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Hanesbrands Inc.(HBI - Analyst Report) reported second-quarter 2013 earnings per share of $1.19, up 77.6% from the comparable prior-year quarter. Earnings beat the Zacks Consensus Estimate of 96 cents by 24%.

The second-quarter earnings upswing was on the back of the success of the ‘Innovate to Elevate’ strategy implemented by the company. The strategy focuses on value-added, higher-priced and higher-margin items that can be supplied at lower cost. Earnings this quarter also benefited from lower comparable base in the prior-year quarter due to higher cotton cost.

Revenues and Operating Profits

Quarterly revenues increased 2% to $1.2 billion, backed by decent sales growth in the Innerwear segment. Revenues were in line with the Zacks Consensus Estimate during the quarter.

Gross profit surged 18.7% year over year to $435.5 million, while gross profit margin inflated 520 basis points (bps) to 36.3% in the second quarter. The increase in gross profit resulted from lower cost of sales following shutdown of underperforming businesses.

Operating profit in the quarter shot up 51.3% to $181.5 million from $119.9 million in the year-ago quarter. Operating profit margin expanded 490 bps to 15.1% mainly due to lower cotton costs, favorable pricing and successful implementation of the Innovate-to-Elevate strategy.

Segment Details

Innerwear:Net revenue for the Innerwear segment climbed 3.4% year over year to $687.3 million in the reported quarter mainly backed by strong sales of HanesComfort Blend and X-Temp underwear and socks brands in Innerwear basics, and Smart Size bras brand in Innerwear Intimate category.

Operating profit in the segment shot up 22.7% year on year to $152.7 million and margin inflated 119 bps to 22.2% as both Innerwear basics and Intimates achieved margin expansion during the quarter.

Activewear: Activewear segment sales climbed 2% from the year-ago period to $294.2 million, driven by strong sales of Retail Championand C9 by Championbrands. Results excluded the decline in branded print wear sales, which is in the process of phasing out its low margin products.

The segment reported operating profit of $37.1 million compared to $2.1 million a year ago. Operating margin improved to 12.6% backed by margin gains in retail activewear, branded print wear and Gear for Sports categories of the segment.

International: Net sales in the International segment slipped 1.0% to $125.0 million in the quarter. Foreign exchange headwinds primarily hurt the segment results. Excluding currency, revenues in this segment increased 5% in the quarter. Operating profit, however, climbed 7.1% to $12.7 million in this segment backed by the success of Innovate-to-Elevate strategy.

Direct to Consumer: Direct to Consumer segment sales declined 2.1% to $92.6 million reflecting soft retail conditions in the country. However, operating profit surged 30.1% to $9.1 million compared to year ago level.

Other Financial Updates

The company exited the second quarter of 2013 with cash and cash equivalents of $82.3 million compared with $68.5 million in the previous quarter. Long-term debt was $1.37 billion in the first quarter of 2013 compared with $1.4 billion in the first quarter of 2013.

Guidance

For full year 2013, the company updated its guidance based on the decent first half of fiscal 2013 results. It raised its earnings per share guidance to a range of $3.50 to $3.65 from its previous range of $3.25 to $3.40. It expects operating profits between $550 million and $575 million for the year, higher from previous estimated range of $500 million to $550 million. It, expects net sales of $4.55 billion compared to $4.6 billion as estimated earlier.

HBI estimates net sales of branded print wear to decline in the range of $40 million to $50 million for 2013. Free cash flow is expected to be approximately within $450 million to $550 million compared to previous estimated range of $350 million to $450 million.

Hanesbrands engages in the marketing of innerwear, outerwear and hosiery apparel and carries a Zacks Rank #2 (Buy). Other companies in the same industry are G-III Apparel Group Limited (GIII - Snapshot Report), Michael Kors Holding Limited (KORS - Analyst Report) and PVH Corp. (PVH - Analyst Report). All of these companies hold a Zacks Rank #2 (Buy).

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