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Hanesbrands Moves to Profit on Lower Sales

Margins up strongly on expense reductions in first quarter.

A reduction in expenses of more than $100 million allowed Hanesbrands Inc. to report a higher-than-expected profit despite lower sales in the first quarter.

In the three months ended March 30, the Winston-Salem, N.C.-based manufacturer of knitwear, innerwear and activewear posted net income of $51.4 million, or 51 cents a diluted share, 1 cent above the analyst consensus estimate of 50 cents. In the prior-year quarter, the firm reported a loss of $26.8 million, or 27 cents, 3 cents of which was attributed to discontinued operations.

Sales slipped 2.8 percent to $945.5 million from $973.1 million, just topping estimates of $945 million. Gross margin expanded 840 basis points to 34.6 percent of sales from 26.2 percent a year ago. Operating margin, just 1.1 percent in the 2012 quarter, reached 9 percent of sales.

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While all four of its business units — innerwear, activewear, direct-to-consumer and international — experienced some degree of sales decline based on both what the firm described as a “sluggish retail environment” and its exit from several imagewear businesses, operating profits improved at all segments except international. The largest business, innerwear, saw profits expand 68.7 percent to $89.7 million on a 2.4 percent sales decline, to $497 million, while both activewear and direct-to-consumer reported operating profits versus losses a year ago. ComfortBlend apparel, Smart Sizes seamless bras and Tagless apparel secured gains in retail space.

In innerwear, the company said bras and socks experienced midsingle-digit increases with men’s underwear up slightly.

Lower expenses figured prominently in the bottom-line and margin improvements. Cost of sales dropped 13.9 percent, to $618.2 million from $718 million, while selling, general and administrative costs fell 0.9 percent, to $242.2 million from $244.5 million.

“We are pleased with our ongoing strategic execution, which resulted in improved profitability in the first quarter and bolsters our outlook for the rest of the year,” said Richard Noll, chairman and chief executive officer. “Our operating margin was strong, our brands are commanding more retail shelf space and our product innovation is working. We have more margin improvement potential ahead of us.”

Based on the quarterly results, the company reaffirmed its full-year guidance for net sales of approximately $4.6 billion and earnings of $3.25 to $3.40 a share.

Shares Tuesday closed at $48, up 99 cents or 2.1 percent, but slid $2, or 4.2 percent, back to $46 in after-hours trading following the disclosure of results.