Michael P. Dastugue
Chief Financial Officer at Hanesbrands
Thanks, Steve. As previously mentioned, we faced an unexpected cyber event and external factors that impacted our second quarter performance and while we're not at all satisfied with our results, the near term headwinds we're facing do not change our long-term strategy or the work we are doing to transform Hanesbrands into a consumer-centric growth company. I'm encouraged by the progress we've made in implementing our full potential plan. In the quarter, we continue to increase investments behind our brands globally. We're rolling out new product innovation across men's and women's, with a robust pipeline that extends beyond 2023. We're effectively managing SG&A costs and finding cost savings opportunities. We're continuing to find ways to leverage our global capabilities, which improves speed to market and lowers cost. The macro related factors impacting near-term performance, should settle out over time. That said, our focus remains on controlling the things we can control and executing our long-term strategy. By leaning in to our growth related investments during challenging times, we believe, we will be even better positioned to gain market share and deliver sales and profit growth over the next several years.
For today's call, I'll touch on the highlights from the quarter as well as provide some thoughts on our outlook for the remainder of the year. For additional details on the quarter's results and our guidance, I'll point you to our news release and FAQ document. Overall, our second quarter results were below our expectations. This was driven by a combination of unexpected Cyber Event in late May and softer point-of-sale trends relative to our forecast. In total, we estimate the Cyber event negatively impacted the second quarter by approximately $100 million in sales, $35 million in operating profit and $0.08 in EPS. Absence of this Cyber Event, we estimate sales for the quarter would still has been below our forecast. However, adjusted operating profit and EPS would have both been at the high end of our guidance range. Looking at the specifics in the quarter, net sales were $1.51 billion, a decrease of 14% as compared to last year. Adjusting for the 220 basis point headwind from foreign exchange rates, constant currency sales decreased 11% from the prior year. Although the macro headwinds are weighing on our near-term performance, sales were up 75% on a two-year stack basis excluding PPE and year-to-date sales are 8% higher than pre-pandemic levels with growth across all businesses. For the domestic businesses in the first half of the quarter, sales were pressured by point-of-sales trends and product availability challenges. Unfortunately, this was magnified in late May due to the cyber event. It impacted our ability to receive and ship products, while at the same time we saw consumer demand slow as a result of the highest inflation in decades. We saw these trends across-- across both our Innerwear and Activewear businesses.
Overall, our international businesses performed relatively better in the quarter despite the Cyber Event. Constant currency sales declined approximately 3% as compared to prior year; although performance varied by region. Sales in Australia and Europe declined in low-single digits, in Latin America sales were up as we overlap COVID related headwinds in the year ago quarter and in Asia, sales were essentially flat with prior year as the intermittent COVID headwinds in China were offset by growth in the rest of the region.
And now turning to margins, adjusted gross margin declined 120 basis points over prior year to 37.8% driven by lower sales volume, input cost inflation, the incremental cost associated with the Cyber event and exchange rates. These headwinds, more than offset the benefits from business mix. The first quarter price increase in innerwear, cost savings and less air freight. With respect to SG&A on a percent of sales basis, our adjusted SG&A expense increased 215 basis points over prior year to 27.7%. The increase was driven by the deleverage of lower sales volume, as well as planned increased investments in brand marketing and technology. These more than offset cost controls and expense efficiencies from our Full Potential initiatives. This resulted in adjusted operating margin of 10.2% for the quarter. Our operating margin was in line with our forecast as the organization did a great job of managing expenses in response to the challenges we face while maintaining brand related investments.
Turning to cash flow and the balance sheet, we ended the quarter with nearly $1 billion of total liquidity, which included approximately $250 million in cash. Cash flow from operations was a use of approximately $210 million in the quarter, driven primarily by working capital used for inventory. Inventory at the end of the second quarter was up 19% over prior year in unit. On a dollar basis, inventory was up 37% due predominantly to inflation, lower second quarter sales and the early arrival of products in the third quarter commitments. Inflation alone represented roughly half of the year-over-year increase. We're confident in the quality of the inventory, as approximately 80% of the year-over-year increase is in replenishment innerwear products. That said. we did end the quarter with more inventory on hand than planned. We already have a number of initiatives underway to reduce our inventory and we expect by year-end that our inventory units will be below last year's level.
The reduction plans we have in place include temporarily reducing production shifts in our manufacturing facilities as well as strategic actions tied to our segmented supply chain initiative. On top of those, is our ongoing initiative to reduce SKUs. We have plans to further reduce SKUs by another 30% with some of the benefit coming this year. The impact from these actions is reflected in our updated financial guidance.
And now turning to guidance. Looking at the second half of the year, we reduced our sales and profit outlook to reflect the changes in FX rates, the short-term cost associated with our inventory reduction actions, as well as an assumption that slow consumer demand continues and the retail environment remains challenging. With respect to sales, although we expect the second half to be down low to mid single digits as compared to the prior year, sales are still expected to be well above pre-pandemic levels. We are continuing to invest in our brands and we are seeing good consumer engagement and we're launching new product innovation. Touching on the quarters, we expect better year-over-year sales performance in the third quarter as compared to the fourth quarter. This outlook is driven by initial back-to-school commitments and the shipments of our initial Champion fall-winter product sets.
Turning to margins, at the midpoint, we expect gross margin in the second half to decline approximately 350 to 400 basis points over prior year with our larger year-over-year impact in the third quarter as compared to the fourth. This is driven by three main factors. First, the impact from inflation. As higher input costs work their way up the balance sheet and on to our P&L. This is unchanged from our prior outlook. Second, the deleverage impact related to lower sales and third, incremental costs related to our actions to reduce inventory by year-end. Looking at our outlook from us for operating margins at the midpoint, we expect second half operating margins to be down slightly more than 400 basis points as compared to last year. The incremental pressure relative to our prior outlook is a function of the deleverage from lower gross profit dollars as we remain committed to investing in our brands and technology. We expect greater year-over-year impact in the third quarter as compared to the fourth and lastly, we expect to generate approximately $400 million in cash flow from operations in the second half, which is more than sufficient to support our full potential investments and our dividend. For the full year, we expect cash flow from operations to be essentially breakeven. The change relative to our prior outlook is due to lower profit outlook and the working capital impact from the higher than planned Inventory dollars. So in closing, I'll echo Steve's comments, the global operating environment remains challenging and it's weighing on our near-term financial results but the organization is not standing still. Our team is focused, we are executing our full potential growth strategy. We're controlling the things we can control and we're delivering innovation with a robust pipeline that extends beyond 2023. As we look forward, we are convinced, our strategy positions us to deliver revenue and profit growth with consistent cash flow over the next several years, and with that I'll turn the call over to T.C.
