Ladies and gentlemen, thank you for standing by, and welcome to the Hanesbrands’ Second Quarter 2020 Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded.

[Operator Instructions] I'd now like to hand the conference over to your host today, Mr. T.C. Robillard, Chief Investor Relations Officer. Please go ahead, sir..

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 second quarter of 2020. Hopefully, everyone has had a chance to review the news release we issued earlier today.

The news release, updated FAQ document and a 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.

These risks include those related to the impact of the COVID-19 pandemic and measures by governmental or regulatory authorities to combat the pandemic on our business and 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 releases. 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, exclude all restructuring and other action related charges and expenses. The use of the term PPE relates to our personal protection garment business including face masks, face coverings and gowns.

Also please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the exited C9 Champion program at Target and the DKNY intimate license. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release.

With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer. For today' call, Gerald and Scott will provide some brief remarks, and then, we'll open it up to your questions. I will now turn the call over to Gerald..

U.S. Innerwear, U.S. Activewear and international. Point-of-sale trends improved sequentially through the second quarter in all of our key geographies, with the positive momentum carrying into July, as consumers settled into new routines, stimulus initiatives were rolled out, and retail doors reopened around the world. In fact, point-of-sale in our U.S.

Basics and Champion businesses in May and June exceeded pre-COVID levels. In U.S. Innerwear, point-of-sale trends accelerated through the quarter. Moving from down 29% in April to up 8% in May and up 11% in June.

We experienced strong momentum in our Basics business with mid-teens point-of-sale growth, yielding more than 300 basis points of market share gains in the quarter.

Within our Intimates business, point-of-sale returned to essentially flat in June and improved to up 3% in July, regaining its pre-COVID momentum as the mid-tier and department store channels reopened. We experienced a similar trend in our Champion business within the U.S. Activewear segment.

In the quarter, Champion point-of-sale accelerated from down 14% in April to up nearly 40% in May and up more than 70% in June as consumers continued to actively seek out the brand, particularly within the online channel.

With store reopenings underway in our International business, we saw monthly progression within our Innerwear businesses in Europe and Australia as well as within our Champion businesses in Europe and Asia. Strength in our Online business continued globally in the second quarter, with sales up more than 70% over prior year.

We experienced strong growth across our key regions in the quarter, with triple-digit online growth at some of our largest customers and nearly 200% growth on our newly enhanced champion.com website. Within our Apparel business, which excludes PPE, online represented over 30% of total sales in the quarter.

We are encouraged by the strong POS trends, which we believe points to the improving shipment and revenue trend in our Apparel business as we move through the second half and into next year. Turning to the second highlight of the quarter. Our newly created PPE business generated over $750 million of revenue.

This was well ahead of our initial expectation as we benefited from additional government contracts for both mask and reusable gowns, and we were able to fulfill demand for a number of businesses. We recently launched our consumer PPE facemask business at retail.

We expect to generate more than $150 million of additional PPE revenue in the second half of the year. Looking forward, we continue to believe this consumer product line represents a meaningful ongoing business opportunity. The third highlight of the quarter was cash flow, as we generated $65 million of cash flow from operations.

Year-to-date, operating cash flow was $40 million better than last year. With the majority of retail doors closed for half the quarter, this performance speaks to the cash-generating power of our model and the discipline of the organization to aggressively manage operating cost and working capital.

We continue to expect to generate positive operating cash flow for the second half of the year. And finally, in terms of liquidity, we said on our last call that our focus in this environment was on managing cash while positioning the company to be able to take advantage of opportunities.

This focus allowed us to capture stronger-than-expected demand for our products in the quarter as well as maintain our dividend. We ended the quarter with $1.8 billion of liquidity, which we believe provides us ample capital to maximize our operating flexibility and positions us to grow the business going forward.

Looking ahead, there remains uncertainty about the extent and pace of reopening economies in the midst of COVID-19, and we are planning accordingly. Absent any rollbacks of store reopenings, we expect year-over-year revenue trends in our Apparel business to improve sequentially in the second half. Our core brands are healthy.

We are gaining market share. Point-of-sale trends remain strong. Our back-to-school and holiday plans are set and initial spring 2021 bookings of Global Champion are up meaningfully over prior year in each region.

We believe the positive underlying trends in our business, both prior to and during the pandemic, positions us for growth in a post pandemic environment. So in closing, we delivered a strong quarter in a very challenging global environment. Momentum is building in our Apparel business, and we believe we have ample liquidity.

We believe our diversified global business model continues to position us to drive growth and take advantage of opportunities over the next several years. Before I turn the call over, I'd like to take a moment to wish those of you from the investment community, the best in the years ahead.

I've enjoyed getting to know you and exchanging points of view over the years. To the Hanesbrands team, it's been an honor to be part of the HBI family for so many years. Together, we built a company and successfully expanded it to be a global leader in our categories.

These are things that could only be achieved by the determined efforts of 60,000 team members around the world pulling together. I look forward to watching Hanesbrands continue to prosper under the leadership of Steve Bratspies in the years ahead. And with that, I'll turn the call over to Scott..

Thanks, Gerald. Our strong second quarter results, including double-digit growth and adjusted and GAAP EPS, underscore the earnings and cash flow leverage, our vertically integrated business model can generate. Sales for the quarter were $1.74 billion, which includes $752 million of PPE revenue.

As compared to last year, sales increased 6% on a reported basis and 7% on a constant currency basis. Excluding PPE, Apparel revenue declined approximately 40% over prior year. This is well ahead of our expectation and accounted for more than half of the upside in the quarter relative to our base case scenario.

Adjusted gross margin of 37.9% decreased approximately 180 basis points over the last year. Approximately 50 basis points of the decline was the result of deleverage from minimum royalty payments in our sports license business.

The remainder of the decline was driven by COVID-related door closings, which had a greater sales impact on our core international and our Champion and U.S. Activewear businesses. As a reminder, these businesses carry higher gross margins, but they also carry higher SG&A expense.

Adjusted operating margin for the quarter increased approximately 430 basis points over prior year to 17.5%. Higher sales drove meaningful SG&A leverage, which was further benefited by our temporary cost savings initiatives.

Interest and other expense declined $8 million over prior year to approximately $47 million due primarily to lower average rates in the quarter. Restructuring and other related charges were approximately $63 million in the quarter.

Our planned supply chain restructuring actions and program exit costs, which remain unchanged, accounted for $11 million of these costs. The remaining approximately $52 million are nonrecurring COVID-related costs in the quarter, which are noncash.

These include a $20 million intangible asset write-down, $11 million of bad debt expense and approximately $21 million of inventory adjustments primarily related to canceled orders from retailers for seasonal product we already made. The tax rate of 17.8% was higher than our expectation as better-than-expected performance in U.S.

Innerwear and PPE resulted in a higher mix of U.S. profit in the quarter. And adjusted and GAAP earnings per share increased 58% and 12% over prior year to $0.60 and $0.46 respectively. Now let me take you through our segment performance. From a high level, all of our segments experienced a similar progression through the quarter.

We saw significant year-over-year pressure in April, as regions sheltered in place. This was followed by sequential improvement in May and June as consumers shifted to open channels, including online and closed stores began to reopen. For the quarter, U.S.

Innerwear sales increased approximately 67% over the prior year, while the operating margin expanded nearly 550 basis points to 27.8%.

Both revenue and operating profit exceeded our base case scenario, driven by better-than-expected sales in both our core Innerwear and new PPE businesses, our significant fixed cost leverage from higher sales and by lower SG&A expense due to our temporary cost reduction initiatives. Adjusting for sales from our PPE business, core U.S.

Innerwear performed significantly better than our base case scenario. Core revenue declined approximately 27% over prior year, with Basics down 18% and Intimates down 52%.

These better than base case results were driven by the strong performance of our Basics and Intimates businesses, within the channels that remain open as well as the reopening of mid-tier and department store channels late in the quarter.

On the back of improved point-of-sale during the quarter, we have seen booking trends in both Basics and Intimates strengthen through July. Turning to U.S. Activewear. Revenue declined 52% over prior year, which was better than our base case scenario.

The year-over-year decline was due to COVID-related door closures as well as school closings and fewer group events that significantly impacted our Sports Apparel and Printwear businesses. As expected, Activewear's operating margin declined over prior year.

Deleveraged from lower sales, deleveraged from minimum royalty payments in our Sports License business. And our decision to hold Champion marketing investment flat over prior year more than offset our temporary cost savings initiatives.

While Champion experienced headwinds due to COVID-related channel closures, we were encouraged by the accelerating point-of-sale trends through the quarter and a continued POS strength in July. We believe this underscores the consumers' ongoing desire for the brand and points to improving revenue trends going forward.

Switching to our International segment. Revenue is well ahead of our base case scenario. As compared to last year, revenue declined approximately 20% on a reported basis and 17% on a constant currency basis. Adjusting for PPE sales, core International revenue declined 44% as compared to the prior year.

The better than base case performance in our core International business was driven by online as well as the performance of our company-owned stores as they reopened.

The International segment's operating margin of 17.3% increased 310 basis points over prior year, driven by lower SG&A costs as we benefited from various temporary cost savings initiatives. Touching briefly on our Global Champion business.

Excluding C9, revenue declined 46% over prior year with declines in both our domestic and international businesses. Like other parts of our business, Global Champion was hindered by closures of our company-owned stores and channel partner doors early in the quarter.

As doors reopened, Global Champion trends improved through the quarter with momentum continuing through July, reinforcing our expectation for sequential improvement in Champion sales through the balance of the year. Turning to cash flow and the balance sheet.

We delivered a strong cash flow performance in the quarter, generating $65 million of cash flow from operations. Year-to-date, operating cash flow was approximately $40 million above last year.

The strong performance was driven by previously planned inventory reduction efforts, temporary cost savings initiatives, continued working capital discipline and timely actions taken within our manufacturing network. With respect to our balance sheet, inventory declined approximately $265 million or 12% compared to last year.

Leverage was 3.4x on a net debt-to-adjusted EBITDA basis, down from 3.5x last year. And we ended the quarter with approximately $1.8 billion of liquidity, which we believe provides us with significant cash – capital cushion in this uncertain environment.

Due to the uncertainty and unpredictability of the COVID-19 pandemic as well as the current lack of visibility in our business environment, we are not providing third quarter or full year 2020 guidance at this time. However, I will like to share a few thoughts to help frame some of the key levers within our business model.

Looking at our Apparel business, which excludes PPE, revenue declined approximately 40% over prior year in the second quarter. Absent any rollbacks of store reopenings, we currently foresee an environment for the year-over-year decline in our Apparel business to improve sequentially in both this third and fourth quarter.

With respect to our PPE business, we currently expect more than a $150 million of PPE revenue in the second half, the vast majority of which is expected in the third quarter. While we continue to tightly manage SG&A expenses, the amount of temporary cost savings from the second quarter are currently not expected to repeat in the second half.

Combined with a lower overall unit and sales volume, we believe it is reasonable to assume year-over-year pressure on margins in both this third and fourth quarters. Now with respect to our tax rate, we currently expect a rate of approximately 17.5% for the second half.

And in terms of cash flow, we continue to expect to generate positive cash flow in the second half of the year. So in closing, we delivered strong second quarter results. Our balance sheet is healthy, and we believe we have ample liquidity.

While there remains a significant amount of uncertainty, we are encouraged by the positive underlying momentum in our Apparel business, which we believe points to a return to pre-COVID levels in our business once the pandemic has passed. And with that, I'll turn the call back over to T.C..

Thanks, Scott. That concludes our prepared remarks. We will now begin taking your questions and will continue as time allows. I'll turn the call back over to the operator to begin the question-and-answer session.

Operator?.

[Operator Instructions] Our first question comes from Omar Saad with Evercore ISI. Your line is now open..

Good morning, thanks for taking my question. Great quarter, guys. Gerald, I love the mic drop. It's a great way to walk off the stage. Congratulations and best wishes on your retirement..

Thank you..

Sure. I wanted to ask my one question around PPE, this new business that you have, $752 million.

Could you dive in a little bit more? How much of that is government? Was any of that consumer in the quarter? Is there any recurring element to the government side of it? And then how do we think about the consumer piece? Is it mostly a mask business and wholesale versus DTC? And then if you could also talk about on the manufacturing side, how you're able to switch over your manufacturing? Are there kind of nuances and complexities investors should be aware of? And then is it easy to switch it back as the traditional Innerwear business ramps back up again and you need to use that capacity? How easy is it to build additional capacity, kind of all of that kind of discussion around that PPE business, I think, would be really helpful? Thanks..

Sure. Happy to provide some more color about that. And I would just say, first, we're just delighted with how the big quarter came out, and we exceeded our expectations. And certainly, the PPE portion you're asking about, but also meaningfully in our Apparel business, and it's just an extraordinary effort by the organization in total.

So we're very pleased with it. From the PPE standpoint, that business within the quarter was predominantly government and there was business-to-business element of it as well.

We did add some more contracts on the government side in mask and gowns late in the quarter, which caused the over-delivery on that side as well as businesses began to open up, in particular, they were seeking mask for their employees and so forth.

As I noted in my comments, as we're moving now into the third quarter, we are focusing on shipping our consumer businesses that are showing up at retail and that was over $150 million number we put out for the balance of the year.

Those are in-store now, heavily under the Hanes name, but also under the Champion name, selling through extremely well, very strong reaction to those businesses as well. Our research tells us the consumer is really looking for a trusted brand and innovation and it's right up our alley and good response. And so we're pleased with that.

And I think that alone could be a $200 million to $300 million kind of business on an annualized basis in the future. Relative to future government business, there, certainly, could be additional opportunities out there, and we'll certainly seek those as the opportunity emerges.

But those would be incremental and opportunistic at this point relative to our guidance on the consumer side of things. From the standpoint of manufacturing, certainly, to ramp at the pace we did in Q2, we used internal production and used outside production as well to bring up a very quick ramp to the total production.

As it's come down to a more level production for the consumer side of things, we've fallen back into our own manufacturing facilities. And that's not a big switch for us. It's very similar in production to our panty or underwear products, and we make them alongside in the same facilities, and we can certainly support that going forward.

This is not a capital-intensive move on our part. So we find it very complementary to what we already do. So with the change in consumer behavior and the emerging mandates by states, we feel this could be a business that goes on for a long period of time..

Our next question comes from Susan Anderson with B. Riley FBR. Your line is now open..

Hi, good morning, nice job on the quarter and congrats, Gerald, on your retirement and best of luck as you move forward, you'll definitely be missed..

Thank you, Susan..

So it sounded like POS significantly exceeded results, especially as you entered May and June. So I'm curious how that tied with your replenishment in the quarter.

And then if you can maybe talk about what you've experienced so far in July in both the Innerwear and Activewear?.

Sure. Be happy to. We did have extraordinary POS, as you mentioned. And through the second quarter, it ramped very nicely and was really above pre-COVID levels in both our Innerwear and our Champion businesses. And as our international markets opened, they also performed very well and ramped very nicely back to pace.

As we've gone into July, our POS has continued to be favorable, and the shipments are following.

And in fact, in our early starts – we're ahead of our early expectations in July as the momentum is in our business, and it certainly gives us more confidence about our ability to just continue to sequentially improve our Apparel business as we work through the year..

Our next question comes from Michael Binetti with Credit Suisse. Your line is now open..

Hey guys, congrats on a nice quarter, and Gerald, let me add my congrats as you move on to the next adventure. I'd love to hear a little bit more about the Innerwear trends that you did see in the quarter, market growth versus you did mention some share gains, particularly the share gains, I'd love to know.

What areas those were in, what channels, what categories? And how you see that as being – what is the sustainability of that for the Innerwear business? And I'd also like to know, as you – did you – if you received replenishment orders in 2Q on Innerwear, how production is ramping up? And are you capacity constrained at all in that category right now?.

Sure. Happy to provide some more color on that. Our POS did ramp nicely through Q2, as we commented, Basics first and Intimates following. There's a clear indication that our innovations are working. And certainly, we did see nice POS trends, and we've seen those continue into July.

I would say that an important achievement during that period of time is in the large retailer. We completed the placement – the replacement of their underwear department, and we captured space there and we've seen nice performance as that's come through the placement.

I would say, overall, we gained 300 basis points of share in Basics, and it was across a number of areas. It was across socks, it was across women's panties, and it was across underwear. And certainly, underwear benefiting from that retail space expansion. So there's a lot of activity there.

We can now see our back-to-school bookings, and they're solid as well. And then back-to-school is a very important period for our Innerwear businesses. In addition, we can all see all the way out to holiday, and we see a nice increase in holiday bookings at this point in time.

So there's just a lot of energy in Innerwear that gives us a lot of good feeling about it, and we feel it's on pace to potentially get back to stability as we work to the latter half of the year. So really good performance coming out of the Innerwear segment..

Our next question comes from Matt McClintock with Raymond James. Your line is now open..

Yes. Good morning, everyone, and Gerald, I have to say it's been a pleasure knowing you. I can only wish you the best. Thank you so much for the years. My question will be on Champion. I'm just really curious about – you mentioned, I think, 2021 you talked about strength there.

Can you kind of parse out the quarter of Champion's growth this quarter between e-commerce and just point-of-sale on the physical locations? And then can you kind of talk about where the strength is coming from, as you're starting to get bookings now for the future? Thanks..

Sure. Happy to, Matt, and thanks for your comments. Certainly, from the standpoint of Champion, early in the second quarter with much of the specialty and department stores channels closed, Champion saw very nice growth online. And as we mentioned, we had a 40% increase, for example, in the U.S.

in our POS relative to prior year, driven heavily by online. That's online in third-party brick-and-mortar, where we were seeing sometime triple-digit rates in the U.S. as well as our own champion.com, which you may recall, we just sort of upgraded. It was in the 200% increase level.

If I take you internationally, we saw as the markets reopened, the brand also ramped very quickly back to sort of pre-COVID, kind of, momentum and it ramped very nicely. And all of that momentum is carried for us into early July as we look forward.

I did mention in my comments that we can now see farther out, even as far as into next year and our bookings have been very favorable there. And there's no doubt that the retailers witnessed the strength around the world of Champion even online, as markets were closed and it has created a lot of interest in our brand.

They clearly see that the consumer is pursuing the brand, even when channels are closed. They're pursuing it online. So there's a lot of momentum in that business. And so those bookings were very favorable as we look to the spring of next year, and it was around the world. It was no one market, it was a global market.

I would add to that, that we still anticipate our Champion second partner ramping their stores and Champion in the second half of this year. They've already brought our online business on. In China, we've seen very nice growth there online as well. So there's just a lot of energy in Champion.

We remain very bullish on our ability to reach our $3 billion goal over time..

Our next question comes from Jim Duffy with Stifel. Your line is now open..

Thank you, good morning. Gerald, thank you to you for all the help all these years, wish you the best of luck. I wanted to ask a question on the state of channel inventories with this improving strength that you're seeing in POS, it looks like some channels may be chasing product.

Your own inventories are tight relative to where they historically might be at this point in the season.

Can you just speak about the flow of inventories in the channel? And as it relates to your own balances?.

Yes Jim, and thanks for your comments, first of all. But yes, and I meant to include this in an answer to part of Michael's question. So I appreciate the follow-up on this. The strong POS that we've experienced – that was demand certainly higher than we expected.

And there are holes in inventory, in certain cases, particularly in Basics, and we're chasing that back in. And I think it really speaks to the opportunity for us as we move into the third quarter as we have the inventory inflow now. And on top of the POS, we've gotten some opportunity to fill up some holes out there.

So we – that obviously – the answer is we would lean on inventory, and we're ramping back up to match demand on the Innerwear side of things. And on the Champion side, as the channels have opened up, we've gotten a clearer view of bookings out of some of the channels that were closed.

We're ramping that production as well, and what we expect is a nice sequential improvement in Champion in Q3. For example, in the U.S. market, but we would expect a further ramping of that scale of improvement in Q4, as we fully bring all the inventory in and service all the demand..

Our next question comes from Paul Lejuez with Citi. Your line is now open..

Hey, thanks. Sorry if I missed it. Curious if you quantified what you're seeing in your Champion stores as they reopen and how that has looked over the past several weeks? And also curious if you could talk about any investments that you might need to make to support further increases in the e-comm business? Thanks..

Sure. I’m happy to do that – answer that question. Thanks. It's – if I take the store question first, POS is – or the traffic is generally ramped back at a sequentially improving pace, as we we've opened the doors, most of the doors. And you'll recall, we have Champion doors around the world. So there's no one answer to this. Some are faster than others.

But if I give you a couple, for example, in Europe where in Italy stores reopened, late May and the June. We saw the traffic began to ramp nicely as soon as they were open. It's not yet and generally back to last year's levels, but it's ramping nicely. In Australia, we have a few Champion stores there as well as many bond stores.

As the markets open, we saw a very quick ramp back in traffic there, approaching last year's levels. And the U.S. has been sort of a mix of both of those. It's a little slower. But in our outlet stores – our U.S. outlet stores, the traffic has been a little slower, but we've seen higher conversion.

So the shoppers that come in all those channels are very determined, and they're buying more in general as they come to the stores. So generally, I would summarize a little slower traffic and maybe a little higher conversion in total.

From the standpoint of capital investment in our online, we don't expect dramatic capital investment to support our growth here.

Remember, our growth's coming from a combination of working very carefully with the large pure-play and brick-and-mortar players that are out there, and that's always been a wholesale business for us directly to their warehouses, and they handle it. And our surging or growing online here, we have plenty of distribution space.

We've done – we spent the last year or so investing in our systems and upgrading our systems, and we believe those are scalable with a reasonable investment..

Our next question comes from Jay Sole with UBS. Your line is now open..

Great. Thanks so much.

Can you talk about the contribution to EBIT within the Innerwear and the International segments from the PPE business in the quarter?.

So for the PPE business, like Gerald mentioned earlier, we are again very pleased with the volume of the business. And again, like Gerald mentioned earlier, we are again very pleased with the volume there, $752 million within the quarter. We really don't speak to the kind of profit level information at a product level.

We typically are so much within our business between the International and the Innerwear segments that this PPE businesses flow through the supply chain network kind of supports all the products. And so we typically don't disclose separate profit margins across our individual product lines within the segments.

But again, we're very pleased with the volume of the business. And again, like Gerald mentioned earlier, see this as a continuing business going forward..

Yes. I would just add to that, Jay, from the standpoint of how it worked. We ran it through the infrastructure, the Innerwear and the International business.

And as you could see, it gave us tremendous leverage because it worked – we had effectively lowered our SG&A through cost cuts and so forth in businesses like Innerwear and cost savings in the pandemic, but we put tremendous volume through it. And the fixed cost that was left gave us tremendous margin leverage that you can see.

And it really speaks to the, I think, leverageability of this whole company with fairly low SG&A, fairly lean. And so when you put volume through it like that, you get tremendous leverage across the business..

Our next question comes from Laurent Vasilescu with Exane BNP Paribas. Your line is now open..

Good morning, thanks for taking my question. Congrats on a very strong quarter. Gerald, I wanted to follow-up on the Champion business. I think historically, in prior quarters, you would parse out the performance of core Champion in the U.S. versus international on a year-over-year basis.

Could you possibly parse it out for this quarter? And then secondly, I think the July 2nd press release with regards to the government contract had Hanes and Champion branded masks. Can you possibly parse out just how big the mask business was for – that was branded Champion? That would be very helpful. Thank you..

On the Champion side, in general, let me just answer, it was pretty much the same around the world. I think Scott referenced, it was down about 46% or something like that. And it's pretty much the same around the world.

And again, back to my earlier comments, the business is a combination – is heavily distributed in specialty and department stores, and those were closed heavily for the period. That results actually exceeded what we expected in our base case or best case scenario going into the quarter, and we see with those channels opening.

We're seeing a nice quick ramp. And certainly, the POS as the customers there. When they could find it online, they went and found it, and now that it's open at retail, they're going to both places. So we're very encouraged for this – the expectation and what we see in bookings for sequential improvement in that business, a lot of strength there.

From the mask standpoint, the vast majority of the mask were Hanes mask. There was a small element of Champion primarily sold on our online sites. So I think speaking to the strength of the brand, we put them out there and they sold out immediately. So we've gone back and we're making more, but it was a smaller portion of our focus.

Our initial focus with the government, and certainly, the retails was with our more broadly distributed Hanes brand. And now we're looking at adding some Champion more broadly in distribution..

Our next question comes from Ike Boruchow with Wells Fargo. Your line is now open..

Hey everyone, good morning. Good quarter, and Gerald congrats and we’ll miss you. Just two questions that we had. Just first, I guess, Scott or Gerald for the back half – the commentary on SG&A with some of the temporary cost initiatives in 2Q obviously, not repeating.

Is there any help that you could kind of give us for the back half of Q3, Q4? I mean, obviously, you're not going to have as much of an SG&A decline, but should dollar still be down? I mean, I'm just kind of curious on how we should think about the expense dollars in the business now that things have reopened? And then just the second question is just on PPE, it's a great revenue stream business for you guys.

I guess, just trying to think about that business into the next year and beyond. I mean, I think we're probably all hopeful that we're not wearing masks this time next year. Just how do we think about how much of that revenue is really sticky? And how we should think about that revenue base as we move into next year? That would be really helpful.

Thank you..

Yes. Good morning and thanks for your question. So regarding our SG&A spending and our cost-saving initiatives, one of our key priorities as the crisis emerged, was reducing our cash-based expenses. So that was really important to us as we managed cash and our liquidity balances.

And so as we think about the second half of the year, again, of course, we're not giving specific guidance for the rest of the year because there is a – we're still in the middle of the pandemic, and there's still a lot of uncertainty there. As you think about SG&A, again, we're going to continue to tightly manage our spending in the second half.

And we do expect some of our cost savings to flow through the second half, but they won't be nearly as much as we saw in the second quarter. And it's also important to note, as you think about the back half of the year, and as Gerald was mentioning earlier, with our core apparel trends improving and sequentially improving the rest of the year.

As the business improves and continues to recover, we're naturally going to see our spending levels increase to support our business. A good example of that is our investment in our brands..

All right. Let me take the second half of that. On the PPE business, we believe that there's a permanent – as consumer behavior change here that's going to last for some time. Certainly, as we've been first mandated to wear mask in most states as part of the pandemic, and we believe this will go on for, the wearing of masks for some period of time.

As I noted in my earlier comments, that certainly would be what our consumer business in mask represents, and we expect it to be over $150 million in the year. We expect that it could be a $200 million to $300 million business on an annualized basis going forward..

Our next question comes from Adrienne Yih with Barclays. Your line is now open..

Good morning, and let me add my congratulations as well, and a happy retirement for you Gerald..

Thank you..

On the e-commerce penetration, you mentioned that it would – grown to about 30%.

How much of that is wholesale versus own brand direct-to-consumer? And would you expect that penetration to be post COVID? So maybe end of year? If you can also talk about the recognized sales and EBIT margin in that digital channel relative to wholesale, that would be appreciated. Thank you..

Sure. From the standpoint of the 30%, we've spoken for some time that the largest portion of that is through our third-party partners. So it's through our brick-and-mortar and our pure-play partners. And I would expect that, that mix will continue to be so going forward. The businesses are growing very well there – year is very well there as well.

Going forward. Our own sites are performing well, but there's tremendous business being built in those pure plays in brick-and-mortars. So from that standpoint, I don't expect that mix to change dramatically in the near term, going forward. The economics of the pure-play and the brick-and-mortar is very similar to our wholesale economics.

It's a wholesale sale, as we've so often said, and it's very similar to our wholesale business. We've also worked on the economics of our own sites as well, and they're quite attractive from the standpoint of how we're performing.

So we feel good about the mix we have in that, should it mix a little more toward our sites or the other way, I think we're equally happy with that mix at this time..

Our next question comes from David Swartz with Morningstar. Your line is now open..

Yes. Thanks for taking my question. Can you talk about the receivable balance and the timing of payments on PPE from the government contract? And also if you're having any difficulty in collections from wholesale customers in the U.S. and international, including department stores in the U.S.? Thanks..

Yes. Sure. Good morning and thanks for your question. So for our receivables balance is kind of as a whole. Again, we are continuing to monitor our balances there with our customers and working closely with them to manage any exposures.

We did have a bad debt charge of $11 million in the quarter, but that related to several of our smaller customers that were impacted by COVID. And as you would expect with the COVID market disruption. As for the financial strain on some of the retailers due to store closures and just reduced consumer spending.

But again, we're working closely with our customers and managing the balances there. And feel really good about the progress that we've made in the quarter with our customers as far as the collection efforts in those balances. We feel really good about that.

The reports that the PPE business and the receivable balance, again, the $752 million of revenue that flowed through the quarter, a lot of that was later in the quarter. And so we do have a larger receivable balance at the end of the quarter. You'll notice that in the cash flow statement, the use for receivables was up more than it normally is.

But again, we will expect that collection to happen pretty quickly in the third quarter. So again, we feel really good about our receivables balance at the end of the quarter..

Our next question comes from Carla Casella with JPMorgan. Your line is now open..

Hi, good morning. This is Sarah Clarke on for Carla Casella. Thank you so much for taking our question, and congrats on the quarter; and Gerald, good luck in your next adventure. We just wanted to dig into back-to-school a little bit more.

How are your retail customers planning for back-to-school orders, especially given the increased likelihood of online learning? And I don't know if you mentioned this in the call, but what percent of your retailer, wholesale partners are open now versus at the peak of COVID?.

Sure. Let me answer the last part of that first. Right now, the vast majority, if not all of our customers are open. As we look to late June and into July. And so there's a small amount of closures in Australia, but aside from that, we're pretty well open around the world. From the standpoint of the back-to-school, we've got good view to that.

We're right in the middle of it right now. And I think when you think about back-to-school, it's most important to our Basics business and Innerwear and from Champion, it's certainly a replenishable item as well.

What we saw is even in the worst of the pandemic lockdown, when that online picked up the business for both Basics, and as you heard in my comments, we were up year-over-year in Champion and in Basics in that May, June period. So we have good view to it from the standpoint of bookings.

We can see our secondary displays with our retailers, much of the Basics business is a mask business. So we feel like we're well fixed to sell the business. In the event – in the unexpected event that there could be a lockdown of certain channels, we think we're well positioned to pick that up online.

So we expect it to be a good back-to-school from the standpoint of performance relative to the market we're operating in..

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

We'd like to thank everyone for attending our call today, and we look forward to speaking with you soon. Have a great day..

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day..