Hanesbrands Inc. (NYSE:HBI) Q2 2023 Earnings Call Transcript

Hanesbrands Inc. (NYSE:HBI) Q2 2023 Earnings Call Transcript August 10, 2023

Hanesbrands Inc. misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $-0.00656.

Operator: Good day, and thank you for standing by. Welcome to the Hanesbrands Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, T.C. Robillard, Vice President of Investor Relations. Please go ahead.

T.C. Robillard: 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 2023. 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 current macroeconomic conditions, consumer demand dynamics, our ability to successfully execute our full potential transformation plan or any modifications to that plan, the inflationary environment, cyber security, and our previously disclosed ransomware incident. These risks also include those detailed in our various filing 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.

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

Steve Bratspies: Thank you, T.C. Good morning, everyone. Welcome, and thank you for joining our call this morning. Today, I’ll provide a check-in on our full potential strategy, with a review of the areas of the business where we’re doing extremely well, where we know we need to do more and where things are challenging right now. Before I dive into that update, I’ll begin by touching on our second quarter results. After my remarks, I’ll turn the call over to Scott to discuss the details of the quarter and our second half outlook. Touching on the quarter’s performance, we’re pleased that revenue, operating profit and earnings per share were in line with our outlook. We’re also pleased that several of our key performance metrics are improving.

We delivered 90 basis points of sequential gross margin improvement. We continued to reduce inventory, achieving a year-over-year reduction of $255 million or 12%. We generated positive operating cash flow for the quarter and year-to-date, and because of the strong cash generation, we began paying down debt earlier than expected. U.S. Innerwear delivered a strong quarter, with results that were ahead of expectations, including sales growth of 3% over last year and 440 basis points of sequential margin improvement. On a constant currency basis, International sales were consistent with prior year. Growth in Champion Asia and stable performance in Champion Europe essentially offset the decline in our Australia business, which was driven by a very challenging macroeconomic environment.

In U.S. Activewear, sales and operating profit were below our expectations. The combination of soft category dynamics and the near-term impact from our strategic brand-related actions continue to weigh on U.S. Champion sales. Looking at the rest of the year, the headwinds impacting our Australia and U.S. Activewear businesses have increased, which is the primary driver for our adjusted outlook for the second half. That said, we remain on track for strong margin recovery and we expect to exit the year with gross margin in the high 30% range, to generate $500 million of operating cash and to pay down more than $400 million of debt. Now I’d like to provide a progress check-in on our initiatives that are part of our full potential plan, beginning with our Champion business.

Champion is a great brand. It is over 80% domestic and 65% global awareness and a significant global growth opportunity. We’ve made solid progress on improving the operations and processes within the Champion business that position us for future growth. However, the timing of these actions translating to financial results has been mixed. In Asia, where the brand is the most advanced in terms of product and channel segmentation, we’re experiencing strong growth. In Japan, the combination of new product launches and the ramp up of our loyalty program are driving strength in our retail business. And in China, we continue to work with our partners to open new stores, launch new footwear franchises and develop localized product and marketing to build a strong foundation for future growth.

In Europe, despite the macroeconomic headwinds, the business is stable. We’ve seen solid performance within our retail business, our footwear business continues to build momentum, and we’re leveraging our global scale by bringing our top-performing styles to the U.S. This performance is balanced against the headwinds we’re seeing in wholesale, as retailers take a more cautious approach to fall/winter orders. In the U.S., Champion is not where we expected it to be at this point in time. This is clear in our results and our outlook. And as a result, we’re actively taking steps that we believe will drive the long-term success of the brand. We’ve brought in new leadership, which is driving new talent in design, merchandising and sales. We’ve coordinated and launched our new brand purpose of Champion a better tomorrow.

We’ve completed our first full global product line from the new team, which is based on our disciplined global segmentation approach, and will be available for the 2024 fall/winter selling season. In total, nearly one-third of our 2024 product and fabric platforms will be global versus zero today. This will reduce SKU complexity and drive additional cost savings beginning next year. We’ve streamlined our supply chain operations, including balancing third-party sourcing and internal manufacturer, consolidating sourcing partners and shifting to dedicated Champion DCs. And we’re taking the necessary steps of shifting our channel mix in the U.S. This is a big initiative that is taking longer than expected due to the category and channel inventory headwinds.

It’s the right thing to do for the brand for the long term, and we’re receiving very positive feedback from our retail partners. In addition to the natural margin recovery we expect next year from lower input costs and the benefits of using global product platforms, we’ve also taken recent additional actions to improve Champion’s performance in the U.S. We quickly opened seven pop-up Champion stores to move through excess inventory in a way that preserves margins and brand equity. We’ve established partnerships with industry-leading licensees for kids’ apparel and outerwear, with the potential for additional categories. We’re also beginning to leverage our successful performance in the collegiate channel by using our quick-turn graphics capabilities to drive incremental revenue opportunities in our wholesale business.

We’re doing a lot to position Champion for success. We’re making progress and we’re continuing to adapt to the environment. We remain highly confident in the potential of the brand; however, we expect Champion sales in the U.S. to continue to be pressured throughout the rest of the year. Turning to Innerwear. Our U.S. business is on track and reflects the execution of our full potential strategy. If you recall, the goal was to take a consistently declining business and return it to growth, and we’re seeing this play out as we’re connecting our brands with younger consumers and regaining momentum. Consumer-focused innovation is up 30% over last year. Our innovation pipeline is full, providing us visibility to new product launches through 2025, including the launch of M by Maidenform this fall.

We’re telling our brand and product stories as well as supporting our innovation launches, such as our recent nationwide campaign for Hanes Originals. We’ve increased our back-to-school presence with a 9% increase in off-shelf displays, and we gained permanent retail shelf space from another national brand that will set this fall. Our supply chain segmentation work has driven a focus on less inventory, fewer more profitable SKUs, improved efficiencies in our DCs, and reduced product delivery times from Asia by over 40%. We’re also leveraging data analytics to help our retail partners improve Innerwear on-shelf availability to drive sales and make more efficient inventory investments. And we’re executing a thoughtful long-term pricing philosophy that ensures a winning brand proposition by differentiating our brands, enabling shelf space gains and delivering value for our consumers and our retail partners.

With respect to our International Innerwear operations, as I previously mentioned, Australia continues to face headwinds as higher interest rates are significantly weighing on consumer spending in our categories. Despite their macro challenges, the team is doing an outstanding job and continues to make progress on executing our long-term strategy. We continue to bring innovation to market. Our innovation products are performing above our expectations, led by the lineup of Bonds absorbency products. We’re delivering value to the consumer, and most importantly, we’ve gained market share. We believe our business in Australia is very well positioned to return to growth once the macro pressures ease. Taking a step back, from the outset, full potential has been about leveraging our iconic brands and competitive advantages, simplifying all aspects of the business and focusing on the biggest growth opportunities.

And this remains true today. We’re making progress in many areas. Innerwear is regaining momentum. Gross margins improved 90 basis points sequentially, as previously discussed. We’re on track for strong margin recovery and we expect to exit the year with gross margin in the high 30% range, as inflation continues to roll off our balance sheet. We continue to make structural changes to our agile supply chain and organization as well as take costs out of the business. The most recent example is after a broad review of our global operations, we reorganized and relocated approximately 250 corporate roles to leverage our talent pools outside the U.S., standardized processes and reduced expenses by approximately $15 million. Furthermore, we’re unlocking working capital as we decreased inventory by 12% or $255 million year-over-year.

We’re generating cash and are on track to deliver $500 million of operating cash flow for the year. And we’re on track to reduce debt by more than $400 million this year, with approximately $100 million already paid down in the second quarter. We’re proud of these achievements, but there’s work left to be done and we’re taking action. In addition to the steps I referenced for U.S. Champion, we’re identifying additional cost savings initiatives across the organization. We’re also actively looking across the business at additional options to enhance shareholder value. This includes options to address our debt, to further simplify the business and to accelerate revenue growth and margin improvement. Before I turn the call over to Scott, I’d like to take a moment to congratulate him on his appointment to CFO that we announced a few weeks ago.

Scott did an excellent job as our Interim CFO, and I want to thank him for his hard work and dedication. He’s a great partner, and I look forward to continuing to work together. And with that, I’ll hand the call to Scott.

Scott Lewis: Thanks, Steve. For today’s call, I’ll touch on the highlights from the quarter and then provide some thoughts on our second half outlook. For additional details on the quarter’s results and our guidance, I’ll point you to our news release and FAQ document. We delivered solid results for the quarter despite the increasingly challenged consumer environments in Australia and the activewear apparel market in the U.S. Revenue, operating profit, EPS, as well as gross and operating margins were all in line with our outlook. What stood out to me in the quarter’s results was the continued progress we made on reducing inventory and unlocking working capital. We generated another quarter of positive operating cash flow in a period that typically uses cash.

The continued positive cash generation allowed us to begin our commitment to use free cash flow to pay down debt earlier than expected. Turning to the details of the quarter, sales were $1.4 billion, a decline of 5% versus prior year. Excluding the 120 basis point headwind from the impact of foreign exchange rates, constant currency sales declined 4%. Touching briefly on our segments, sales in our U.S. Innerwear segment increased 3% over prior year and were ahead of our expectation. Despite continued softness in apparel spending, we were able to gain market share behind the launch of our Hanes Originals product, our increased presence for back-to-school, and our ability to leverage our digital tools. We believe we are well positioned to continue to gain market share going forward, driven by the launch of our next innovation, M by Maidenform, in the fall.

Our second half retail space gains and our robust innovation pipeline, which provides us new product visibility through 2025. Looking at U.S. Activewear, second quarter sales declined 19% compared to last year as Champion sales continued to be impacted by a combination of challenging category dynamics and the strategic brand related actions we’re taking to drive stronger brand health through a more disciplined channel and product segmentation approach. And with respect to our International business, constant currency sales were consistent with prior year. Growth in Champion in Asia, Innerwear growth in the Americas, and stable performance in Champion Europe essentially offset the macro driven slowdown in Australia. Turning to margins. Adjusted gross margin of 33.6% was in line with our expectation.

As compared to first quarter, adjusted gross margin increased 90 basis points sequentially. As compared to last year, it declined 425 basis points, driven by the previously incurred higher input costs that are rolling off our balance sheet as well as the impact from business mix, including lower DTC sales in the quarter. These headwinds more than offset lower air freight expense and the benefit from cost savings. With respect to SG&A expense, we levered by 20 basis points as compared to last year, which was ahead of our outlook as we remain disciplined in our choices in this challenging environment. The year-over-year improvement was driven by the benefits from our cost savings initiatives, particularly within distribution, discipline expense management and channel mix, which more than offset the impact from lower sales.

This resulted in an adjusted operating margin of 6.1% for the quarter, which was at the high end of our outlook. Looking at the remainder of the P&L, interest and other expenses, tax expense and earnings per share were all in line with our outlook for the quarter. Turning to our balance sheet and cash flow. We continue to see the benefits from our ongoing inventory discipline and the actions we took late last year. For the quarter, inventory declined 7% sequentially and declined 12% or $255 million as compared to last year. We also generated $88 million of operating cash flow in the quarter, bringing year-to-date operating cash flow to $132 million. With respect to our debt, we paid down nearly $100 million in the quarter. Our leverage was 5.6 times on a net debt to adjusted EBITDA basis, which was below our second quarter covenant of 7.25 times.

We remain committed to using all our free cash flow to pay down debt. And now turning to guidance. We updated our full year outlook to reflect the increased headwinds we’re experiencing in our Australia and U.S. Activewear businesses. These headwinds are being partially offset by the strength in our U.S. Innerwear business. We continue to expect year-over-year margin improvement in the second half, particularly in the fourth quarter as we begin selling lower cost inventory and we anniversary last year’s manufacturing time-out cost. We’ve been manufacturing product for several months at gross margin levels that are in line with 2021 and early 2022. This gives us visibility and the confidence that we are still on track to exit the year at meaningfully higher margin run rate.

For the full year, we expect net sales of $5.8 billion to $5.9 billion; adjusted operating profit of $425 million to $475 million; adjusting earnings per share of $0.16 to $0.30; operating cash flow of approximately $500 million; and free cash flow of approximately $450 million. Our working capital initiatives are performing above our initial expectations, particularly our actions to reduce inventory. This is offsetting the lower profit outlook as it relates to full year operating cash flow. As it relates to free cash flow for the year, we continue to expect to be able to pay down more than $400 million of debt this year, with nearly $100 million already paid down in the second quarter. With respect to our outlook for the third quarter, at the midpoint, we expect net sales to decline slightly less than 8% on both the constant currency and reported basis.

For adjusted operating profit, we are guiding to a range of $130 million to $150 million as we expect continued sequential improvement in margins through the year. We expect interest and other expense to be approximately $80 million, tax expense of approximately $25 million, and adjusted EPS to range between $0.07 and $0.13. So, in closing, we are continuing to adapt to the changing consumer landscape. We’re making progress in a number of areas, and we’re taking action to improve in the areas that are challenging. U.S. Innerwear is regaining momentum. U.S. Activewear’s challenges are persistent and we are taking additional actions to stabilize margins and position the business to return to top-line growth. Our International business, overall, is stable and we’re well positioned to return to growth in Australia once the macroeconomic pressures ease.

We delivered solid second quarter results. Our margins are improving sequentially, as we communicated last quarter, with good visibility to continued margin improvement in the third and fourth quarter. We are generating cash and repaying down debt. And with that, I’ll turn the call over to T.C.

T.C. Robillard: Thanks, Scott. Before we open up the call for questions, we want to briefly address the letter that was publicly issued by one of our shareholders earlier this week. As you likely saw, we issued a statement in response the same day. That said, we’re here today to talk about our second quarter 2023 results and outlook. Given that, we won’t be commenting further on our engagement with this shareholder today and appreciate you keeping your questions focused on our results and outlook. I’ll now turn the call back over to the operator to begin the question-and-answer session. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Jay, your line is now open.

Jay Sole: Great. Thank you so much. Steve, there was a lot of very helpful commentary in the prepared remarks, but can you really just take us inside the Champion brand a little bit more. Give us an idea of where things stand right now in just terms of brand momentum all over the world, the product, where you see the product going, and what it’s going to take to get to the growth rates that you envision for the brand?

Steve Bratspies: Sure. Good morning, Jay. As I said in my remarks, I still see a lot of really great significant global opportunity. [indiscernible] We’ve got really strong global awareness and it’s a really unique brand around the world. And I think we’ve made a lot of progress improving in terms of the operations, the processes, really position the brand for the future. We’ve talked about new leadership that’s moving with breakneck speed. We’ve launched a new global purpose, which is our Champion a better tomorrow. We’re launching our first global product offering, which will be available fall/winter next year selling season global product platforms, which we talked about before, which are going to really drive cost out of the system.

We’re simplifying complexity in the brand. I’m excited about the supply chain opportunities that have been created. We’re going to be more efficient. We’re going to drive more cost savings. We’re going to be faster and more flexible than we’ve been in the past. But clearly, financial results have been mixed. There’s obviously no doubt about that. Globally — internationally, the brand is doing okay. And it’s running good in Asia. We’re seeing growth there. Our product in Japan is resonating. Some of the new [colabs] (ph), in particularly, are really working well with the local consumer. China, we’re getting started and we’re doing well. Our key partners are making significant investment behind the brand because they believe in it with new stores, getting excited about the footwear line.

The business in Europe is holding ground. It’s a tough market, challenging consumer there. Our retail is performing well, particularly in our footwear business. But we are seeing headwinds in wholesale that could be a bit of a headwind in the second half. But fundamentally, the challenge we have is the U.S. And that’s — the brand is not where we expected it to be at this point. Sales are going to remain pressured through the back half of this year. And fundamentally, we have to improve our product segmentation. We have to improve our product performance. We’re seeing soft POS right now in a challenging category as we go forward. That’s the work that we need to do that we really need to focus on. But good news is the brand continues to resonate.

We’re taking some new action. We’ve created new pop-up stores to move through inventory. We’re expanding the categories that we’re focused on with the brand and kids and outerwear with new licensees. And we’re getting good feedback on our new product that’s coming out next year. We continue to see good momentum with — in the collegiate channel with that younger consumer. And we’re going to get some really strong natural margin recovery next year as inflation starts to ease. So a good, strong kind of global footprint, it’s going to take time in the U.S., but I feel like we’re moving in the right direction, but it is taking us longer than we initially anticipated. But I’m confident we’re working on the right things.

Jay Sole: Got it. Well, that’s really helpful. Thank you, Steve.

Steve Bratspies: Thank you.

Operator: Our next question comes from the line of Ike Boruchow with Wells Fargo.

Ike Boruchow: Hey, good morning, guys. I guess question is on the gross margin. So can you elaborate a little bit more on the exiting of the year in the high 30%-s? Is that kind of the run rate you expect into next year? And then, I guess to that point, what I would love maybe, Steve, some of your high-level views on is with cotton and AUC coming down, how do you think about pricing within the Innerwear business into next year? Do you think about — I mean you worked at some of these big partners. Do you think that they view that as an opportunity to actually take pricing down within their own private label to drive value? Like how do you kind of see pricing playing out next year with cost deflation starting to impact that core Innerwear business? Thank you.

Scott Lewis: Hey, good morning. I’ll take your margin question, and thanks for your question. So, on gross margins, very pleased with the progress that we’re making this year. We saw a second quarter margin improvement of around 90 basis points over the first quarter. So, we feel very confident about our ability to return to that high 30% gross margin rate. As we exit the year, we have good visibility, with significantly lower costs that are running through our supply chain today. In fact, the products that are running through our supply chain are at gross margins in line with 2021 and early 2022. In fact, input costs have come down significantly. For example, cotton costs, they’re down nearly 40% year-over-year and been stable since the first quarter.

Freight costs, they’re down enough significantly. For example, ocean freight, the container lanes, were down 80% year-over-year. And you can also see that on the balance sheet, raw materials, work in process, balances are down about 26% year-over-year. So, we’re seeing that play out in what we’re seeing in the manufacturing facilities and also seeing on the balance sheet. So it’s really just a matter of time before that flows through the P&L. And so, I see second quarter as an inflection point. You’re going to see a continued sequential improvement on margin rates over the third and fourth quarter. And so, again, by the time you get to that fourth quarter, you’re going to be in that high 30% range, 37% to 39%. And if you use that midpoint, just as an example, you’re asking about kind of going forward, we’re not giving guidance for 2024, but just using that midpoint of the fourth quarter gross margin rate in the high 30% range and what we have visibility to, if you just simply apply that to the expected sales that we’re going to see in 2023, that’s an incremental $200 million of costs coming out of the P&L into next year.

So, we feel really good about that progress, and we’re going to see.

Steve Bratspies: Yes, just exciting to see that, and I think it’s a good progress, and it’s going to make a difference in the business. So, to talk about your second part of your question around pricing, let me share the first kind of how I think about pricing and kind of pricing philosophy that I think is really important to make sure we have winning brand propositions in the long run. How do we differentiate our brand? How do we continually gain shelf space, making sure we’re delivering value to our consumers and to our retail partners, and we fit well into their construct of how they build their categories at the shelf every day? We take a consumer-driven approach and we always put the consumer at the center of how we think about pricing.

Our plan over time is to grow space and to grow our shares. And we need to be diligent, obviously, about price gaps to do that. We’re focusing on really making sure that we both on the top-line and the bottom-line and how we think about the business in the long run over the next couple of years. Obviously, there’s short-term variations that need to be managed as we go through there and things can get disrupted. But we’re always going to put the consumer at the center of how we do it. Now there’s different ways of taking pricing and managing price. Certainly, innovation is one we can do that, which I mentioned in my remarks. I’m excited about the innovation that’s coming. All of it is accretive to our current pricing position to our margin, and we’re thinking about margin accretion for all innovation that comes forward, which is one way for us to do it.

And we’re reaching new customers as we do that. We said we need to get younger with our brands, and we are getting younger. TSP was an example of that. Originals is accomplishing that. We’re excited about M from Maidenform is going to accomplish that, and all have specific pricing strategies. To answer your question directly, do I see pricing coming down and the need to reduce pricing, no. When you look at private label share, in Innerwear, private label share is down year-over-year. So, I think we’re doing a good job of managing those price gaps, and we’ll continue to obviously watch it closely. We never — we did not price for peak inflation, which obviously put some pressure on us in the short term. Going back to our pricing philosophy, what I think is in the long run.

But I think we’re set up well and positioned well on price as we go forward. We’ve been thoughtful about that in back-to-school this year and how we position price versus margin. So, I think our pricing position is good in the market. I think we’re going to have more flexibility next year with the gross margin improvement that Scott just talked about. But I don’t see us necessarily needing to go backwards on price at this point. Our price is held, and I feel good about it.

Ike Boruchow: Great Color. Thanks.

Operator: Our next question comes from the line of Paul Lejuez with Citi.

Brandon Cheatham: Hey, everyone. This is Brandon Cheatham on for Paul. Thanks for taking our question. I was wondering if we could dig in on the Activewear channel. Do you get a sense when that channel may have worked through that excess inventory? I was wondering if you could expand on the channels that you’ve stopped distribution with, but that really focused on kind of like the off-price clearance related distribution, or is it broader than that? And then how does that change how you go to production for the Champion brand and the long-term potential for that brand?

Steve Bratspies: Sure. Good morning. Couple of pieces there, and if I don’t cover them all, let me know. When you think about the channels, when you think about Activewear in general, there’s still inventory out there in the channel. I think it’s slowing things down and causing some pressure. If you look at the recent growth in the Activewear channel, it’s been declining and that’s been accelerating right now. Some of that is driven to the backup in inventory right now. Now, we’ve taken a lot of inventory actions that positioned us extremely well to manage through the slowdown in the channel. If you remember last year, the time out that we took, we moved quickly to take action against inventory, which I think positions us well this year.

Our inventory year-to-date on a comparison basis were down 12% or over $250 million in inventory. So, we’ve managed it very tightly and thoughtfully so that we’re well positioned to deal with the challenges in the market right now. And our year-end target is going to be down significantly. We’re targeting about $1.5 billion of inventory at the end of this year. So, we feel like we’re in good shape on inventory to manage through the complexities of the channels that are out there. In terms of the channels that we’re moving, it’s more about balancing the mix of channels, more than exiting channels directly. We are really working on a very specific channel segmentation strategy and having a strong discipline behind that segmentation strategy. So, you mentioned off-price.

Off-price is an important channel. It plays a key role. It needs to be managed appropriately and have a very purposeful strategic role. And if we do that across all our categories, I think we’re going to be in good shape. I would tell you, a couple of years ago, I think we got away from that. We weren’t disciplined and we weren’t thoughtful enough in individual channels. Now we’re putting a very clear model in place to understand what product goes where, when. And if we do that, I think we’ll be very effective. That has been well received by all of our retail partners. We’ve been very clear with them on what we’re doing, how we’re doing it, the product that they should expect and how that relationship should work. And they agree with it, and we should be in good shape.

It’s just taking us time to get there.

Brandon Cheatham: Very helpful. Thank you.

Steve Bratspies: Thank you.

Brandon Cheatham: And if I could, just one follow-up on the covenants. Can you remind us where those are for the remainder of the year? Do you think you need to do any more work there?

Scott Lewis: Yes. Good morning. Thanks for your question there. So, for our covenants, we’re in a good position with our financial covenants. We’ve made really good progress this year in a number of areas that really put us in a good place. Like we talked about earlier, we’ve generated $130 million of operating cash flow. We continue to expect $500 million of operating cash flow or about $450 million of free cash flow for the year, which is more in line with our historical levels. We’ve already paid down $100 million in debt, and we expect to pay another $300-or-more million of debt in the second half. That puts us in a better leverage position, but it also helps reduced interest costs. And keep in mind, not covenants, but just keep in mind our liquidity, we have about $1 billion of liquidity right now.

So, we’re in a good place there. And we talked about earlier about the margin improvement over the back half of the year. SG&A, we anticipate that we’re going to have about $70 million of reduced SG&A costs this year, and we’ve already seen $42 million of that in the first half. So — but with all that said, we are obviously tightly managing our cost and spending in this environment. And we are being very prudent with our investments and our spending there. We’re balancing near-term challenges with long-term opportunities, and we’re not done. There’s other opportunities that we’re actively seeking. So, our current outlook factors in a kind of muted consumer environment. But if it gets more challenging, that’s in our outlook. We’re a global company, a diverse company, and there are a number of actions and levers that we can take to preserve cash flow and stay in compliance with our covenants.

And we’ll take those actions as we need to.

Brandon Cheatham: Got it. Thanks a lot, and good luck.

Operator: Our next question comes from the line of Paul Kearney with Barclays.

Paul Kearney: Good morning. Thanks for taking my question. Two. I’m wondering if you can comment on the performance of the Champion brand by channel, specifically, I’m interested in whether it’s outperforming in — anywhere or in the mid-tier department store in particular? And then second, I’m wondering if you’re viewing some of the difficulties in the brand today as a result of kind of promotional activity within athletic apparel? Thanks.

Steve Bratspies: Sure. In terms of the second one in terms of promotional apparel, it is certainly getting a little more promotional out there. That ties back to what I was saying earlier about the inventory position in the channel in the category in general, people are still trying to clear inventory. That’s why, again, we work so hard on our inventory to get it to a much better place where it needs to be. So, we weren’t sitting on it as the category slowed down. But there certainly is some increased promotional activity that has caused some challenges out there. And that’s on a global basis. We’re seeing that. We’ve mentioned — we called out Australia and the challenges that Australia is having right now, driven by interest rates, certainly a more promotional environment there right now, but that consumer a bit slow to respond.

That business will recover. It’s a strong business. It’s a great business. Champion is a growing brand there, and we’re encouraged about where it could go as we go forward. As you think — we don’t really comment on specific channels and how we’re doing it. But again, we’re thinking about the business globally. In retail, we’re doing well in Japan, in China, in Europe. It’s the U.S. that remains challenged across channels, except the collegiate channel, which I mentioned earlier, we continue to do well. Young students on campus continues to choose Champion, which is continued growth story, which is exciting for us. But there’s definitely headwinds out there, and we’re balancing it not only globally, but across all of our channels.

Paul Kearney: Great. Thank you.

Operator: Our next question comes from the line of Tom Nikic with Wedbush Securities.

Tom Nikic: Hey, good morning. Thanks for taking my question. I apologize if you gave this already, but can you tell us how we should think about the growth rates for the different segments, both for Q3 and for the full year?

Steve Bratspies: Yes. We don’t guide specifically by segment, but I can give you just kind of — just give you a little bit of color for Q3 and for the back half of the year. So, if you think about Innerwear, good momentum in that business against the declining categories. So, we talk a lot about Activewear declining, Innerwear is continuing to decline a little bit. But I continue to see the momentum in Innerwear and continue to gain share in the back half as we launch new products. So, think about Innerwear business in Q3, roughly is flat, but picking up a lot of momentum in Q4 as the comps get a lot easier, and as innovation ramps and as new product sets for us — a new space sets, excuse me, for us as we go forward. International, continue to have puts and takes across the world.

I expect Australia to remain challenging. And again, that’s market driven. Again, I think that business is a great business, but it’s going to be challenged. I think we’ll continue to see good growth in Asia. And as that business continues to perform, I think we’ll continue to do well there as we go forward. Activewear, as we mentioned in our call, I think is going to be the challenged as we go forward, really driven by domestic Champion, will continue to be a headwind in the back half of the year.

Tom Nikic: Got it. Thanks very much. Best of luck for the rest of the year.

Operator: Our next question comes from the line of William Reuter with Bank of America.

William Reuter: Hi, good morning. So the first question, did you say earlier that there would be $200 million of costs coming out of the P&L in terms of lower input costs for 2024 if inputs remain at the levels you’ve seen in the back half of the year?

Steve Bratspies: Yes. So, let me — kind of Scott mentioned it earlier, if you think about the high 30%-s run rate that we expect to come out of the year at — if you take that run rate and just apply it to, call it, flat sales next year, that equates to basically $200 million improvement in gross margin. So, we’ve been fighting through the gross margin challenge with the inflated costs for a number of quarters now. But we’re getting to the end of that. Q3 gross margin will start to improve versus year ago for the first — quarter for the first time in a long time. And then you’re going to see a big step up in Q4 as we see — we have clear visibility to what those product costs are and how that will flow of the balance sheet into the P&L. And if you just straight-line that out into next year, you’re going to look at about $200 million of improved cost position for 2024.

William Reuter: Great. And then my second question is there have been some questions that — or comments that imply that the Champion brand may have been hurt by distribution through off-price channels. How much of the Champion sales have been to off-price historically? And I guess, do you have a goal for where that may be?

Steve Bratspies: Yes, we don’t give a specific number by channel and share channel mix. What I would tell you is there’s an off-price channel — there’s different definitions of different channels. So, if you think about where we want to play, we want to have a very clear structured part of the business. We have a good business in off-price today, and we’ll continue to have a good business in off-price as we go forward. It’s the mix that we need to manage between off-price department store, sporting goods channel, the online businesses that we have that we want to balance very closely. So, it’s how much in each channel and maybe more importantly what product in which channels and be incredibly purposeful about that. That’s a big part of the strategy, and that’s a pivot from where the brand was a few years ago, and it takes some time to implement.

Operator: Our next question comes from the line of Carla Casella with JPMorgan.

Carla Casella: Hi. Just one clarification question. You talked about the collegiate channel. Can you talk about how big that is overall business? And is that an opportunity beyond Champion?

Steve Bratspies: We actually have some other brands in the collegiate channel already. Our Alternative brand, Hanes plays a small role in that business. So, we think of it as an opportunity to grow. Again, it’s where we resonate well. We go to market there. We have a bit of a unique way of building that business as we go forward. We don’t share the specific size of that business as we go forward, but it’s a business that’s continuing to grow. And it’s a business that we think has — is a good marketing vehicle for us as we go forward. But it’s a sizable piece of the business, and more than a couple of hundred million dollars in size.

Carla Casella: Okay. And then, on the pop-ups, can you give us for how long you expect to have pop-ups open? How many? And then, maybe how much of your inventory is slated to move through there?

Steve Bratspies: Sure. We’ve opened seven of them right now, and they’ll stay open or continue to grow and continue to increase depending upon performance. Just a couple of weeks right now, but off to a good start. Team did an amazing job of moving with pace to get them open quickly to find really attractive leases as we start to move inventory through them. So, we’ll have to see how the performance is. I’m optimistic about inventory that they can move and increase presence of the brand. Again, they’re getting brand out in front of people, putting good quality inventory in there, maintaining pricing as we do this is going to be important for us, and I think that’s how we’re executing it right now. And we’ll open as many as we can, depending upon performance and finding the right appropriate lease locations.

Carla Casella: Okay. Great. And those will be through year-end, or is that something you could do on an annual basis?

Steve Bratspies: Yes. Some of the leases vary. And they’re opportunistic as you go forward, but I would expect them to at least be open through year-end and then we could open more. We could extend them depending upon performance as it plays out.

Operator: Our next question comes from the line of Hale Holden with Barclays.

Hale Holden: …additional options to address that and further simplify the business and options around the business. And I was wondering if that might include divestitures to accelerate that paydown?

Steve Bratspies: Hey, Hale, we missed the first part of your question. Could you start over? I’m sorry.

Hale Holden: Yes, no problem. You made the comment in the script that you’re looking at additional options to address debt or further simplify the business. And I was wondering if that might include divestitures.

Steve Bratspies: Yes, thanks for the question. We’re always looking to pressure test our strategy, checking ourselves to make sure that we’re taking the right actions for the business, for our shareholders as times change. And as was mentioned in my remarks, I said we’re looking for new ways to improve performance that could include options to address that, further simplify the business, looking for things to accelerate revenue growth and improvement. No specifics at this time, but we’re considering the options that are out there.

Hale Holden: Great. Thank you so much.

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

T.C. Robillard: We’d like to thank everyone for attending our call today, and we look forward to speaking with you soon. Have a great day.

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