Hanesbrands' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Hanesbrands Inc. ( HBI)

Q3 2011 Earnings Call

November 2, 2011 4:30 pm ET

Executives

Charlie Stack – Executive Director, Investor Relations

Richard A. Noll – Chairman and Chief Executive Officer

Richard D. Moss – Chief Financial Officer and Principal Accounting Officer

William J. Nictakis – Co-Chief Operating Officer

Analysts

Robert Drbul – Barclays Capital

Susan Anderson – Citigroup Inc.

David Glick – Buckingham Research

Omar Saad – ISI Group

Ken Stumphauzer – Sterne Agee

Steven L. Marotta – CL King & Associates, Inc.

Andrew Burns – D.A. Davidson & Co.

Eric Beder – Brean Murray Carret & Co.

Scott Krasik – BB&T Capital Markets

Paul Simenauer – JPMorgan

Emily Shanks – Barclays Capital

Jessy Hayem – TD Securities Inc.

Presentation

Operator

Good afternoon, my name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands’ Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I’d now like to turn the call over to Mr. Charlie Stack, Executive Director of Investor Relations. Please go ahead, sir.

Charlie Stack

Good afternoon, everyone, and welcome to the Hanesbrands’ quarterly investor call and webcast. We are pleased to be here today to provide an update on our progress after the third quarter of 2011. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found in the Investors section of our hanesbrands.com website.

I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks are detailed in our various filings with the SEC, such as our most recent forms 10-K and 10-Q, as well as our news releases and other communications. The company does not undertake to update or revise any forward-looking statements, which speaks only to the time at which they are made.

We want to reiterate that in this inflationary environment, there are some aspect of our business that we intend to refrain from discussing in great detail for competitive reasons. Specifically, we will refrain from disclosing details regarding cotton purchasing practices, forward-looking cost position or forward-looking specific timing or amounts of pricing actions.

As always, with me on the call today is Rich Noll, our Chief Executive Officer, but due to our recent Executive announcements, we have two new attendees. First is Rick Moss, our newly promoted Chief Financial Officer, many of you on the fixed income side have know Rick for years, Rick was [forward] to getting to know the equity side deeply as well. We also recently appointed Bill Nictakis and Gerald Evans as Co-Chief Operating Officers. Going forward, we intend to rotate them on calls beginning with Bill today, and Gerald would join us on our fourth quarter call.

In terms of today’s agenda, Rich will highlight a couple of big picture theme. Bill will provide a sense of what is happening in the fields, our major businesses. And Rick will emphasize some of the financial aspects of our results as well as share his thoughts about how we can continue to maximize value Hanesbrands.

I will now turn the call over to Rich.

Richard A. Noll

Thank you, Charlie. Let me address three topics that I’m sure are on top of mind. Profits being above our expectations, sales being below, and how has pricing impacted our results. The top line answer for pricing being very well.

Third quarter profit results were very strong, our operating margin of 12.4% is at the highest level in our history. And our year-to-date EPS of $2.28 already exceeds 2010 full year EPS of $2.16.

Profit increases were driven by Innerwear, up $24 million to 44%. And Gear for Sports added an additional $13 million of profit. Profits also grew 10% in the rest of Outerwear, and 16% in our Direct to Consumer business.

Price, mix and cost control fueled significant gross margin expansions, and overcame higher commodity costs. Gross margins increased 360 basis points, leading to a 270 basis point increase in operating margin. With these results, we’re well on our way to having a record year.

Next, let me talk about pricing. Our approach, pricing to at least maintain operating margin is working, while units do in fact decline, they declined much less than price increases, and are driving good results for us, and our retail partners.

Let me highlight two categories that had some of our largest price increases, socks and male underwear. These categories grew 4% and 10% respectively in Q3. In fact it’s a great story, that further the retail sell through dollars are up nicely, and units are only down a few points. And actually price increase did dampen unit demand, in case it is mitigated by other tactical changes to measure up programs to drive sales and we’re extremely pleased with these results.

Our male underwear business is also performing very well. While units have declined, sales dollars are still quite strong, and even with the third price increase that was effective in late September, sell through data across our major accounts indicate the elasticity is at or better than our expectations. It is also driving good dollar comp for our retail partners.

And finally, the best indicator of our pricing strategy is working is, our retailers continue to increase our shelf space as we expect net gain 2012.

Lastly, in terms of our overall sales results for the quarter, sales growth was lower than our expectation with a major reason, especially for innerwear, due to the consumer macro trends and back-to-school coupled with retailers focus on their own inventories.

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