Hanesbrands Inc. (HBI)

HBI 
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Industry: Consumer Services
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Hanesbrands, Inc. (HBI)

Q4 2011 and Year End 2011 Earnings Call

February 15, 2011 4:30 pm ET

Executives

Charlie Stack – Chief Investor Relations Officer

Richard A. Noll – Chairman of the Board & Chief Executive Officer

Gerald W. Evans, Jr. – Co-Chief Operating Officer

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

Analysts

Robert Drbul – Barclays Capital

Susan Anderson – Citigroup

Eric B. Tracy – Janney Capital Markets

David Glick – The Buckingham Research Group

Jim Duffy – Stifel Nicolaus

Omar Saad – ISI Group

Ken Stumphauzer – Sterne Agee

Steve Marotta – CL King & Associates

Scott Krasik – BB&T Capital Markets

Eric Beder – Brean Murray Carret & Co.

Carla Casella – JP Morgan

[William Brunner] – Bank of America Merrill Lynch

Presentation

Operator

At this time I would like to welcome everyone to the Hanesbrands’ fourth 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) Charlie Stack, Chief Investor Relations Officer you may begin your conference.

Charlie Stack

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 fourth 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 www.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 10K and 10Q as well as our news releases and other communications.

The company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made. With me on the call today are Rich Noll, our Chief Executive Officer, Gerald Evans, one of our two Co-Chief Operating Officers, and Rick Moss, our Chief Financial Officer. For today’s call Rich will highlight a few big picture themes, Gerald will provide a sense of what’s happening in a few of our major businesses, and Rick will emphasis some of the financial aspects of our results. I will now turn the call over to Rich.

Richard A. Noll

The Q4 results and the 2012 guidance we release today are clearly below our expectations and the high standards we set for Hanesbrands, with the same challenges that face others in our industry are weighing on our results. Importantly, for 2012 excluding our issues in outerwear which I’ll discuss in a moment, the rest of our businesses should grow both sales and profits on top of 2011’s record levels. We should quickly get through our challenges and then you should see the true earnings power of the company in the back half.

I will start by highlighting a few key themes followed by Rick and Gerald giving you more details. Specifically, I will summarize why we missed expectations in Q4, the solid state of our core businesses, the challenges we face in the wholesale channel of our outerwear business, and then conclude with a few comments concerning our renewed focus on cash flow and debt reduction.

First, we clearly missed our Q4 guidance due to an unexpected sales short fall. Operating profits missed proportionately and while EPS didn’t miss quite as much we find that little consolation. What happened was relatively simple, into early November both our retail sell through rates and retailer order pace was tracking to our expectations. However, in December while our sell through rates remained in line with our expectations the order pace from retailers slowed substantially as they became rather nervous about mounting inventories throughout their apparel departments. As retailers began to markdown and clear out their cold weather apparel we expect the order pace to return to normal and equal our sell through rates.

The December short fall aside, we achieved much in 2011. We instituted multiple double digit price increases, managed unprecedented inflation, and completed the build out of our global supply chain. With all that, we recorded record sales, record operating margins, record EPS, and reduced long term debt to a record low $1.8 billion.

Notably, our core business worked quite well. We implemented three price increases and competitors have followed. Elasticity was within our expectations and price gaps are now closing to what we believe are appropriate long term levels. Both male underwear and socks increased sales and profit in 2011, a trend we expect to continue in 2012. I am very proud of the hard work and dedication of our teams to make 2011 a record year.

Now, let me comment on our single biggest challenge in 2012 which is in our outerwear segment. As a reminder, outerwear is comprised of both active wear and casual wear products that we sell to both retailers and wholesalers. A portion of the wholesale channel is where we’re having issues. For simplicity, we refer to this as image wear. It’s here where we are seeing the impact of a hyper competitive pricing environment.

While small, in 2011 image wear performed well growing sales to 8% of the company with double digit operating margins. However, things changed in the fourth quarter. The two largest suppliers began fighting for unit share especially in the most promotionally driven sectors of this channel. This fight led to rapid price declines just as the industry was facing the highest cotton costs in history unfortunately creating a perfect storm.

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