly and to continue to be a growth and profit driver for us.

Speaker 9

Okay. And is there is that business integrated with the U. S. At all or is it a business that you're using for sharing best practices? Just wondering if that's A core tied into the U.

Speaker 9

S. Or not?

Speaker 2

Yes, great question. The answer is yes, particularly on things like product design. So, Jay Newman, who used to actually be the leader of product design in Australia is now our global Innerwear product design lead, she's doing a fantastic job. And What you're seeing is a lot more product design move back and forth between Australia and the States, whether that's Our total support pouch product, some of the maiden form product, certain designs that they've used with bonds we've brought over and have launched inside So on a product basis, we are as integrated as we've ever been and we're getting a lot of good results out of that.

Speaker 9

Okay, great. And can I just ask one follow-up question on your you mentioned wholesale inventories? Can you give us a little more color by channel, Which channels might be a little bit heavy or light inventories? I'm thinking mass versus department store versus like a college, collegiate channel?

Speaker 2

Yes. I mean, I'm not going to break it out specifically by channel, because we just don't get into that level of detail. What I would tell you is It varies. And it varies by customer inside of channel. So not everyone is the same.

Speaker 2

And it also varies So I think Activewear is heavier than Innerwear. We feel good pretty good about our Innerwear position. And you can see that The actions we've taken on our inventory to match it, but it varies and I would tell you activewear higher than Innerwear. And we'll see how it Going into next year, but the retailers are certainly taking action as we are.

Speaker 9

Okay. Thanks a lot.

Operator

Our next question comes from the line of William Reuter with Bank of America.

Speaker 5

Good morning. My first question is a little bit of a follow-up on Carla's question With regard to is there any risk or channels that continue to destock? Could this continue to be A headwind, I feel like you had felt like the majority of that was done, but with sell through being soft across the industry, I was wondering if that's changed your perspective?

Speaker 2

So I don't see any risk of destock. It's always a matter of trying to match POS with shipments and I think we're doing a really good job with that. And Personally, I think our retailers are doing a pretty good job of that. So from an Innerwear perspective, I think we're good. And I don't I think the destocking and that those events that you Saw a year ago, I think that's all past us.

Speaker 2

And now it's just about managing the business tightly. We partner with the retailers to do that. In the Activewear space, there's still a lot of inventory in the channel and there's work still being done to push that through. That's not new to this time. We've been dealing with that for a while.

Speaker 2

And it's definitely a headwind on the business. But I don't think it's destock and activewear to work through the inventory that's in the market right now that will allow growth to return.

Speaker 5

Okay. And then just a follow-up for me. It seems like the product segmentation is a pretty Key component of the kind of returning the business to growth and being healthier. Will this be A pulling product out of channels or a transition to different product in those channels, Clearly, you've got some cool stuff going on like with Kith, that does have the halo effect that you described. But I guess I'm wondering whether off price, for example, You will just be changing the product that goes there or you will be reducing it?

Speaker 2

Yes. Good question. So think of it as a more disciplined management It's not necessarily about leaving this channel or that channel. It's about making sure that we're being very thoughtful And precise on which product goes where. We got a brand that plays really well in lots of different channels, whether that's all the way up in the Pinnacle account or whether That's in off price channel.

Speaker 2

But what we need to do is a better job of managing that, just like all of our competitors do. They're very specific on how they manage that, how they manage Which product goes where, we're going to just get a lot better at that than we've been in the past and we think that's going to open up a lot of opportunities for us.

Speaker 5

Makes sense. I'll pass it on. Thank you.

Speaker 2

Thank you, William.

Operator

That concludes today's question and answer session. I'd like to turn the call back to T. C. Robillard for closing remarks.

Speaker 1

We'd like to thank everyone for attending our call today and we look forward to speaking with you soon. Have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Hanesbrands Q3 2023
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