Hanesbrands Q3 2021 Earnings Call Transcript

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Provided by Quartr
November 4, 2021

Key Takeaways

  • Hanesbrands delivered strong Q3 results, with revenue in line, operating profit and EPS above guidance, $315 million in operating cash flow and improved leverage to 2.6x.
  • Consumer demand remains very strong globally, leading to a $500 million increase in full-year revenue outlook; Champion sales rose 20% versus 2019 and U.S. Innerwear market share gained 140 basis points.
  • A diversified supply chain across 32 owned facilities and 29 sourcing countries drove 25% more production than planned, leaving inventory well positioned for Q4 and into Q1 2022 despite transport bottlenecks and inflation pressures.
  • The Full Potential Plan is on track with stepped-up brand marketing, e-commerce enhancements, a tech modernization to nine core platforms and the agreed sale of the European Innerwear business to sharpen focus and free resources.
  • Management reiterated Q4 guidance for ~15% sales growth over Q4 2019 and a 12% adjusted operating margin, raised EPS to $0.40–$0.45 and full-year cash flow forecast to $550 million–$600 million, and plans global price increases to offset inflation.
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Earnings Conference Call
Hanesbrands Q3 2021
00:00 / 00:00

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T.C. Robillard
T.C. Robillard
VP of Investor Relations at HanesBrands

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 third quarter of 2021. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document, and the 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. 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.

T.C. Robillard
T.C. Robillard
VP of Investor Relations at HanesBrands

These risks include those related to the impact of the COVID-19 pandemic and measures taken by governmental or regulatory authorities to combat the pandemic on our business and our operations, as well as the business and operations of the consumer, our customers, suppliers, business partners, and labor force. 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 release. 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 our consolidated financial results and guidance exclude all restructuring and other action-related charges and speak to continuing operations. Given the volatility of the comparisons due to the impact of the COVID-19 pandemic, we have focused our comparisons to 2019.

T.C. Robillard
T.C. Robillard
VP of Investor Relations at HanesBrands

Please note that unless otherwise stated, all comparisons are to 2019 results that have been rebased to reflect the move of our European Innerwear business to discontinued operations, as well as the exited C9 program at Mass and the DKNY intimate apparel license. Comparisons to 2020 results, 2019 results, as well as additional information, including the reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's news release. With me on the call today are Steve Bratspies, our Chief Executive Officer, and Michael Dastugue, our Chief Financial Officer. For today's call, Steve and Michael will provide some brief remarks, and then we'll open it up to your questions. I will now turn the call over to Steve.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Thank you, T.C. Good morning, everyone, and welcome. I'd like to begin by thanking the entire HanesBrands team around the world. This past year and a half has been marked by a constant stream of macro challenges. I've been amazed by our associates' dedication and resilience as they rise to any occasion, find solutions, and deliver results. As I've said before, our associates are our greatest strength. They're an integral part of the success of our Full Potential plan, and I want to recognize all their hard work. HanesBrands delivered strong third quarter results. Revenue was in line with our forecast, despite an unexpected lockdown in Australia that closed two-thirds of our stores for essentially the entire quarter. Operating profit and earnings per share exceeded the high end of our guidance range. We generated strong operating cash flow, and our leverage improved.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Today, I'd like to highlight four key takeaways from the quarter. Number one, consumer demand for our brands remains extremely strong around the world. Two, our diversified supply chain is a competitive advantage. We're in a good inventory position, and we believe we will continue to capture strong consumer demand. The manufacturing of our product has not been an issue. Three, our entire global team continues to effectively manage through the various macro challenges. This was evident in our strong third quarter results and our reiteration of our fourth quarter guidance. Finally, our Full Potential plan is on track. Despite all the global disruptions, we continue to effectively execute our long-term growth strategy. Let me expand on each of these highlights. Consumer demand for our products and brands remains strong.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Since our May Investor Day, we've increased our full year revenue outlook by more than $500 million and our profit outlook by $90 million. We continue to experience broad-based point of sale momentum, which is driving market share gains in both our Innerwear and Activewear businesses. For the quarter, Champion brand sales were up 20% compared to 2019, with growth balanced between the U.S. and international. Champion is all about being fun and inclusive. Consumers around the world love that Champion gives them the confidence to express themselves and to feel good doing it. As a result, Champion U.S. share position increased in the quarter in both men's and women's categories. In Europe, we continue to execute our Champion growth strategy with expansion in key categories, such as kids and footwear, increased space gains, as well as expansion into new geographies.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

In China, we continue to expand our consumer touchpoints. We're adding stores through our partners. We're broadening our product assortment with key pure plays, and we're expanding onto social e-commerce platforms. In U.S. Innerwear, year to date, our market share increased 140 basis points from 2019, with share and space gains across categories and brands, including Hanes and Maidenform. We're seeing strong consumer response and returns from our increased marketing investments, particularly in intimates. Our consumer need-based innovation strategy is delivering great new products. Investment behind our Maidenform Tame Your Tummy shapewear product, our Maidenform One Fab Fit bra, and our Bali EasyLite bras has driven increased market share as well as retail space gains and incremental distribution. Total Support Pouch continues to exceed our expectations.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

We have plans in place to expand the franchise globally and introduce additional product features to continue to win in men's underwear. Iconic brands, outstanding products, and effective marketing. It's a great strategy. It works, and we're seeing it play out in our Innerwear and Activewear businesses. Next, I'd like to touch on our supply chain, which is clearly demonstrating why it's a competitive advantage. Our diversification strategy balances production between Asia and Central America. We operate with a strong own manufacturing base and with long-term sourcing partners that are spread across 29 countries. This advantage approach has given us the resilience, flexibility, and visibility to successfully manage through the macro challenges over the past 18 months. Production across all 32 of our own manufacturing facilities was up and running throughout the quarter.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

As strong consumer demand for our brands has continued throughout the year, we have been able to increase production to keep up. By the end of the year, we expect we'll have made nearly 25% more units than our initial 2021 plan. This has allowed us to capture the stronger than expected demand all year. It also puts us in a good inventory position for the fourth quarter and into the first quarter of 2022 to continue to capture the consumer momentum in our brands. Making our product has not been a significant challenge for us, but we are not immune to the other macro challenges. Like the vast majority of companies around the world, we're facing worldwide transportation bottlenecks as well as higher levels of inflation. This is lengthening the time it takes to get product from our manufacturing facilities to our customers.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

It's also increasing costs. Our team has done an amazing job managing through the various macro challenges all year. This was evident in our strong third quarter results, especially when you consider the extended government lockdowns in Australia were not contemplated in our prior guidance. We're delivering cost savings and efficiency opportunities. We're leveraging our scale and our global footprint. We're also aggressively managing expenses without sacrificing the Full Potential investments that will drive growth. This gives us confidence to reiterate our fourth quarter guidance despite the increasingly challenged macro environment. Adding to our confidence, the consumer demand environment remains strong. We have the inventory to meet the demand, and consumers in Japan and Australia are gradually returning to stores as the government lockdowns have recently been lifted. Looking into 2022, we expect the broad-based inflation pressures to continue. This isn't anything that's unique to us.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Inflation is impacting everyone globally. We're aware of the pressures, and we're working to mitigate the impact. This includes raising prices globally as we know our brands have pricing power. We're being thoughtful in our approach and keeping the consumer at the center of our decisions. Plus, we're continuing to work on additional cost savings and efficiency initiatives. Turning to our Full Potential plan. We continue to execute our long-term growth strategy. Media and marketing investments behind our brands continue to ramp. We're encouraged by the returns we're seeing on these investments. In line with our Full Potential plan, we expect brand investment to continue to increase in the fourth quarter and again in 2022. We continue to improve the consumer experience on our e-com sites. We've added capabilities, we've increased site speed, we've improved inventory availability, and we've enhanced search functionality, to name a few.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

This has helped drive higher conversion rates and higher average order values on our sites globally. In addition, we're progressing on our technology modernization initiative. We plan to simplify our systems down to nine core platforms running on a single core technology backbone. This will help us globalize the business and reduce costs. It will drive better business insights and consumer connections, and it will improve decision-making, forecasting, and planning. We have completed the planning and scoping for this initiative and are beginning our phased implementation. We're also building a winning culture at HanesBrands. We continue to add talent to the organization. In the last several months, we've brought on a number of key leaders in our Champion business, our global brand marketing team, as well as in our HR organization.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

We've also initiated a voluntary retirement program to create more career growth opportunities for our associates and to generate savings that will be reinvested in the business. Lastly, we've taken an integral step in our Full Potential plan to simplify and focus our global portfolio. We signed an agreement for the sale of our European Innerwear business. We greatly appreciate our Hanes European Innerwear team's hard work, partnership, and understanding throughout this process as we drive greater resource and investment focus and improved operating speed. Our Full Potential plan is progressing as expected. We're encouraged with the results we're seeing, and we remain focused and committed to executing our long-term growth strategy. In closing, consumer demand for our brands remains strong. Our diversified and resilient supply chain puts us in a good inventory position to capture demand.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Despite macro challenges, we're delivering strong results while simultaneously executing our Full Potential growth strategy. With that, I'll turn the call over to Michael.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Thanks, Steve. We had a great quarter. I'm really pleased we were able to deliver on our increased guidance, especially in light of a number of headwinds, including the extended lockdowns in Australia and Japan, as well as higher transportation and inflation costs. The team did an amazing job managing through these challenges, and it is evident in our strong third quarter results. For today's remarks, I'll touch on some of the key highlights from the quarter, including our revenue drivers, profitability, and leverage, as well as provide additional insights on our outlook. As compared to 2019, sales increased 11% or $179 million to $1.79 billion. On a constant currency basis, sales grew 10%.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Champion brand sales globally increased 20% over third quarter 2019, with 22% growth in the U.S. and 19% growth internationally. Champion growth in the quarter was driven by strong consumer demand across channels in the U.S., continued growth in our European business, as well as the ramp of our partners in China. Switching to U.S. Innerwear, sales increased 25% over 2019, with double-digit growth in each of our businesses, including socks, kids, women's, and men's. Consumer demand across our Innerwear brand portfolio is driving strong point of sale trends and increased market share, while pent-up consumer demand is fueling category growth rates above historical levels. We're seeing momentum from our innovations and increased media investments, with particular strength in our Maidenform and Bali shapewear and bra products.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

With respect to our international Innerwear businesses, sales were consistent with 2019. We experienced strong growth in the Americas, while sales in Australia declined due to COVID-related lockdowns. Although two-thirds of our Australian stores were closed for almost the entire quarter, online growth in Australia was strong, as we were able to capture a portion of the lost store traffic by leveraging our omni-channel capabilities. Since the end of the quarter, the lockdowns have been lifted in both Australia and Japan. Stores are beginning to reopen in both countries, reflected in our fourth quarter outlook as an assumption for modest ramp-up of traffic. Gross profit increased $80 million or 13% compared to 2019, and gross margin expanded nearly 65 basis points to 39.1%.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Cost savings programs in our supply chain and benefits from business mix more than offset higher transportation and inflation costs in the quarter. SG&A deleveraged approximately 100 basis points, driven primarily by two factors. One, consistent with our Full Potential plan, we invested an incremental $25 million in brand marketing as compared to 2019. I'm pleased with the returns we are seeing on these investments, including improvement in our brand equity measures, better conversion on our e-commerce sites, as well as higher point of sale trends. Two, we experienced higher wage costs in our distribution centers, which is a challenge across many industries. Operating profit increased $20 million or 8% over 2019, and our operating margin declined by 40 basis points to 14.7%. Turning to cash flow in the balance sheet.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

For the quarter, we generated $315 million of cash flow from operations, bringing year-to-date operating cash flow to $527 million. With respect to inventory, we have strategically invested in additional inventory. This has allowed us to capture the stronger than expected demand all year, and it's put us in a good inventory position going into the first quarter to capture the stronger consumer demand momentum we're seeing in our products and our brands. Our performance is translating into improved financial strength. Leverage at the end of the quarter was 2.6x on our net debt to adjusted EBITDA basis. This is a significant improvement from 3.6x last year and 3.3x in the third quarter of 2019.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Additionally, we intend to refinance our senior secured credit facility in the fourth quarter, subject to market conditions. We plan to use the proceeds from this transaction and cash on hand to redeem the $700 million of 2025 senior notes, which have a 5 3/8% coupon and were issued in May 2020 in response to the global uncertainty caused by the COVID-19 pandemic. These senior notes carry a make-whole provision, which along with the transaction fees, is estimated to result in a one-time charge of approximately $45 million in the fourth quarter. Through this transaction, we expect annual interest savings of approximately $35 million, of which $4 million is expected to come in the fourth quarter. The expected interest savings and one-time charge are factored into our fourth quarter guidance. Now turning to guidance.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Similar to my prior remarks, my comparisons will be to 2019. I'll point you to our news release and FAQ document for additional guidance details. However, I would like to share a few thoughts to frame our outlook. We reiterated our fourth quarter guidance for sales and adjusted operating profit. We increased our adjusted earnings per share guidance due to the expected interest savings I just referenced and a lower tax rate. We increased our operating cash flow guidance. For the fourth quarter, our guidance for net sales is $1.71 billion-$1.78 billion, which at the midpoint represents 15% growth over fourth quarter 2019. Adjusted operating profit is expected to be $200 million-$220 million, which at the midpoint represents an operating margin of 12%.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

As we mentioned in our last call, we expect the headwinds from brand marketing investments and cost inflation to increase sequentially through the second half of this year. This outlook has not changed. With the ongoing disruptions in the global transportation environment, we're seeing incremental pressure from higher freight costs, particularly ocean freight, as well as higher labor costs in our distribution centers. Despite the incremental pressure in freight and transportation costs, we're comfortable maintaining our adjusted profit and margin outlook. We've identified additional efficiencies and savings opportunities in the quarter to be able to offset these higher costs. With respect to adjusted earnings per share, we increased our fourth quarter range to $0.40-$0.45 to reflect the expected $4 million of interest savings and lower than expected tax rate.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Despite the strategic inventory investments I spoke about, we raised our full year operating cash flow outlook to $550 million-$600 million to reflect the better full year profit performance. Touching briefly on 2022, given we are in the middle of our planning process and the global operating environment remains fluid, we are not providing specific guidance for next year at this time. However, we wanted to highlight a couple of items as you think about next year. First, the current environment remains very challenging. Like the vast majority of companies around the world, we expect broad-based inflation pressures to continue into 2022. Second, we are working on initiatives in an effort to mitigate these pressures. We're looking at cost reduction and productivity initiatives.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

We are also raising prices globally while being thoughtful in keeping the consumer at the center of our decisions. Third, our Full Potential plan remains on track. We're pleased with the results we're seeing, and we're committed to maintaining our growth-related investments. We'll provide more details on 2022 guidance on our fourth quarter call. In closing, I'd like to echo Steve's comments. Demand for our brands remains strong. We believe we are well positioned to capture this demand given our investments in inventory and marketing. Despite macro challenges, we're delivering strong results while simultaneously executing our Full Potential growth strategy. With that, I'll turn the call back to T.C.

T.C. Robillard
T.C. Robillard
VP of Investor Relations at HanesBrands

Thanks, Michael. 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

As a reminder, If you would like to ask questions at this time, please press star then number one key on your touchpad telephone. To withdraw your question, press the pound key. Please stand by as we compound our Q&A roster. Our first question comes from Omar Saad with Evercore.

Omar Saad
Omar Saad
Senior Managing Director at Evercore

Thank you. Good morning. Appreciate the update. I guess I'd like to focus around the activewear to wear commentary you made. You know, obviously, innerwear is incredibly strong. But you know, if you could just elaborate on the commentary on activewear, the activewear category. It's not something we've heard from other companies. You know, along those lines, you know, how do you think about Champion coming out of COVID? Are there any signs that Champion is experiencing any slowdown post that kind of COVID comfortable Reverse Weave sweatshirt trend? Thanks, guys.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Thanks, Omar. Good to hear from you. So let me talk about Activewear a little bit, and then I'll jump into Champion. I feel really good about the business, quite frankly, and overall, don't see any trend change. Consumers are definitely seeking the product. We do still have a headwind in our Activewear business around sports college licensing business as that channel was pretty conservative coming out of COVID to open up this year, but we expect that to continue to grow. While we're not back to 2019 levels in that channel yet, we are above 2022. I think that's gonna continue to grow, and I think there's big opportunities for us in that business. In terms of Champion, I see it accelerating.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

I don't see it slowing down at all coming out of the COVID-19 timeframe. Certainly had a good quarter, up 20%, versus 2019. A lot of momentum around the globe. We are, you know, continuing to pick up new doors, gaining space, adding new categories. You know, the footwear growth in Europe is really encouraging. Our kids business in Europe, really encouraging. We're seeing the same thing, in the U.S. You know, when we just launched our, Reverse Weave Week, which is kind of really celebrating the iconic Reverse Weave platform that we have, really strong consumer engagement that is, you know, introducing some consumers, quite frankly, to Reverse Weave and then reengaging others at the same time. The response was really strong.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

The innovation that we're putting out in Champion, the latest thing we just put out is an enhancement to our Soft Touch innovation in bras and leggings. It's doing extremely well. It's gaining new space. I feel really good about the Activewear business. We gotta get the college bookstore business going again, but Champion has a lot of momentum, not only domestically but globally, and we expect it to continue to only increase as we go forward.

Omar Saad
Omar Saad
Senior Managing Director at Evercore

Thank you, guys. Thank you.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Thank you.

Operator

Our next question comes from Susan Anderson with B. Riley.

Susan Anderson
Susan Anderson
Managing Director, Senior Equity Research Analyst at B. Riley

Hi. Good morning. Nice job on the quarter. I was wondering if maybe you could talk about your own online businesses. I'm wondering if you're seeing kind of an increase in growth there as you've revamped your sites, particularly with the new Champion site.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Sure. Good morning, Susan.

Susan Anderson
Susan Anderson
Managing Director, Senior Equity Research Analyst at B. Riley

Morning.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Our digital business is one that it's growing well. If you look at Q3, the online, you know, total online, including retailers.com versus 2019, we're up 62%. Our own sites are up 50%. There's really good growth there and volume. That said, I know we have work to do to continue to improve there. I'm pleased with the progress the team is making, but I still think it's a huge upside for us. We're underdeveloped still. We're adding new capabilities. Our inventory availability is improving. Search functionality is getting a lot better. We're seeing some, what I call some really strong green shoots in the performance of the business as average order value and conversion continue to go up globally. We have work to do.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

I think I look at it as all upside for us as we continue to get better and continue to improve the business, but I'm encouraged with the growth that we're seeing right now.

Susan Anderson
Susan Anderson
Managing Director, Senior Equity Research Analyst at B. Riley

Great. That's good to hear. Just if I could add one follow-up. I'm wondering if you can give an update just on your capital allocation priorities. Your cash balances are strong. It's nice to see the increase in free cash flow expectations. Just curious

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

How you're thinking about returning cash to shareholders if you'll start to repurchase shares again? Thanks.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Hi, Susan, it's Michael. Yeah. No, it's something we're definitely talking a lot about. Clearly, it's a very important part of our full potential plan. I think when you look at where we are today, I think we're, you know, invested in the business. We're paying a healthy dividend. As you probably also saw in the release, you know, I called out in my comments, we're working on a debt retirement. You know, we're working through refinancing our credit facility. You know, what we're gonna do is, you know, call the five, three, eight notes, you know, using both, you know, refinancing plus cash. When you look at that, you know, I think that's a really strong step forward for the company.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

You know, I think the other piece is, you know, Steve called out in his comments, right? You know, we're on trend to generate $500 million more in sales and $90 million more in profit than what the organization thought we would be at the beginning of the year. There's clearly a number of things that we can do here. We're working through the financial outlook for 2022. As part of that, clearly, we need to, you know, lay out our long-term capital allocation strategy. I would expect that when we're back together here in three months for our fourth quarter call, we'll be able to lay that out with a little more detail and insight.

Operator

Our next question comes from Michael Binetti with Credit Suisse.

Michael Binetti
Michael Binetti
Managing Director at Credit Suisse

Hey, guys. Good morning. Thanks for all the updates here. I do wanna ask you a little bit. I know you don't wanna guide us on 2022 today, but maybe thematically. I know that you mentioned there's gonna be cost inflation that extends through next year, and there's some pricing. Maybe just some thoughts on the timing of how you see that cost inflation working through the P&L. I know you guys have lead times and have some visibility there versus the pricing you might be able to take. I'm wondering if there's a timing mismatch there at all to think about.

Michael Binetti
Michael Binetti
Managing Director at Credit Suisse

In particular, the reason I'm thinking about that is because I know you have a really tough compare in the first quarter, as you anniversary a lot of the success you had in the Innerwear business, specifically last year. I'm trying to think, Steve, about how you're approaching that on Innerwear. Maybe you could speak to, you know, I guess, cost versus pricing would be helpful on timing, but then also just, you know, category share gains that you're looking at for early 2022 that can help you with that big hurdle.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Sure. Let me start. I'll talk a little bit about the category early in 2022 and a little bit what we're doing in pricing. Then, Michael, I'll let you talk a little about timing on costs and things like that. You know, when we go back a year ago, basically, coming out of our Unvarnished Truth session, you know, we really pegged Innerwear as roughly a 1% growth category. Quite frankly, we were losing share at that time. As part of our plan, we really laid out in May that, you know, we are committed to a pivot, and we're gonna get this Innerwear business growing again. Focusing on the consumer, we've gotta drive more innovation than we have historically done and increasing investments in our brand. I feel like we're on a good path to doing that.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

When you look at Michael, this next year, what are we gonna grow? If you look at the category this year, the category this year is gonna grow about 25%. Now, our business in the U.S. is gonna be up 35% when you back out PPE. We feel really good about our performance. That said, I don't think this is 25% growth business going forward, and I know you don't either. It's gonna naturally moderate over time. Our goal in that space is to continue to grow faster than the category and continue to take share. I feel like we're really well positioned to do that. Exactly what the category growth's gonna be next year, I don't know, but I just know that we're gonna grow faster than the category as we go forward.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Part of that in terms of managing headwinds is gonna be your point on pricing. As we mentioned, we are gonna take price globally in 2022. We actually have a plan in place. We're executing that plan already. It will be broad-based across brands, channels, and product lines. But of course, and Michael, you mentioned this in your comments. We're gonna do it thoughtfully. We're gonna keep the consumer in mind. One of the key components of our plan is consumer centricity and making sure that we understand where we are from a competitive standpoint, partnering with our retail partners. Throughout it, we're gonna continue to gain share. I know we have the pricing power within our brands.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

If you think about our brand portfolio, we've got either category leaders or we're positioned in really fast-growing categories that are at least high demand, the Champion brand growing very quickly. We've got good retail partners. And there's different ways of doing pricing, right? There's absolute pricing. There's mix. There's pack size. So we're gonna pull a lot of different levers on pricing to make sure that we're offsetting the cost inflation that we're seeing as much as we can, but also keeping our eye on growth. And that's part, key part of our plan, and we're not gonna give up growth as we go forward into Q1. Michael, I want to let you talk about the timing of costs and how you think they're gonna flow through.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Sure. Yeah, no, I mean, I think clearly, you guys are, you know, seeing this across, you know, the entire industry, right? There's the transportation cost is probably the largest impact as we're currently, you know, looking at, you know, the business. You know, we've got ocean freight rates up, in some cases, 400%-500%. We're also doing more air freight than what we would normally be doing, because of in-transit times. There are some commodity prices, you know, clearly cotton and some of, you know, oil, et cetera, that have gone up. We saw some of that in Q3. You'll see some more of it definitely in Q4, and that's reflected in our guidance. You know, I do think our supply chain team has done a nice job trying to offset these.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

I think you saw that in our Q3 results. I mean, you know, whether it's just traditional productivity improvements, you know, raw material utilization, you know, they've been working on programs to reduce overhead over the last couple of years. Done a nice job there. They've been internalizing production. I think one of the things that we've been talking more about and doing a little bit of, and I think there's more opportunity, is consolidating our third-party suppliers and really leveraging those things. When you combine that with the fact that, you know, Steve and the team, you know, almost a year ago now came up with the, you know, program for lifecycle SKU management, reducing the number of SKUs by over 20%.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Clearly that gives the organization a lot more flexibility when it comes to managing costs. You know, there are gonna be pressures. You know, that's why we wanted to make sure we're calling that out. You know, we're working on a number of things to try to offset it.

Michael Binetti
Michael Binetti
Managing Director at Credit Suisse

Great. If I could ask just one follow-up on that. I guess, Steve, how do you land this? If you look at next year, we've heard a couple of other apparel companies say, "Look, there could be a mismatch in some of the lapping some of the strong demand from 2021 with, you know, we didn't have time to bring back the investments that we wanted to, so we'll see some cost pressures too into 2022." I mean, as you land this, can 2022 be a year in line with the algorithm that you laid out at the Investor Day?

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Well, you know, as I said, we're not gonna give specifics on 2022 as we go forward, but here's what I would tell you is, I think the actions that we laid out on Investor Day are gonna continue. One of the things that I'm adamant about is continuing to invest behind our brands and do that. We've done that in Q3. We're gonna do it in Q4. We plan to continue to do that as we go forward, despite the headwinds. The I will not say financial algorithm. The operating algorithm that we put in place is gonna continue next year. Do I think it all the disruption, everything changes our view of our Full Potential plan in the long term? No. We're confident we can continue to deliver against that Full Potential plan.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

The operating algorithm is in place. It's gonna be working. We're dialing up the things that Michael talked about. We have to find more cost savings and get more efficiency, but the fundamental way we're approaching the business, the way we're gonna operate underneath the Full Potential plan won't change as we go forward.

Operator

Our next question comes from Jim Duffy with Stifel.

Jim Duffy
Jim Duffy
Managing Director at Stifel

Thank you. Good morning. Thanks for taking my question. Guys, among my client base, there's a lot of concerns around cotton costs for HanesBrands. You, you've spoke to inflation broadly. I know cotton exposure is likely a smaller portion of your cost of goods and fiber usage than many expect. Can you size your cotton exposure directly and setting freight aside, maybe provide a view on what you're seeing for product costs as we look into 2022?

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Yeah, sure, Jim. How are you? Good morning. Good to hear from you. You know, cotton is certainly important to us, but what I would say is this organization knows how to manage it extremely well. When we look at, you know, the prices, we're locked in into the second half of next year, so we have good visibility to what it is. As I said, this company knows how to do it extremely well. We dollar cost average our direct purchases, so we'll always be just below, you know, average price for the year. When you think about cotton, you mentioned this, you know, it represents kind of high single-digit on percent of COGS for us.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

There's a lot of other things that quite frankly are bigger cost headwinds to us as we go forward. We're managing it closely and buying as we go. We think we can manage it well. As I said, we have good visibility beyond the midpoint of next year as to what it's gonna be, and we're focusing on all of our cost base to make sure that we can continue to deliver the margin commitments that we're gonna make.

Jim Duffy
Jim Duffy
Managing Director at Stifel

Great. Thanks for that, Steve. Just one more, if I may. Can you speak to the current state of channel inventories relative to sell-through trends? Has the channel caught up with the strong consumer demand?

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Not completely. It's interesting when you look at our situation and where we are. Definitely consumer demand is outstripping the total capacity of the entire supply chain system right now. That said, we have the inventory that we need. Our challenge is to continue to get it into the right place at the right time. Our manufacturing plants are doing extremely well around the globe. You know, one of the things that we think is an advantage for us is the diversification of our supply chain around the globe. Good balance, Eastern Hemisphere, Western Hemisphere, 32 facilities. They've been running extremely well. You know, Michael mentioned this earlier. We've been able to produce, or we're gonna produce 25% more units this year than we planned at the beginning of this year. We're producing a lot of product.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

We have to get it into the right place at the right time. We have more in-transit inventory than we would normally have. You know, right now, about 30% of our inventory is in transit. So we think we have the right inventory, the right amount of inventory, the right seasonal inventory. We're still working on getting the right place at the right time. One of the things that I feel really good about going into Q4 and going into next year is we're gonna have the inventory that we need. We just got to continue to pump it through the pipeline at the right rate to make sure we can meet the continually increased consumer demand. If we had a little bit more in the right place, we would've sold a little bit more in Q3.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

There's no doubt about that. The demand is there.

Operator

Our next question comes from Ike Boruchow with Wells Fargo.

Will Gaertner
Will Gaertner
Equity Research Analyst at Wells Fargo

Hi. Good morning, guys. This is Will Gaertner on for Ike. I just wanted to dig a little bit more into the Champion business. Can you just sort of size up, you know, what the penetration is in, you know, the U.S. versus Europe versus China? And in China, are you guys seeing any sort of...

Will Gaertner
Will Gaertner
Equity Research Analyst at Wells Fargo

Pushback and nationalism against the brand as some other athletic brands are seeing.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Sure. In terms of the business, Champion has a good global footprint. Obviously, the U.S. is the biggest part of the business right now. Our Champion Europe business continues to grow and is doing extremely well. We're kinda just getting started in Australia, and I have high expectations for the business over there over time. Growth has been really good. I was really pleased with the 20% that we put up globally this past quarter versus 2019. The business continues to run extremely well and picking up all kinds of new space. There's a lot of momentum behind the innovation. We have great, strong retail partnerships. Champion.com is, again, a huge upside for us.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

The point I was making earlier about e-com and digital, I have high expectations for champion.com and what it can do for us over time. In terms of China, no pushback. Our business is running well. Our partners are doing a really nice job. We continue to ramp up stores. We have over 300 doors right now. Business is growing really well. We're up 140% versus the 2019 number. We feel good. What I feel good about is it's the growth is balanced between men's, women's, kids, both physical and e-com business as we enter new platforms there.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

We have not run into the pushback against our brand and continue to think that business presents a lot of opportunity for us.

Will Gaertner
Will Gaertner
Equity Research Analyst at Wells Fargo

Great. Thank you.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Thank you.

Operator

As a reminder, if you'd like to ask a question at this time, that is star then one. Our next question comes from Carla Casella with JPMorgan.

Analyst at JPMorgan

Hi, good morning, and congrats on the quarter. Just a couple quick ones from us. This is Mike on for Carla, by the way. Was curious if you guys had a amount of proceeds that you're expecting from the European Innerwear sale and whether or not that completes the strategic review. Then second, you know, margins came in pretty good. We're kinda curious on the inflation front. I know you guys have spoken to it a little bit, is if you could give it a little bit of color on what amount came from labor, materials or and I think it was also mentioned oil and airfreight. Just get a better sense of what's really driving any sort of inflation you're seeing. Thanks again.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

Thanks for the question. Let me start with our European Innerwear business. You know, over a year ago, when we started our deep dive assessment of the entire business, what we called our Unvarnished Truth, we came to that exercise, and one of the key tenets and components of our business was to focus our global portfolio and simplify our business overall. Part of that was about the European Innerwear business, and we thought that that was a business that we didn't want to drive investment over time. We thought we could spend our capital, our management time and resources in other areas of the business to drive greater return. We started the sale business.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

We are pleased to announce the agreement with Regent to sell the business, and we think it allows us to move on to think about investment where we can drive higher returns for the business over time. Michael, you wanna talk a little bit about cost and

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Yeah.

Steve Bratspies
Steve Bratspies
CEO at HanesBrands

How we see it?

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Yeah, no, I think clearly, you know, there's a number of different things driving cost pressure. You know, I touched on the transportation cost 'cause probably on a percentage basis, it's probably up the most significant. But clearly, there's pressure on cotton, there's pressure on oil, there is pressure on wages, whether it's globally in manufacturing or whether it's here in the U.S. as it relates to our distribution. You know, most of the things I just spoke about clearly impact cost of goods sold, distribution impacts SG&A. You know, it's across a number of different fronts. As you can also probably appreciate, we had anticipated this, and this was factored in when we were together three months ago. We probably had a little bit of timing shifts.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

There's probably a little bit more that we anticipate hitting Q4 now versus what ended up hitting Q3, so that helped us. That's why we part of the reason why we were better on the margin in Q3. Q4, we expect there to be more pressure as that inventory starts to roll through the P&L from a cost of goods sold perspective. And there will be as we said, there will be pressure into 2022. I think when you think about the initiatives that we're working through on, you know, productivity, better utilization of material, et cetera, all the different things I spoke about a few minutes ago, I think we have a pretty good plan to try to, you know, work through offsetting as much as we can.

Michael Dastugue
Michael Dastugue
CFO at HanesBrands

Then clearly from a business perspective, Steve spoke about price and some of the things that we're working on there. More to come when we get together in Q4.

Analyst at JPMorgan

Great. Thank you very much. Best of luck.

Operator

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

T.C. Robillard
T.C. Robillard
VP of Investor Relations at HanesBrands

I'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.

Analysts
    • Jim Duffy
      Managing Director at Stifel
    • Michael Binetti
      Managing Director at Credit Suisse
    • Michael Dastugue
      CFO at HanesBrands
    • Omar Saad
      Senior Managing Director at Evercore
    • Steve Bratspies
      CEO at HanesBrands
    • Susan Anderson
      Managing Director, Senior Equity Research Analyst at B. Riley
    • T.C. Robillard
      VP of Investor Relations at HanesBrands
    • Will Gaertner
      Equity Research Analyst at Wells Fargo
    • Analyst at JPMorgan
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