Investor disappointment with third-quarter projections overshadowed a strong second-quarter performance by Hanesbrands Inc. Wednesday, sending shares down more than 9 percent amid uncertainty about the future of cotton prices.
The Winston-Salem, N.C.-based owner of trademarks including Hanes, Champion and Playtex stuck by its full-year guidance but said third-quarter earnings “could increase as much as 30 percent over last year’s 63 cents” a share. That would put the low end of EPS expectations at 82 cents, 9 cents below the analyst consensus estimate of 91 cents.
On the company conference call, Richard Noll, chairman and chief executive officer, indicated that price increases stemming from higher costs for cotton and other inflationary pressures haven’t had a meaningful effect on sales.
“In terms of elasticity, while still early, preliminary results support our assumption that units fall off less than the rate of price increases,” he said. “Now looking ahead, we have instituted another price increase in the U.S. retail business for the fourth quarter, which should cover the increases needed as we head into 2012.”
Citing competitive considerations, Noll declined to discuss the company’s pricing strategies or its approach to the volatile cotton market, where prices have contracted in recent weeks after a long upward trajectory. Prices for 2012 cotton deliveries are considerably lower — down to $1 a pound in some cases from as high as $2 this year, according to Noll.
“In fact, we’re already starting to talk to retailers about how to make sure that lower cotton prices don’t adversely affect them from a negative [comparable sales] perspective and us as well, and we’re already developing programs to make sure we handle this volatility in a successful manner for both of us,” he said.
In the quarter ended July 2, net income rose 1.6 percent to $86.8 million, or 87 cents a diluted share, 1 cent above consensus estimates, versus profits of $85.4 million, also 87 cents, in last year’s quarter, which benefited from a lower effective tax rate. Paced by growth in the international sector and in its outerwear business, primarily from the acquisition last year of Gear for Sports, sales rose 13.9 percent to $1.23 billion from $1.08 billion a year ago. Gross margin expanded to 34.9 percent of sales from 34.8 percent a year ago.
Year-to-date net income increased 10.6 percent to $134.9 million, or $1.36 a diluted share, while sales were up 12.9 percent to $2.26 billion.
Shares finished the day at $30.24, down $3.02, or 9.1 percent, as the S&P Retail Index slipped 0.7 percent to 545.61, and the Dow Jones Industrial Average was down 0.1 percent to 12,571.91. Of the 169 equities tracked by WWD, Hanesbrands’ decline was the second largest on a percentage basis. Citi Trends Inc. was off 12.1 percent to $13.97 after reporting it expects its net loss for the second quarter ending July 30 to come to 60 cents to 70 cents a diluted share, after its same-store sales contracted 12 percent in both May and June and are expected to be down 11 percent for the full quarter.
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