Good day and thank you for standing by. Welcome to the Hanesbrands fourth quarter 2021 earnings call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during this session, you’ll need to press star then one on your telephone keypad.

Please be advised today’s conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, TC Robillard, Vice President of Investor Relations. Please go ahead..

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 fourth quarter of 2021. Hopefully everyone has had a chance to review the news release we issued earlier today.

The news release, updated FAQ document, and the 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 taken by governmental or regulatory authorities to combat the pandemic on our business and the 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 and guidance exclude all restructuring and other action-related charges and speak to continuing operations. Given the volatility of comparisons due to the impact of the COVID-19 pandemic, we have focused our comparisons to 2019.

Please note that unless otherwise stated, all comparisons are to 2019 results that have been re-based to reflect the move our European innerwear business to discontinued operations, as well as the exited C9 program at mass and the DKNY intimate apparel license.

Comparisons to 2020 results, 2019 results, as well as additional information including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today’s news release. With me on the call today are Steve Bratspies, our Chief Executive Officer, and Michael Dastugue, our Chief Financial Officer.

For today’s call, Steve and Michael will provide some brief remarks and then we’ll open it up to your questions. I’ll now turn the call over to Steve..

Thank you, TC. Good morning, everyone, and welcome. Hanesbrands delivered strong fourth quarter and full year results. Our global team did an outstanding job all year, delivering results that significantly exceeded our initial plan while strengthening the long-term fundamentals of our business. I want to thank all of our associates around the world.

Because of their hard work, dedication and global teamwork, Hanesbrands exited 2021 in a much stronger position despite the most challenging operating environment in decades. We have a significantly stronger foundation both operationally and financially, and a more attractive long-term growth profile than we had prior to the pandemic.

Hanesbrands has changed. We are rapidly becoming a new company, one that’s consumer-centric, growth-oriented, and results-driven. In May of last year, we laid our full potential plan. If I take a step back and evaluate our progress, a few things are clear to me. First, our growth strategy is working.

We’re seeing it in our financial results, in the culture of our organization, and in the increased consumer demand for our brands; and second, we’re even more confident today in our long- term strategic vision than we were just nine months ago.

As a result, we increased our full potential 2024 financial targets and we’re increasing capital returns to shareholders with the addition of a three-year, $600 million share repurchase plan. Our full potential plan is gaining traction and we feel very good about our progress. Our growth strategy is working and it’s evident in three areas.

One, the investments in our business are enabling us to operate more efficiently and effectively; two, we’re delivering results on a consistent basis; and three, we have a stronger financial foundation. Touching on each of these. First, we’re better positioned for growth today than prior to the pandemic.

We have made improvements to our processes, we’re more globally integrated, and we’ve streamlined our portfolio, including today’s announcement of our plan to sell the U.S. sheer hosiery business. At our Investor Day, we committed to building world-class brands and increasing investment to drive growth.

We’re seeing very good initial returns on these investments. In 2021, our marketing and media investments to build and support our brands globally were $70 million higher than pre-pandemic levels. This fueled increased growth in our global innerwear and active wear businesses for the year.

It helped drive growth and market share gains in our Champion brand, which ended 2021 with global sales that were 36% higher than last year and approximately 20% above 2019. And these investments also helped generate 150 basis points of market share gains in our U.S. innerwear business.

We also continued our investments in technology and in our diversified supply chain to improve efficiencies and our speed to market. These investments have helped broaden our product and brand assortment with our major retail partners through increased shelf space, particularly with our U.S.

innerwear business, and they have allowed us to strategically invest in inventory to capture demand upside and position us to drive future growth. The second indication that our full potential strategy is working is our consistent execution.

Our global team has done an amazing job all year of delivering results through an increasingly challenged macro environment. This was most evident in our full year results as we delivered $550 million more in sales and $100 million more in operating profit relative to the outlook we provided at our May Investor Day.

These results demonstrate the team’s ability to both run the business and change the business at the same time. We’ve been able to implement our long-term growth strategy while consistently delivering near-term results.

And the third indication our strategy is working is that we’re operating on a much stronger financial foundation that prior to the pandemic. We ended the year with sales and operating profit well above 2019 levels. We held our operating margin even while investing $70 million more in media and marketing.

We also strengthened our balance sheet, lowering our leverage to 2.7 times, bringing us comfortably back within our targeted leverage range. As you can see, there are a lot of good things happening at Hanesbrands and our underlying fundamentals are improving.

Some of this improvement is masked by the current macro environment and we expect this to continue in the short-term with inflation and transportation headwinds continuing to weigh on margins in the first half of 2022. We expect margins to inflect in the second half and return to year-over-year expansion.

This will occur as we capture the full benefit of our price increases, the planned reduction in the use of air freight, and our disciplined cost management continues to provide savings and efficiency gains. Looking forward, we are even more confident today in our long-term vision.

Our confidence is driven by the traction we’re seeing with consumers and key customers, the progress in our full potential plan, the investments we’re making to drive future growth, and the team’s proven ability to execute, particularly in one of the most challenging environments in decades.

As a result, we have increased our three-year financial targets. For 2024, we now expect revenue of approximately $8 billion and adjusted operating margin of approximately 14.4% and cumulative free cash flow of approximately $1.6 billion. We believe this positions us to drive strong shareholder returns over the next three years.

We’re investing in the business to drive growth. We’re also paying a meaningful dividend. We’ll begin buying back stock this quarter. And based on our full potential outlook, we expect to be able to do all of this while simultaneously de-leveraging the balance sheet.

So in summary, we feel very good about the underlying fundamentals of our business and the strong consumer demand for our brands. Our full potential growth strategy is working, we’re investing for future growth, and we’re even more confident today in our long-term opportunity and our ability to drive higher shareholder returns.

And with that, I’ll turn the call over to Michael..

Thanks, Steve. We’re seeing solid traction in our full potential plan. The growth-related investments we are making are driving consumer demand for our brands, and the team continues to do an amazing job managing through the various macro challenges. This was evident in our strong fourth quarter and full year results.

For the fourth quarter, sales were in line with our expectations. Consumer demand remains strong and continues to outpace supply.

Adjusted operating profit was at the high end of our range while adjusted operating margin came in above our outlook, and earnings per share were in line with our outlook despite a $0.02 per share headwind from the higher than expected tax rate.

For today’s remarks, I’ll touch on some key highlights from the quarter as well as provide additional insights on our outlook. As compared to 2020, sales increased 4% to $1.75 billion. Last year’s quarter included PPE sales as well as a 53rd week.

Combined, these represented nearly 500 basis points of headwind to the quarter’s growth rate with 175 basis points coming from PPE and approximately 300 basis points from the 53rd week. We also experienced a 60 basis point drag on growth from foreign exchange rates which flipped to a headwind in the fourth quarter.

Adjusting for these items, sales increased 9% over prior year on a constant currency basis. As compared to fourth quarter 2019, sales increased 15% or $230 million. On a constant currency basis, sales grew 14%. Champion brand sales globally increased 25% over fourth quarter 2019 with 33% growth in the U.S. and 15% growth internationally.

Champion’s growth in the quarter was driven by strong consumer demand across channels in the U.S., continued growth in Europe and the Americas and Australia, as well as the ramp-up of our partners in China. Switching to U.S.

innerwear, sales increased 19% over 2019 with double-digit growth in each of our businesses, including socks, kids, women’s and men’s. We continue to see good results from our increased media investments with growth across the Hanes, Maidenform, and Bali brands.

Looking at our international business, sales increased 10% over 2019 driven by strong demand for our brands in Europe, Australia, the Americas and China. Gross profit increased more than $50 million or 8% compared to 2019.

With the amount of new retail space we gained, we made the strategic decision to expedite more product to arrive in time for the space sets at our retail partners. This was the primary driver of the 235 basis point decline in our gross margin in the quarter.

With efficiency improvements in our manufacturing from programs such as supplier consolidation, cost savings from our SKU reduction initiative, as well as benefits from business mix, we were able to offset the vast majority of the inflation and transportation costs headwinds in the quarter.

With respect to SG&A on a percent of sales basis, our SG&A expense was consistent with the fourth quarter 2019. Disciplined expense management across the organization was able to offset the higher expected labor cost in our distribution centers and the planned investments in our brand marketing related to full potential.

Operating profit of $220 million came in at the high end of our range despite the previously mentioned expedite cost, while operating margin of 12.6% was above the high end of our expectations.

Looking at the full year, I’m pleased with how the global team managed through the increasingly challenging year and delivering strong results, especially as it relates to the outlook we initially laid out at investor day. Sales for 2021 were $6.8 billion, an increase of 13% or $800 million as compared to 2019. This was driven by 21% growth in U.S.

innerwear and approximately 20% growth in Champion brand sales globally. Adjusted operating profit increased 14% or $111 million. We saw good profitability in the year.

Adjusted operating margin of 13.7% was consistent with 2019 despite the difficult operating and inflationary environment and incremental $70 million of marketing investments, and adjusted earnings per share increased 26% to $1.83.

Now turning to cash flow and the balance sheet, we ended the year with over $530 million of cash and total liquidity of $1.75 billion. We generated $623 million of cash flow from operations for the year.

Even with our strategic decision to increase investments in inventory to support higher levels of consumer demand, we were able to exceed the high end of our expectation due to higher levels of profitability and disciplined working capital management. Our strong performance is translating into improved financial strength.

Leverage at the end of the quarter was 2.7 times on a net debt to adjusted EBITDA basis. This is a significant improvement from 3.5 times last year and 2.9 times at the end of 2019.

Now turning to guidance, I’ll point you to our news release and FAQ document for additional guidance details; however, I would like to share a few thoughts to frame our outlook.

We expect the macro environment to remaining challenging in 2022, including continued inflation and transportation headwinds, particularly in the first half; however, we are not slowing down the execution of our full potential plan.

Consumer demand remains strong and we’re continuing to invest in marketing, technology, and our supply chain to drive sales growth and increase our market share. From a revenue standpoint for 2022, we expect sales to increase 3% to 5% over last year. For the first quarter, we expect sales to be flat to up 4%.

With the consumer demand we are seeing for our brands and the continued investments we are making in marketing and media, we feel good about our ability to comp last year’s one-time sales benefits and drive additional growth and market share gains globally in 2022.

That said, we continue to be impacted by disruptions in the global transportation and logistics environment, which are causing higher levels of in-transit inventory. These continued supply constraints are restricting our ability to fully capture all of the consumer demand we are seeing.

Said differently, based on demand, our sales growth outlook would be even higher for both the first quarter and full year absent these supply chain challenges. Looking at our segments, our outlook assumes full year sales for our U.S. innerwear segment for flat to down 2% over prior year.

For the first quarter, we expect innerwear sales to decline approximately 3% driven by the supply challenges I just mentioned.

With respect to our other segments for the full year, we expect high single digit sales growth in our active wear segment and mid single-digit sales growth on a reported basis in our international segment as compared to prior year.

Turning to margins and in line with our comments from last quarter, we expect margin pressure to continue in the first half on both a gross and operating margin basis.

This is driven by the timing of inflation, our strategic decision to spend more on expediting product to service our innovation launches and retail space gains, as well as the planned in growth-related investments tied to our full potential plan.

For the first quarter, we expect the gross margin rate to decline over prior year by a similar amount to what we experienced in the fourth quarter, and we expect an operating margin decline of approximately 420 basis points at the midpoint of our guidance range.

We expect Q1 to represent the trough for both gross and operating margins on both an absolute and year-over-year comparison basis. We then expect margins to build sequentially through the year. Looking at the second half, we expect both gross and operating margins to inflect and return to year-over-year expansion.

Our confidence is based on several discrete items that are within our control. First, our price increases will begin to fully flow through innerwear in place midway through Q1 and active wear in place at midyear.

Second, the significant Q1 expedite cost to service our new retail space gains and first half innovation launches are expected to decline meaningfully throughout the remainder of the year, and third, additional savings from our cost and efficiency programs are expected to ramp through the year, helping to mitigate the impact of inflation.

With respect to adjusted earnings per share, our guidance calls for full year EPS of $1.64 to $1.81 and first quarter EPS of $0.24 to $0.31. I’ll note our earnings per share guidance for both Q1 and full year exclude any impact from share repurchases. As Steve mentioned in his remarks, we expect to begin repurchasing shares in the first quarter.

We expect to repurchase shares quarterly while maintaining flexibility to be opportunistic depending upon performance and market conditions. In closing, we are seeing solid traction in our full potential plan. We are making strategic investments to strengthen our brands, increase market share, and drive long term growth.

These investments are generating expected returns, and despite the current macro disruptions, we will continue to invest for both future growth and profit as planned. While we expect the environment in the first half to remain challenging, we understand the challenges and we have plans in place to manage through them.

As you’ve heard, we feel good about the margin improvement in the second half of the year as pricing will be fully in place and the temporary expedite costs roll off.

We’re confident in our long term full potential plan, which is reflected in our increased financial targets for 2024 and the board’s authorization of a $600 million share repurchase plan. I feel really good about the progress we’ve made and I’m excited about what I believe this organization is going to accomplish over the next three years.

With that, I’ll turn the call back to Steve..

Thanks Michael. There are a lot of good things happening at Hanesbrands. While some of this is being masked by near term macro headwinds, our underlying fundamentals are strong and getting stronger. We expect this to be increasingly visible as the year progresses. There are three things I’d like you to take away from this call.

First, Hanesbrands has a stronger foundation both operationally and financially than it did prior to the pandemic. Growth related investments have increased and are generating returns. Revenue and operating profit are well above 2019 levels and our leverage has declined.

Second, we’re even more confident today in our long term opportunity and as a result, we raised our three-year financial targets.

Our confidence is driven by the traction we’re seeing with consumers and customers, the progress in our full potential plan, and the proven ability of our global team to execute and consistently deliver even in challenging macro environments. Our growth strategy is working and we’re seeing it across the organization and in our financial results.

Finally, we’re focused on increasing capital returns to shareholders. We’re investing in the business to drive growth, we’re paying a meaningful dividend, we’ll begin buying back stock this quarter, and based on the outlook of our full potential plan, we’ll continue to de-lever the balance sheet.

Hanesbrands is rapidly becoming a new company built on a culture of performance. We’re consumer-centric, we’re growth-oriented, we’re results-driven, and we’re very well positioned to drive higher shareholder returns over the next three years. With that, I’ll turn the call over to TC..

Thanks Steve. That concludes our prepared remarks. We’ll now being taking your questions and we’ll 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..

Thanks. Good morning. Another great quarter. Appreciate all the information as well. You just had this record year in revenues, an elevated kind of new sales base for the company, and it seems you’re pretty confident you’re going to grow again in 2022 based on your guidance today.

Maybe talk about some of the key factors that give you that confidence that you’re going to be able to grow this year off of such an already elevated base.

And also, could you please - my follow-up question, I guess, is maybe talk about once we get beyond the expedited freight, what’s the underlying inflation in the business and the cost structure? And do you believe there’s going to be longer-term more structural inflation, and what would that mean for Hanes and its margin structure? How much pricing power is there on this business? Thanks..

Good morning Omar, thanks for the question. So in terms of this year’s revenue, yes, we certainly are overlapping some big numbers, but we feel really good about the way the business is tracking and the opportunity that we have to continue to grow. So what’s underlying that? The biggest piece is consumer demand.

Our environment is strong, as we said, demand is outpacing supply right now, which will be an issue that will challenge throughout the year, but a really good challenge for us to meet as consumers continue to want our brands, want our products as we go forward.

I’m starting to see a lot of really good traction on the full potential plan starting to generate returns on the investments that we’re making, which gives me more confidence that, even in that continued challenging environment that we know we’ll see, that we’ll continue to thrive and do well. You break it down by business, you look at the U.S.

innerwear business, demand remains really strong. Obviously we’ve had the transportation headwinds. I’m excited about some of the innovation that’s starting to come in that business. We’re going to launch TSP X-Temp - that’s a total support pouch product that was so successful last year.

We’re going to add onto that by adding a performance component to it. I’m seeing some good innovation coming out of our intimates business, which I think has been lagging for a while. So we’re starting to see momentum there, both behind Maidenform and Bali.

Champion has a really good pipeline of innovation coming and we’re continuing to pick up new doors, gain space on a global basis, new geographies, so good news coming there.

We’re going to get aggressive behind our Be Your Own Champion campaign as we target women more specifically for our business, because we know we have a big opportunity to grow there, so you’ll see some new marketing from us in March directly going after that segment. And in international, same thing, businesses are all strong.

They’ve probably this year been more hit by COVID, so we have some positive overlaps that we’ll go through this year as we’re hopeful that doors start to open more consistently in Europe and in Japan. So a lot of tailwinds in the business as we fight the headwinds in the macro environment.

The underlying strength of the business, the underlying strength of the consumer, customer relationships and the way they’re excited about our brands are all real positive for us.

Michael, you want to take the second piece?.

Yes, on inflation, Omar, clearly, as we look at every part of cost of goods sold at this point, right, there’s pressure. Transportation is probably the biggest year-over-year increase, raw materials to a certain extent, and to a lesser extent wage pressure. And as we think about it, we’re controlling the things that we can control.

We started the price increases here in the first quarter for the innerwear business, and then active wear kicks in in the middle of the year. We do believe we have pricing power. We’re having conversations with customers.

No one likes to raise price, but we’re doing it really thoughtfully and keeping in mind price gaps and all the things you’d want us to think about. And so - but it’s not just how do we offset inflation with price, we’re thinking about it in terms of continuing with all the programs for efficiency and cost savings.

One thing that we talked about the last year is the SKU reduction initiative.

Happy to say that we’re over 30% reduced from where we were a couple of years ago, and I would say that we still have opportunities to continue to look at our assortment and our SKUs and make sure that we’re making the things that drive the most value for consumers and customers.

Additionally, especially in supply chain, where that’s our biggest cost, we’re working through supplier consolidations. We’re looking at making investments in equipment to make sure that we’re utilizing the raw materials appropriately, minimizing waste. We started in the back half of last year to work on overhead reductions.

And so I think we feel good about that as we start 2022. So, big picture, there’s price to offset inflation and then there’s the cost initiatives. And we feel good about it, especially once we get to the second half of the year..

Yes, and let me just add one thing on pricing power of the brands. We’re very confident in our pricing power of the brands, and we’ve seen that play out throughout the year, and it’s not just domestically.

We have price in China and Europe and Japan - all have been accepted by the retailers, all flowing through on the normal category calendars that are going through. So our brands do have pricing power. We’re not concerned about that in any way, and you’ll see that price start to flow through the P&L..

Thanks..

Thank you..

Our next question comes from Susan Anderson with B. Riley..

Hi, good morning. Let me add my congrats also on the quarter. It’s nice to see those market share gains.

I was wondering, maybe just to continue on the top line, curious the growth in innerwear, how much of that -- it sounds like it was mainly POS, but are you still seeing re-stocking or are we pretty much past that at this point? And then I’m curious if you could talk about how much was pricing versus units.

And then also, it sounds like you’re still chasing demand, but I guess, is there any concern out there that some of those big retailers may start to manage inventory kind of similar to what we’ve seen in the past, with maybe not as consistent, I guess, restocking of the inventory? Thanks..

Sure, good morning, Susan. Thanks for the questions. In terms of growth in innerwear, a lot of pricing has not gone through yet, so it’s unit increase in volume that’s being driven by the business as we go forward, so I feel good about that.

I’m a guy who focuses on units, focuses on volume, it’s critically important for this type of business, and we’re driving a lot more volume through. If you think about where we - the numbers we gave you in May, we built $550 million more in sales than we thought we would do in May for this year.

So that’s volume pumping through our system and our supply chain doing a great job of meeting a huge amount of incremental volume. We haven’t been able to meet all of it. There’s actually more demand for the brands than we’ve been able to actually meet, but a huge incremental add this year.

In terms of restocking, I don’t see a ton of restocking going forward. I think we’ve hit a degree of equilibrium in that space and we’re now trying to meet demand in POS on kind of a more one-to-one basis than we were last year, so I don’t see a huge increase on that as we go forward.

And in terms of absolute inventories that the retailers are going to carry, retailers are always trying to reduce inventory, there’s no doubt about that, but we feel really good about the position that we have with our key retailers. We gained a lot of space, permanent space going into this year, that’s going to be incremental to us.

That’s one of the reasons we have the expedite costs that we do. So we feel good about the inventory levels that we’ll continue to build with retailers going forward. As we think about our business and how we’re running our business, and Michael mentioned it earlier, we’re very focused on SKU reduction.

We took out over 30% of SKUs versus where we traditionally operated. We’re going to continue on that journey to reduce SKUs and become more efficient and make sure that our inventory is incredibly efficient that we have in the market..

Great, that’s helpful. Thanks so much. Good luck this year..

Our next question comes from Michael Binetti with Credit Suisse..

Good morning. This is Rick Patel on for Michael. Thanks for taking our question. We were hoping to get more color on the road map for margins. Your updated margin target for 2024 reflects expansion from what you’re expecting in 2022.

I know there’s some near term pressure, but can you provide some more details on the pathway there as we think about the puts and takes over the longer term?.

Okay, yes Michael, I think when we step back and we think about it, clearly the number one thing is growing the top line. We feel good about the momentum, especially the momentum relative to nine months ago when the team laid out the plan with you guys in May. We over-delivered this year.

As we looked at how do we reset the target for 2024, clearly it’s continuing to make the investments in top line growth, and so feel really good about that. When you think about the margins, what would be different probably is there is more inflation than what we all would have factored into our models back nine months ago.

That said, there wasn’t pricing factored in as we just talked about a few minutes ago, so we factored in--the pricing is going to take care of the majority of the inflation, and then I think it’s the continuation of the cost initiatives, that could be efficiency and productivity that we touched on, SKU rationalization, supplier consolidation, internalizing some products.

There’s a whole host of things that the supply chain team is working on to help reduce costs. There is going to continue to be the investments in media, and so the percent of sales for media is going to go up.

We’re going to make those investments, we’re going to make the investments in technology that we talked about, but we’re going to leverage sales and that’s going to help us to deliver the margins that we’ve laid out for 2024..

The other thing I would add, and Michael, you covered it, but just one thing I would add and that we’ll probably talk more about as we go forward is we’re doing a lot of work on distribution capabilities domestically, adding fulfilment capacity in the back half of this year and into next year to grow our DTC business to get much more efficient as that business grows, to be able to deliver product more efficiently, so we have a lot of work going on there right now.

We’re looking at our wholesale DC mix and how we’re going to be able to mitigate labor cost increases by running those buildings differently, so there’s a lot of different things that are going on across the business, and we feel really good about the cost savings, the cost transformation initiative that we kicked off as part of full potential.

It’s really core to who we are and how we operate every single day so that we continue to do both sides - we’re going to drive the top line and we’re going to take cost out of the business as we go forward..

That’s very helpful.

Can you also touch on the outlook for market share gains from here? It seems like the environment got a little bit more competitive in the fourth quarter relative to prior quarters, so as we think about shelf space gains and the price increases that are coming up, how do we think about [indiscernible] to accelerate market share in 2022?.

Sure. You know, market share is always a battle, and it’s one of the things that I’m incredibly passionate about and I talk to the team about all the time.

As we make changes to our business portfolio, whether that’s through price, whether that’s through assortment and mix, we’re not going to lose market share - that’s one of our core mantras as we operate. I’m a big believer in market share being a good metric for us to run the business.

As you think about going forward, using the innerwear business as an example, we’ve gained a lot of space going into next year, which is obviously a key component to how we grow over time in a type of business like that, so we’re going to fill that space with new products and some of our best products, and we just gained incremental space as we go forward, so that’s a key component.

Pricing is a strategic lever that we talked about to cover cost and inflation. You’ve got to be really smart about it and you’ve got to be able to think about it product by product, channel by channel, season by season to make sure that you manage price gaps, absolute price, and then price gaps at the shelf.

We are running this business with a very competitive mindset.

We’re focused on continuing to gain market share across all of our businesses, and you’re right - it’s an extremely competitive market out there, but I think we’ve got a really good operating plan, both a highly strategic plan and then each business has a very disciplined competitive operating cadence that they go to market with, to make sure we continue to gain share..

Thank you. Good luck in the new year..

Thank you..

Our next question comes from Ike Boruchow with Wells Fargo..

Hey, good morning everyone. Michael, just a couple on the gross margin. Gross margin was down around--I think similar in Q1 as to Q4. You talked about the expedited costs to get product on the shelf, which totally makes sense.

Sorry if I missed it - can you specifically quantify what that expedited cost was in Q4, what you’re expecting for Q1, and then the follow-up to that is, is your expectation today that all that headwind that you saw in the fourth quarter comes back to you in 2022 when we lap this in a more normalized environment?.

Yes, I think we haven’t called out or quantified the expedite or air freight cost.

We think what happened in Q4 and what’s happening in Q1 is really kind of a temporary impact, and so when we think about the back half of 2022, we do believe while there will continue to be some of the inflationary impacts on things like ocean freight and raw materials, etc., we think that the pricing and the other cost initiatives will offset that.

But we felt like it made sense from a long term perspective as we’re talking to our key customers and we’ve got these space gains, to make the investment in these expedite costs, so it is putting the pressure on Q4--or, it didn’t put the pressure on Q4 and it’s going to put pressure on Q1, and as we look out to the year, it will gradually decline to a more normalized rate..

One thing I would just add to that expedite, and we talked about it a little bit earlier, we’re going to be an aggressive company and we’re going to try--we’re going out to win in the marketplace. We’ve let our brand teams and our sales teams loose on go gain space.

This is an opportunity when there’s disruption in the markets - I view it as an opportunity to win, and we’re going after it very aggressively. Yes, it creates some short term margin issues with us, as Michael, as you said, we’re going to expedite because we’re going to support the space and we’re going to go out and capture growth opportunities.

It’s a near term issue that will play out, but coming out of that, we’ll have more space and we’ll have growth and a tailwind behind us in the business..

I guess the question I’m getting at is you view that as a transitory cost in the business, right?.

We do, yes..

Yes..

Okay, and then just one quick follow-up, Michael - the gross margin decline in Q1, understandable.

Should gross margins remain down year-over-year in the second quarter before ultimately inflecting, or are you just--should they actually start to expand again by the time we get to the second quarter?.

Yes, the gross margin year-over-year will improve throughout the year, and yes, by the back half it will be up..

Okay, great. Thank you..

Our next question comes from Jim Duffy with Stifel..

Thank you, good morning. I wanted to dig in some on the simplification strategy. You’ve stepped up the SKU reductions to 30% from 20% just a year ago. What are the additional areas you’ve identified for simplification, and then I’m curious if you could be more specific about some of the product drivers of the shelf space gains.

Then building on that, how should we think about SKU rationalization in the context of working capital levels and opportunities for improvement?.

Sure, good morning Jim. I’m really pleased with the effort the organization has put behind SKU reduction. SKU reduction is an emotional issue and it’s hard, that team’s tackled, but this team has really stepped up and been aggressive about it. That’s why we’re over the 30%, and we can go further, by the way. I don’t think we’re done.

I think we have opportunities to continue to build and continue to grow in that space and be really disciplined.

Now, that also means we’re going to be launching new products, so we’re not contracting, we’re expanding in terms of how we think about the business, but there’s a lot of excess that builds up over time and we’ve been able to reduce that as we go forward.

In terms of shelf space gains, I’ve been pleased with where we’ve gotten in the beginning part of this year, and we’ve talked about there’s some cost that comes with it, but we’ve been able to do it. It’s been broad.

Some of it is the customers we have just gaining more space for our existing products, some of it is becoming the major brand in other categories across different customers, so it’s driven by--usually shelf space is driven by a couple different things, and we have experienced all of these.

Some of it is new products that are coming in that they want to create space for. Some of it is just performance at the shelf and they want to give more space to make sure they stay in stock on key items, so you need more shelf space to do that. Some of it is leaning towards one brand over another brand, and so we’ve seen all those play out.

We do have some really good innovation coming under Maidenform that’s going to make a difference and gain some new space. I mentioned the X-Temp product, that total support pouch is going to be really big and we’re going to be putting media behind this and leaning into it.

Also, there’s a broader move out there that seems to be aligned with us and some key customers around getting younger. We have said that that’s a core component of our brands and where we need to get to over time. We’ve started that journey and we’re leaning into it.

I’ve been really pleased to see some very early initial results, but positive ones, where in the fourth quarter we gained share in men’s underwear with men under 39, over 100 basis points of share gain. It’s early on that journey of getting younger, but that’s a really good, I call it a green shoot example of some progress that we’re making.

Michael, I’ll let you talk about in terms of working capital and the benefit of SKU reduction..

Yes, absolutely.

It’s frankly probably hard to see it right now given the increase in inventory - you know, I think we’re up about 15% over last year, but I can tell you that in-transit is well above that amount, so--and keep in mind with the inflationary aspects, inventory is up because of that, so the SKU rationalization is doing a great job of helping us to manage that.

Longer term as we--I do think longer term that we’ll get to a better place on in-transit. In-transits will come down at some point.

I’m not going to sit here and predict inflation, but I do think that there continues to be a lot of opportunity for us to scrutinize our assortment and look at our best performers, and make sure that we’re in stock and our inventory turns have a lot of upside..

Great, thank you guys. Nice work..

Our next question comes from Paul LeJuez with Citi..

Hey everyone, this is Brandon Cheatham on for Paul. I wanted to dig on the first quarter gross margin. At least on the innerwear, price increases are hit, but you’re expecting a similar gross margin headwind in 1Q versus 4Q.

Can you kind of dig in there - are you expecting more transportation headwind in the first quarter than the fourth quarter, or are there other inflationary pressures that may not have gotten passed along? Anything that you can provide on that..

Yes, I think you’ve got the inflation that we started seeing in the back half of last year is rolling--you saw some it in Q4, you’re seeing more of it in Q1. You’re seeing the expedite and air freight costs that you saw more in Q4, and you’re seeing it again in Q1.

The price increases in innerwear, for example, don’t start until the middle of the quarter, so you’ll get a full quarter of innerwear increase in second quarter, you’ll get the active wear increase in the middle of the year, and so that’s what’s creating the pressure on the Q1 margin, but like we said, that will improve as we go throughout the year..

Got it, that’s very helpful.

The transportation costs, can you parse out of how much of that is air freight versus maybe being on spot rate with containers or domestic trucking? Where is the vast majority of that?.

Yes, the last couple of quarters, clearly we’ve have more air freight than we would traditionally have. The transportation cost just in general - ocean freight, that’s up significantly, as you’re probably seeing across all of the companies you follow. It’s factored into the guidance, so..

Got it. If I could squeeze one more in on the incremental revenue gains, your long term plan, I think $200 million is expected to come from Champion.

What other segments are driving that incremental $400 million?.

It’s across the business. I’m excited about the $200 million that’s coming from Champion and the momentum that we have in that business on a global basis, but I expect all the businesses--I expect U.S.

innerwear to contribute to that, the international components of the business are going to contribute to that, so all the businesses should continue to grow and all will contribute to that increased target that we put out there..

Appreciate it, good luck guys..

Thank you..

Our next question comes from Jay Sole with UBS..

Great, thank you so much. Steve, I was just wondering if you could elaborate a little bit more on Champion and the bigger picture opportunity that you see as you continue to work on this brand.

Maybe you can talk about China a little bit, what you’ve seen in some of the Asian markets, and maybe some of the different category opportunities that the brand continues to work on. Thank you..

Good morning Jay. I feel really good about Champion. We have good momentum there. We said Q4 global sales were up 25% versus 2019, so the brand continues to build this momentum.

When you look at it on a global basis, we’re picking up new doors, we’re gaining space, expanding to new categories and new geographies at the same time - we just launched in South Africa, we’re expanding in the Middle East, so you have some kind of--the core components of building a brand on a global basis are all there.

The other thing that I think we’re starting to move a little faster on, and I think we have more work to do but we’re starting to make progress on, is the innovation in that space.

I was excited to see our Champion Europe team is really starting to capture some of the latest trends, like natural dying that’s derived from organic sources - that’s very hot right now and they’re putting a line out there that includes that.

Our soft touch innovation in sports bras and leggings is starting to catch even more momentum than it has, and that’s got recycled poly material and it’s really super soft, a versatile product.

You’re going to start to see more domestically around Be Your Own Champion as we’re leaning into a concept called win with women, because we know that’s a big growth segment for us as we go forward. The brand has a lot of momentum behind it and it’s doing a lot of good things and will continue to grow.

You mentioned China - let me take a minute and talk about that. Really pleased with the growing partnerships that we have there and how those continue to evolve. Like others, traffic in stores has been impacted by COVID, obviously, but we feel that consumer is responding to us really well.

We continue with our partners to open new stores, ecomm is growing, so we see it as a big opportunity for us and we’re very bullish on what can be done with Champion in China, because the consumer receives it extremely well and we think we have the right business model going forward.

We’ve got to get past the omicron impacting store traffic there, but we think it can do extremely well. Other parts of China, Japan is still really hit by omicron, but again the fundamentals of our business there are strong, so we need to get past that as we go forward. As I look at the business in total around Champion, we’re doing well.

I think we can do even better as we go forward and as the brand continues to grow and continues to expand. We’ve got opportunities to reach new segments that we’ve talked about in the past, get better with kids and women, we have innovation opportunities, continue to find new geographies, so the momentum behind the brand is good.

We think we’re a challenger brand in this space, we’re not necessarily the biggest, but we think we’re playing the right way for our brand and it offers a lot of opportunities for us to continue to build and add that $200 million that we’ve targeted by 2024, above our previous growth targets..

Got it, thank you so much..

Our next question comes from Carla Casella from JP Morgan..

Hi.

First of all, did you give us proceeds for the asset sale, and any thoughts on timing of potential additional asset sales that could be sold as a whole or in parts?.

Carla, would you mind asking your question again? We were having a hard time hearing you..

Okay. The sheer sale, I’m wondering if you gave what the proceeds were from the sheer sale, and if you’ve received them all or if there is a delayed payment coming in..

The hosiery announcement, sheer hosiery?.

Yes..

Yes, so we announced that we made it available for sale, we took a $38 million charge in the fourth quarter, and we expect to complete that transaction sometime during 2022..

Okay, and any update on the international?.

The European innerwear business?.

Yes..

That’s expected to close in the first quarter..

Do we know the amount on that?.

On the European innerwear business, we announced that that was a sale for one euro which we announced back in Q4.

Okay sorry, I missed that. Then just one follow-up - the business has changed a lot over--given your initiatives, some of the additional shelf space you’ve gotten.

Can you talk about who your biggest retail partners are today, and do you think you’re at a stable level or are some of those higher because of COVID, and you expect others to come back after COVID?.

I won’t get into specifics by individual customers, but what I would tell you is the customers that we have and that we’re partnered with, that we’re growing with, we feel very good about the mix of our business and the opportunities that they present. Not a dramatic change as response to COVID.

There’s always ups and downs as their businesses go and our business goes, different products and different brands and things like that, but not a dramatic change or shift in our channel mix coming out of COVID, and I don’t necessarily expect anything dramatic to be happening there.

We like our position in the market and we’ll continue to grow with all those customers..

Okay, great, and I’m sorry, did you give the amount of operating profit that the sheer hosiery business generated in the past?.

What we provided was that the expectation is that the sales this year are about $60 million, and it’s a breakeven business from a profit perspective. That number is factored into our numbers for this year for the guidance..

Our next question comes from Tom Nikic with Wedbush..

Hey, good morning guys. Thanks for taking my questions. I wanted to follow up on the question earlier about the full potential plan. I think you mentioned that you expect all segments to grow, including U.S. innerwear. I think in the past, you’ve mentioned that the U.S.

innerwear category has been about a 1% grower historically, and obviously you’re guiding it to be a little bit down in 2022, but beyond that would you expect U.S.

innerwear to grow similar to that longer term, low single digit-ish type of growth rate?.

Yes, thanks for the question. The category has obviously been disrupted in growth rates the last couple years, and we still expect that we will outpace the category as we go forward once it settles down.

It’s been--as we start growing numbers like 19, 20%, those kinds of numbers in innerwear, as I’ve said in the past, I wish our innerwear business was going to grow at that rate on a long term basis - it won’t. The category will settle down, the supply-demand basis will settle out, but we do expect that we’re going to outpace the category.

I would expect the category over time to settle back to that 1%, 2% maybe growth category, and we expect to grow faster than that as we go forward. Right now, demand is still outstripping supply and we expect to see that for a vast majority of 2022 as the supply chain continues to balance itself out.

It will moderate to some degree as we go forward, but all that growth that’s been in there, we expect to comp that this year and we expect to hold onto all that growth in our base as we go forward. Part of that reflects in our long term goals.

It’s certainly in our guidance for this year, so as we’ve had those huge growth rates, high teens, low 20s for innerwear of this past year, we’re going to build on top of that as we go forward and continue to comp it..

Understood, very helpful. One more, if I could ask.

Is there any help or guidance that you could give us on the full potential plan as far as the below the EBIT line item, so interest expense, tax rate? Do you expect to use the whole $600 million of buyback over the next three years? Anything that could help us kind of get to an EPS number would be helpful..

Yes, when we think about the capital allocation, that was one of the things that we hadn’t come out with, so we felt like it was important to lay that out. The board approved the $600 million program for over the next three years. As you can probably appreciate, it’s going to depend upon performance, market conditions, etc.

The number one priority is to invest in the business, and so we’re going to invest in our business, we’re going to be able to generate excess cash to buy back stock, also we’re going to be able to deleverage some more, so I think this is an and plan. When you think about tax rate, we guided to 17% for this year.

There is going to be upward pressure, and that’s really just a function of the mix, of where we have sales and profits in the U.S. and other countries that have higher taxes, and so right now, I would say that if you used an average of 18% over the three years, that’s probably a good number for your tax rate.

Interest expense, it’s a function of where short term rates go up. We have some of--we have rates factored in for this year’s guidance going up, based on where the market is and is expecting to be, but as we deleverage--you know, once again you’ve got to work through the math because you have to figure out also the excess cash that we generate, etc.

I think the key is to continue the top line growth and momentum..

That’s helpful. Thanks very much, and best of luck this year..

Thank you..

Our next question comes from Steve Marotta with CL King..

Good morning Stephen, Michael and TC. I know we’re running late. I just have two quick questions.

First, as it pertains to the supply chain, at what point in time do you expect this year where the supply-demand equilibrium will be most in balance; in other words, at what point do you feel that you’ll hit more normalized out-of-stock levels as compared to what is occurring right now? My follow-up is what’s your leverage target exiting 2022? Thanks..

Sure. In terms of supply chain, I think we’re going in eyes wide open. We think we’re going to have disruption in the supply chain probably throughout the year, so I’m not sure you’re going to see normalized during this year and we’ve got that factored into guidance.

That said, I do expect it could be markedly better in the second half than it is in the first half, and that’s why all those expedite costs are going to go down and we’ll get back to more of a balance.

Part of that reason is the benefit from the inventory that we have in our system right now, so as the supply chain does start to improve, I wouldn’t say fix itself but improve, we’re going to have access to that inventory that’s in the in-transit bucket right now, so in the back half of the year, we start to balance out a lot more.

But I don’t think you get all the way there, and I think you’ll still have some disruption in the supply chain all the way through the year..

Yes, with regard to the leverage metric, our long term goal is between two and three times. We ended ’21 at 2.7, which is a 23% improvement over 2020 which was 3.5.

As you think about it, it’s going to be a function of cash flow performance and the capex, and as you probably saw, the investment this year is an increase of over $100 million, at the high end of our range. I don’t know that I would expect much change plus or minus around the 2.7 that we ended this year.

It will just be a function of all the different inputs that go into that calculation..

Terrifically helpful, thank you..

That concludes today’s question and answer session. I’d like to turn the call back to TC 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..

This concludes today’s conference call. Thank you for participating. You may now disconnect..