Michael Dastugue
Chief Financial Officer at Hanesbrands
Thanks, Steve. I'm encouraged by the team's ability to adapt to the sales headwinds in the quarter and deliver operating profit and earnings per share that were in line with our expectations. I'm also encouraged by the continued progress we're making on implementing our Full Potential strategy.
While we expect the current operating environment to continue to weigh on our near-term performance, our longer-term fundamentals and value-creation opportunities remain intact. We're staying agile and we're focused on controlling the things we can control. This allows us to manage through the near-term challenges while, at the same time, make the investments and changes necessary to transform the business for the longer term. We're confident in our Full Potential strategy. We're making progress. And by leaning in during challenging times, we believe we will be in a more advantaged position once the macro environment stabilizes.
For today's call, I'll touch on the highlights from the quarter as well as provide some thoughts on our balance sheet and 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.
Looking at the specifics in the quarter, net sales declined 3% on a constant currency basis as compared to last year. Reflecting the 330 basis point headwind from foreign exchange rates, reported sales decreased approximately 7% to $1.67 billion. Although the macro headwinds are weighing on our near-term performance, year-to-date, sales are 6% higher than pre-pandemic levels or 8% higher on a constant currency basis. With respect to our Domestic segments. For the quarter, U.S. Innerwear sales declined 11% compared to last year. Relative to pre-pandemic, sales were 11% above 2019 levels. The decline versus last year was driven by the macroeconomic pressures weighing on consumer spending and inventory actions being taken by retailers.
I'll note, our Innerwear inventory at retail is actually below last year. However, as retailers tightly manage inventory challenges in other categories, we are experiencing a spillover effect that is negatively impacting near-term replenishment orders and pushing out the timing of certain retail events. These headwinds more than offset the benefits from our first quarter price increase and retail space gains.
Turning to U.S. Activewear. Third quarter sales were comparable to prior year. And relative to pre-pandemic, sales were 3% above 2019 levels. As compared to last year, we experienced continued growth in the collegiate channels and strong growth in the printwear channel for both Champion and the HanesBrands. This growth was essentially offset by declines in other channels, particularly for Champion.
Similar to the headwinds in our Innerwear segment, the macro pressures on consumer spending weighed on point of sale and higher Activewear inventory at retail drove order cancellations in the quarter. In terms of our International segment, constant currency sales increased approximately 5% over last year, driven by Champion growth in Europe; Innerwear growth in Australia; and the Other Americas. This growth was more than offset by Champion declines in certain Asian markets.
Turning to margins. Adjusted gross margin declined 460 basis points over prior year to 34.5%. Inflation in commodity costs and ocean freight represented a headwind of more than 400 basis points to our gross margin in the quarter. The time-out actions we're taking in our manufacturing facilities to reduce inventory represented an additional 100 basis points headwind in the quarter. These more than offset the year-over-year contributions from price increases, lower air freight usage and the cost savings we're generating from our Full Potential initiatives.
With more than 500 basis points of margin pressure in the quarter coming from these issues, we believe gross margins can return to or even exceed pre-pandemic levels over time as these headwinds ease. Our confidence is driven by the fact that we're already seeing in lower commodity and freight costs moving through our manufacturing network and we don't expect time-out costs to continue longer term once our inventory is aligned with demand.
With respect to SG&A, on a percent of sales basis, our adjusted SG&A expense of 24.4% was comparable to prior year. There is significant operating intensity across our organization as the global team managed expenses and realized efficiencies from our Full Potential initiatives. This allowed us to deliver operating profit in line with our expectations, while also investing in our brand marketing and technology initiatives related to our Full Potential plan. Adjusted operating margin was 10% for the quarter which came in near the high end of our forecast despite lower-than-expected sales.
Turning to the balance sheet. We made progress on our inventory reduction initiative. Inventory units, while still up over prior year, were down 6% compared to the second quarter as we began to take time out in our manufacturing network. With the majority of our time out planned for the fourth quarter, we're confident we can achieve our goal to end the year with inventory units below last year's level. At the end of the quarter, our net total leverage ratio under our secured senior credit facility was 3.9x on a net debt-to-adjusted EBITDA basis.
Given our current leverage ratio and the near-term outlook for the global operating environment, we proactively work with all of our banks to amend our credit agreement to provide us with greater near-term financial flexibility as we continue to implement our Full Potential strategy.
As detailed in today's earnings release, the maximum allowable leverage ratio was increased for the next 5 quarters and will revert back to 4.5x on a net debt-to-adjusted EBITDA basis for 2024 and beyond. While we will continue to implement our long-term investment strategy and we're pleased to have the additional near-term financial flexibility given the operating environment, I want to be clear that reducing leverage is a priority. We'll continue to take actions to mitigate near-term challenges. We positioned ourselves to return to more normal levels of cash flow next year by taking more aggressive actions this year to reduce inventory. And we're realizing cost savings from our Full Potential initiatives which should drive higher EBITDA as the inflation headwinds ease.
And now turning to guidance. The sales headwinds we experienced in the third quarter are expected to increase in the fourth quarter, specifically, this is the pressure on consumer spending in the U.S. and the spillover effect on near-term orders as retailers tightly manage their overall inventory levels.
Relative to our prior outlook, our reduced fourth quarter profit outlook is driven predominantly by the increased sales headwinds. However, it also reflects incremental pressure from foreign exchange rates and higher interest expense which are each impacting the guidance by $0.01 a share.
At the midpoint of our guidance range, we expect fourth quarter sales to decline approximately 19% as compared to last year. We expect gross margin to decline about 400 basis points versus prior year. Our outlook reflects an approximately 400 basis point headwind from commodity and freight inflation as well as an approximate 200 basis point headwind from time-out costs related to our inventory reduction initiative. These headwinds will offset the positive contributions from price increases and cost savings we're generating from our Full Potential initiatives.
Looking into next year, we would expect peak commodity and freight inflation to flow through our P&L in the first half of 2023. Recall as a manufacturer, our costs are capitalized on our balance sheet for approximately 2 to 3 quarters before rolling onto our P&L when the product is sold. Given the current prices for commodities and freight as well as our current inventory turns, we would expect these lower costs to begin flowing through our P&L in the second half next year, particularly in the fourth quarter.
With respect to the adjusted operating margins, at the midpoint, we expect fourth quarter operating margin to decline approximately 660 basis points as compared to the prior year. Although SG&A dollars are expected to decline more than $40 million year-over-year, we will still delever due to the magnitude of the expected sales decline. Lastly, with respect to cash flow from operations, we expect full year cash flow to be a loss of approximately $400 million. We expect to return to a more normal level of cash flow from operations in 2023, driven by improvements in working capital.
So in closing, let me echo Steve's comments. The current operating environment is clearly challenging, is weighing on our near-term performance. However, we are taking actions, remaining agile and staying focused on controlling the things that are within our control to manage through these challenges. Long term, the fundamentals of our categories and our business remain intact. We're confident in our Full Potential strategy. We're making the necessary investments and changes to transform the business for the long term. And by leaning in during challenging times, we believe we will be at an even more advantaged position once the macro environment stabilizes.
And with that, I'll turn the call over to T.C.
