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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Haynes Brand's fourth quarter 2020 earnings conference call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. Please be advised that today's conference may be recorded. I'd now like to turn the conference over to your host today, Mr. T.C. Robillard, Chief Investor Relations Officer. Please go ahead.
T.C. Robillard
Good day, everyone, and welcome to the Haynes Brands 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 2020. 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 investor section of our Haynes.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 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. The use of the term PPE relates to our personal protection garment business, including face masks, face coverings, and gowns. Also, please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the exited C-9 program at Target and the DKNY Intimates License. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release. With me on the call today are Steve Bradsbys, our Chief Executive Officer, and Scott Lewis, our Chief Accounting Officer and Interim 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 will now turn the call over to Steve. Thank you, TC.
Steve Bradsbys
Good morning, everyone, and welcome. It's hard to believe it has been a year since the pandemic began, and I hope you and your families are staying safe and healthy. To that end, I want to begin by thanking the entire Hanes Brands team around the world for its ongoing dedication, hard work, and focus on safety and service. I'm extremely proud of how much the team has accomplished over the past year, especially under such challenging circumstances. I'm excited to speak with you today to provide an update on the progress we've made since our last call. We're going to center the conversation on two main topics. First, our execution and the financial results in the fourth quarter that drove a strong finish to the year. Second, is the launch of our multi-year growth strategy, which we're calling our full potential plan. That's being developed out of the strategic assessment I outlined last quarter. First, in terms of the fourth quarter, we delivered solid results as revenue, operating profit, earnings per share, and operating cash flow all came in above our expectations. despite the increasingly unpredictable environment. We experienced strong consumer demand for our brands and products around the world, which drove market share gains in a number of categories, including U.S. basics and U.S. instruments. We also saw revenue momentum continue to build across our three largest businesses. In U.S. Interware, we delivered another quarter of above-category growth, with sales, excluding PPE, increasing 16 percent over prior year. We're also pleased with the global performance of our Champion brand during the quarter. On a constant currency basis, global Champion sales increased 11% over prior year. And outside of the COVID challenge sports and college licensing business, global sales were up 18% in the quarter. In the international, along with Champion's strong performance, constant currency sales in our Australian innerwear business increased 8% over prior year. Now, turning to the second topic. We've made significant progress on our growth strategy. Since our last call, we've defined our growth drivers. We've identified the strategic initiatives needed to unlock growth and improve productivity, and we began the early implementation of our full potential plan. It was clear from our analysis of the business that simplification is critical to our future growth. It will make us faster, it will lower costs, and it will focus resources. Specific actions that we've initiated over the past few months as we began to implement our full potential plan include portfolio streamlining and SKU rationalization. I'd like to briefly touch on both of these. First, we're streamlining our portfolio to increase our business focus and improve future returns. Specifically, we're exploring strategic alternatives for our European interware business. While we are in the very early stages, we're committed to being transparent and will provide updates as we move through the process. We're also moving on from PPE. It's encouraging to see that COVID vaccines are rolling out around the world. As a result, this rollout along with slowing retail orders and a flood of competitive offerings have dramatically reduced our future sales opportunities. Therefore, we do not view PPE as a future growth opportunity for the company. The second action we've taken to simplify our business is rationalizing our SKUs. Based on the inventory review that we discussed on our last call, we're removing 20% of our SKUs while also implementing a formal product lifecycle management process. This will heighten our product design and consumer focus, as well as streamline our product offerings, which in turn should lower costs, improve in-stocks, and drive sales of higher volume, higher margin SKUs. As a result of these actions, we've made the difficult but important decision to write down our entire PPE inventory-related balance. as well as the inventory tied to our SKU rationalization. Scott will provide more detail on this during his review of our financial results. As I mentioned last quarter, our goal is to become a consumer-centric growth company, one that generates higher and more consistent revenue growth while also delivering higher levels of profitability over time. Our full potential plan is the blueprint to accomplish this goal. As you can see, we are moving forward with purpose and with urgency. We've already taken action, and we're focused on executing our full potential plan. I look forward to sharing more details about this shortly, but first I will turn the call over to Scott for a review of our results and our first quarter guidance. Scott?
Scott
Thanks, Steve. Overall, Haines Branch delivered solid fourth quarter results. On an adjusted basis, we exceeded the high end of our expectations across all of our key metrics driven by continued top-line momentum. Looking at the details of our fourth quarter results, sales increased 8% over prior year to $1.8 billion. Excluding PPE, sales increased nearly 7% as we experienced continued sequential improvement in our interwear, activewear, and international segments. For the quarter, FX in the 53rd week contributed 190 and 290 basis points of growth, respectively. Adjusted gross margin of 41% was above our expectations for the quarter due to higher sales and product mix. As compared to last year, gross margin declined 80 basis points due to the expected negative manufacturing variances, which were partially offset by higher sales and favorable product mix. Adjusted operating margin declined 250 basis points over prior year to 12% as the gross margin decline, along with the expected higher cost tied to COVID and our full potential plan, more than offset benefits from higher sales and mix. Pre-tax restructuring and other related charges were $661 million in the quarter, of which 96% were non-cash. The vast majority of these costs, approximately $611 million, were inventory-related charges tied to the business simplification action Steve mentioned as we began implementing our full potential plan. Breaking this down, $400 million is related to the entire PPE inventory-related balance that we referred to on last quarter's call. The other $211 million is related to our SKU reduction initiative and represented approximately 12% of our non-PPE inventory balance at the end of the year. The remaining $50 million of charges in the fourth quarter reflect $25 million for a COVID-related goodwill impairment of our U.S. hosiery business, $17 million from the write-off of a discrete tax asset tied to our broads and things acquisition, and $8 million for business-exfoliated actions as well as the previously disclosed supply chain restructuring. Our adjusted tax rate, which excludes $67 million of one-time tax benefits, was 19%. This was above our expectations due to the higher than expected profit in the quarter. And adjusted earnings per share were 38 cents, while on a GAAP basis we had a loss of 95 cents per share. Now let me take you through our segment performance. For the quarter, U.S. underwear sales increased 20% over prior year, driven by an 18% increase in basics, an 8% increase in intimates, and the inclusion of $22 million of PPE revenue. Excluding PPE, U.S. underwear sales increased 16% over prior year, driven by strong consumer demand at point of sale, space gains, and kids' underwear, continued inventory restocking by retailers, and the contribution from the 53rd week. In our basics business, we experienced growth in each product category. And within our intimates business, broth sales increased at a double-digit rate, which more than offset the COVID-driven decline in shapewear sales. For the quarter, Interwear's operating margin declined 60 basis points over prior year to 24.1%, driven primarily by higher distribution costs, which were partially offset by the benefits from higher sales and mix. Turning to U.S. activewear, revenue increased 7% compared to last year, driven by growth in the online, wholesale, and distributor channels. While our sports and college licensing business declined over prior year due to continued campus closures and limited attendance at sporting events, we saw sequential improvement in this year-over-year revenue trend in the fourth quarter. Looking at the Champion brand across all the channels in our activewear reporting segment, Champion sales increased 11% over last year. Activewear's operating margin was 8.9% in the fourth quarter, as expected, ActiveWare's margin declined compared to prior year due to the expected negative manufacturing variances, which were partially offset by the benefits from higher sales and mix. Pushing to our international segment, revenue increased 2% compared to last year. Excluding the $6 million of PPE sales, international revenue increased 1%. And with respect to the champion brand within our international reporting segment, sales increased 6%. On a constant currency basis, international sales declined 3% over a prior year. We experienced growth in Australia, driven by our bonds and browsing things brands across the retail, wholesale, and online channels. We also saw growth in Canada and Latin America. However, this growth was more than offset by COVID-driven declines in Asia and Europe. For the quarter, the international segment's operating margin declined 160 basis points over prior year to 13.3% due to the expected negative manufacturing variances, COVID expenses, and mix. Turning to cash flow, we generated $217 million of operating cash flow in the quarter, which exceeded our guidance, and $448 million for the full year. Looking at the balance sheet, excluding the actions and write-downs previously discussed, inventory declined approximately 4% sequentially, and leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis, which compares to 2.9 times at the end of last year. And now turning to guidance. I'll point you to our press release and FAQ document for additional guidance details. At this time, we were providing guidance for the first quarter. We plan to provide a full-year 2021 outlook as well as three-year financial targets as part of the detailed review of our full potential plan at our upcoming investor day in May. With respect to the first quarter, we expect the uncertainty created by the COVID-19 pandemic to continue to impact the global consumer environment, and we have reflected this in our outlook. At the midpoint, we expect total sales growth of 14% over the prior year. Adjusting for $50 million of foreign currency benefit, the midpoint of our sales guidance implies 10% growth on a constant currency basis. We expect adjusted operating profit of $150 to $160 million, which at the midpoint implies an operating margin of 10.3%. The expected year-over-year margin expansion is due to higher sales, positive manufacturing variances, and the anniversary of last year's COVID-driven volume deal leverage. We expect interest and other expense of approximately $48 million and a tax rate of 16%. And our guidance for both adjusted and GAAP earnings per share is 24 to 27 cents. So in closing, we delivered strong fourth quarter results. And with the momentum we are seeing across our business, we believe we are well positioned to deliver continued growth in the first quarter of 2021. And with that, I'll turn the call back over to Steve.
Steve Bradsbys
Thank you, Scott. We're excited about our future and we're confident in our ability to build on our business momentum in 2021. while also positioning the company for long-term success. I'd now like to spend a few minutes providing some additional details on our full potential plan. Through the plan, we have defined our four pillars of growth and identified the initiatives to unlock this growth and create a more efficient and productive business model. My confidence in the strengths of Haynes Brands that I outlined on last quarter's call have only been reinforced as we've developed our growth strategy. We have iconic brands, We have global breadth and supply chain scale. We have a solid balance sheet. We have a long-standing commitment to sustainability. And we have a dedicated, passionate team with a genuine appetite and readiness for change. This is a strong foundation to leverage in capturing opportunities for growth and driving shareholder value. With respect to our four growth pillars of our full potential plan, they are grow champion globally, drive anywhere growth with products and brands that appeal to younger consumers, build e-com excellence across channels, and streamline our global portfolio. Touching briefly on each of these. First, with Champion, we're making rapid progress developing our global brand strategy that defines our consumer segments, geographies, product offerings, and channels of distribution. We have solid momentum in this business, and we're being thoughtful in how we position the brand going forward. We see significant opportunity to grow Champion over the next three to four years. We're engaging directly with the consumer through digital platforms. We're leveraging our global design centers to deliver innovative products. We're driving category expansion, including a greater focus on women and kids, as well as layered outerwear and casual athletic footwear. And we're expanding in China with our partners through an integrated front-end strategy of standalone stores and online. Our second growth pillar is to get younger in innerwear. In Australia, we'll build our momentum by fueling the growth of our bonds and bras and things brands, particularly through our D2C channels. In the U.S., our plan is to build on our recent interwear growth by shifting our portfolio younger while defending our core. We must maintain our strength with our current consumers while adding the growing base of younger U.S. consumers. We are well positioned to capture this growth opportunity by targeting our incredible brand portfolio of Hanes, Maidenform, Bally, and more to reach unique consumer groups. We plan to invest to meet changing lifestyles with targeted and innovative products. Third, we're building e-com excellence across all online channels. Consumers are rapidly adapting digital tools as a way to connect with our brands and buy our great products. To be successful over time, we must build our e-com capabilities to serve consumers however they shop. We're leveraging data analytics to get to know our consumers better and build long-term loyalty. We're improving performance marketing so consumers can find our products online. And we're developing a frictionless shopping experience to help consumers easily buy and receive our products, whether it's on our own sites or our retail partner sites. Finally, we're streamlining our portfolio and positioning for global growth. This will allow us to focus our resources and efforts on higher growth, higher margin businesses. As I mentioned earlier, we're moving on from PPE and we're exploring strategic alternatives for European interwear. With that overview of our growth opportunities, let me turn to the other key components of our plan, setting the strategic initiatives and making the investments to unlock growth and create a more efficient and productive business model. We've already begun executing on a number of these, including a multi-year cost savings program intended to substantially self-fund our investments. We've identified 20 strategic initiatives, each with its own leader, tactical team, KPIs, and deliverable schedule. While I'm not going to run through all these initiatives today, let me provide some high-level thoughts. We're becoming more consumer and product-focused. We will lead with product design and innovation. We'll elevate the discipline of brand and channel management, and we'll extend our sustainability heritage beyond our supply chain and into our brands and consumer marketing. We're optimizing data and modernizing our technology. Data and technology are key enablers for a number of our initiatives in our full potential plan. We're making data a tool through standardization and accessibility across the global organization. And we're investing in technology to make us more efficient, both in terms of revenue optimization and cost management. We're segmenting our supply chain so we can better serve our customers. Our supply chain is a competitive advantage, and it's been a longstanding strength of the company. Given our broad, diversified portfolio of products, we're enhancing our capabilities to adapt to the changing environment and needs of the digital consumer. Segmenting our supply chain allows us to efficiently meet growth opportunities, deliver innovation, and be quicker to market for our respective interwear and activewear businesses. And over time, this should provide greater revenue opportunities while also lowering costs. And we're transforming our organization to speed up decision-making align ourselves to deliver future growth, and to build a winning culture. We're designing a flatter and more responsive organization around a global innerwear and global activewear structure. This will help us to leverage innovation, improve supply chain service and efficiency, and build powerhouse brands that meet the changing demands of our consumers and customers around the world. We're bringing in new capabilities and leadership. We've added outstanding new leaders, including our CHRO, our Chief Consumer Officer, and most recently, our President of Global Interware. We've also restructured and reorganized a number of existing roles to drive alignment and to focus expertise on critical components of our full potential plan, particularly within supply chain and IT functions, all of which is designed to leverage and unleash the knowledge and expertise of our long-tenured talent base. So to sum up, we're excited about the progress we made in the quarter. Revenue momentum continued to build across our business, which was evident in our strong fourth quarter performance. And we've begun implementing our full potential plan to drive growth and higher long-term profitability. This gives us confidence that we can build our business momentum in 2021 while also positioning the company for long-term success. We're looking forward to a more in-depth discussion about our growth strategy at our May Investor Day. And in closing, I'd like to once again thank the entire Haines Brands team around the world for all your efforts in these challenging times. And with that, I'll turn the call over to TC.
T.C. Robillard
Thanks, Steve. That concludes our prepared remarks. We'll now begin 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
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. In the interest of time, we ask that you limit your questions to one and a brief follow-up. Our first question comes from Omar Saad with Evercore ISI.
Omar Saad
Good morning. Thank you for taking my question. Nice quarter. So I guess, Stephen, my number one question would be, you know, as you think about the full potential plan, and thanks for laying out some of the initial details and thoughts around that, maybe you could share some of the findings behind, you know, during the comprehensive review, the findings behind, some of the key findings that are behind the plan, especially around the Champion brand. Thanks.
Steve Bradsbys
Sure. Thanks for the question. Appreciate you being on the call. When we started really my first day back in August to look at the business and really assess it, we did a real comprehensive view, and we looked at everything. We looked at how our brands are positioned, how we go to market, how the supply chain is performing, who are our key customers, what's our channel mix on a global basis. So we took a very comprehensive look and really got to what we call the unvarnished truth underneath our business. And every time you do that, of course, you learn things about your business, things you're better at than you initially thought, things that you have big opportunities to improve upon. So we looked at all that, and the strategy that we built came right out of that. So as you think about growing Champion, what we learned is, or what I learned, is how strong the brand really is and how much potential it really has. And as I said on the last call, it's one of the reasons I joined the company, because I think there's so much opportunity there when you think about the brand from It's heritage, and this is a 100-year-old brand. It's got an incredible track record of innovation. It's got a really strong global footprint that's continuing to grow. We're seeing a lot of excitement behind the brand. So it's an area that we need to lean into, and we need to continue to build upon, and I think the foundation is really strong, and the upside in the future is really good. The other really key growth area is the U.S. interwear business. And it's a business that's been inconsistent in terms of its growth, I would say, over the last couple of years. And obviously, it's a large part of our business, a very profitable part of our business. And as we looked at our brands, really understanding where we are, what we learned is that our brands are tending to skew a little older. And a lot of the growth in the category is coming younger, younger consumers, shopping differently, looking for different products. So we're looking at our brand portfolio. I love the brands that we have. I think in particular the Hanes brand is a bit underleveraged right now and has massive opportunity to grow as we expand that. And we're going to spend a lot of time thinking about how do we segment each brand, have it have a very clear reason for being, a very clear consumer segment that it's targeting, and capture a larger consumer base as we go forward. Just one example I'll give you, a thing that we learned. getting very granular. Look at the Hanes men's underwear business in the U.S. We have the number one share position in the over 35 age group, and we also have the number one share position in the under 35 age group. But the actual share is very different. We have a lot more share, absolute share, in the over 35, and the growth is coming in the under 35. So we saw that as a big opportunity for us to understand that consumer a little bit better, how they're shopping, what products that they want, and we're going to be very focused and targeted on going after that consumer. And we've got some products in the pipeline that are coming very soon that will enable us to capture that opportunity. One of the other key learnings, I would say, that we had was that I didn't think we were doing a good enough job leveraging our global learnings around our brands and our consumers. So tie back to that men's underwear example that I had just given you. Our Australian business, particularly the Bonds brand, had gone through a very similar exercise just a couple years ago they found themselves aging a little bit and then pivoted and now are doing extremely well capturing younger consumers with a bit of a different positioning, different product offering over time. So there's a lot of learning inside this global company that we can build upon and improve upon. So that's one of the connection points that we're trying to make as we go forward. So just a couple of the learnings that tie directly into key actions that we're taking going forward.
Omar Saad
Got it. That's super helpful. And then for a quick follow-up, did you guys provide the e-commerce and digital metrics this quarter? I know it's one of the strategic priorities, building e-commerce excellence across channels. Thanks.
Steve Bradsbys
Sure. We didn't in our release, but let me just talk a little bit about where we are from our consumer-directed business. So from an online basis, it's about 21% of our sales. In the quarter, it grew 46%, so we were pretty pleased with the performance. at that business over the year, and that was both with our third-party suppliers and with ourselves and our own personal sites. So continue to see momentum in our online business. Work to be done there. It's one of our strategic priorities. I think we can get a lot better. We're good, not great, and we need to improve upon that, but consumer continues to find us, and we keep seeing momentum there.
Operator
Our next question comes from Paul LeJouet with Citigroup.
spk02
Hey, thanks, guys. I'm just curious if you could, on the econ business, if you could give those metrics on the company-owned piece of it, excluding the third-party sites, just to follow up on Omar's question there. And I wanted to understand a little bit more about the ski reduction. I think you said 20% of SKUs, 12% of inventory. What percent of sales does that represent, and what won't we see from the brands? Is that happening more on the Champion side, more on the Interwear side? If you could provide any help there, thanks.
Steve Bradsbys
Sure. Let me take them in reverse order, and may I let Scott talk a little bit about the online. From a SKU activity perspective, I think one of the things that's important is to understand kind of the context around SKUs why we did what we did. And it's really part of the initial full potential plan in the fourth quarter kickoff is we took a number of actions to simplify our business. And simplify is a theme that you're going to hear from me a lot. I think it's really critical for us to be able to increase speed, lower costs, and create focus in our resources. And ultimately that means provide our consumers with a better experience, whether that's in stock, whether that's better products, whether that's better costs at the shelf. So we're going to focus on simplification. And the SKU Rationalization Initiative is a key step in that. And it is about 20% of the SKUs that we took action on. It was about 12% of our inventory at the end of the year as we went forward. From a what are you going to see, I actually hope you don't see anything and that you don't necessarily notice this. And I think that's kind of the intent. that you're not going to be a consumer who's now disappointed that they can't get product X or they can't get brand Y. When you think about SKU rationalization, it's this pruning. One, it's to reduce, but it's also to create room for other things, for newer areas, so that we can drive growth. So while we take 20% of our SKUs out, we're still adding SKUs where it makes sense to our business for us to grow. But we took a very disciplined approach to the SKU reduction. I would bucket it into three areas for you. Some of it is just no regrets. There's some routine cleanup that needs to be done, small amount, you know, excuse that, small amount of inventory could be broken, inventory irregular, so you shouldn't see that at all. Others is some, what I would call some unnecessary downstream complexity in packaging configurations or maybe some sub-brands or labels that are relatively small and are kind of declining businesses, legacy businesses that we want to clean up. And the third area is really kind of past season merchandise that we're continuing to replenish over time for certain customers where we are very confident that we can move them into a more recent version of the product. So, you know, we took a very disciplined approach. This was a global activity. All of our businesses were involved. We followed it in a very rigorous manner that got us to the 20%. But I don't see you looking at it and go, oh, now I'm missing this. We intend this actually to accelerate growth. in our system to enable us to move faster and for us to improve margins over time. So it should be seamless from a consumer perspective.
Scott
Sure. And your other question, and thanks for your question on this. So the online, to make sure I'm clear on your question, I will address the online as far as the growth there. It was 21% of sales versus 16% last year. So we are seeing an incredible amount of growth there as the consumer behaviors, shopping behaviors change and adapt. And so this is another area that As far as the full potential plan, we know there's a lot of opportunity with e-commerce and online, and so we have more capabilities that we're going to invest into as we really look for this as an opportunity to grow even more as we move forward.
Steve Bradsbys
And I always said that our own websites are about 27% of our total online sales, so you can kind of get a feel for how important they are to us and the opportunity that they present for us going forward.
Operator
Our next question comes from David Buckley with Bank of America.
David Buckley
Hi, good morning. Thanks for taking my question. I know we will hear more details in May, but just give us a first quarter guide. Do you believe you can return to a fiscal 19 earnings level in 2021? And then can you share any details on the size and margin profile of the European interwear business?
Scott
Thank you. Yeah, so let me start off, and I appreciate your question. As far as the 2021 and the As we mentioned in our prepared remarks, we're not given full 2021 guidance or an outlook at this time. We are still working through and developing our full potential plan and really look forward to addressing that fully in the May investor day. And so as we think about the first quarter, again, we're really encouraged about the momentum that we're seeing within the business across all our segments. We saw that momentum continue into January. We feel really good about the first quarter based on what we've seen so far. And as we think about going down the P&L from a margin perspective, looking for pretty substantial margin accretion there, both from a gross profit and a SG&A standpoint as we continue to have top-line growth, we're really able to leverage the fixed cost in SG&A.
Steve Bradsbys
And I agree with you, Scott. I think we're seeing good momentum in the business, and we feel good about heading into 2021. In terms of our European interwear business, I'll give you just a little bit of color. We're at the very early stages of this, so we don't have a lot to share in terms of the process, but we wanted to just let you know that we're starting the process and our commitment to being transparent with you. Just a few details, overview of the business. In 2020, it's $500 to $600 million in sales. The average operating margin is a bit below the corporate average. It's largely a wholesale business, but it does have some online and some owned retail with it. The biggest countries we operate in are France, Germany, Italy, Spain. And the business has some great brands. And if you're familiar with that market, the Dean brand in France, Nerdy in Germany, Abonderato in Spain, Lovable in Italy are really good brands. We've got a very strong team over there. But for us, this is just, you know, we have finite resources, and we are focusing on where we think we can generate the best long-term return. So it's a good business, but we're just questioning, is it the right business for us right now? So we started this process, and we'll keep you in the loop as more develops.
David Buckley
Thank you. Appreciate the color.
Operator
Our next question comes from Adrian Yee with Barclays. Good morning.
Barclays
Good morning. Let me add my congratulations. Steve, thanks for all the color. My first question is actually how are you viewing some of the opportunities sort of that some of these digitally native brands have sort of offered up? It seems like they are making a pretty good connection with the millennial, whether it's third love or something, you know, really small and nascent like a Tommy John. So that's my first question just thematically. And then my second question is for Scott. On the manufacturing variance aspect of it, does the SKU reduction in any way, the SKU reduction combined with the non-go-forward PPE, will that have any impact on the manufacturing variance? And kind of along with that, are you replacing sort of the non-go-forward SKUs with more innovation? Thank you very much.
Steve Bradsbys
Let me talk about the – the digitally native brands first. There's a lot of them out there, and they are interesting. Obviously, we watch them very closely and learn from them and understand how they're attracting consumers and what they can do. I look at it versus our brand portfolio, where we have really strong brands in the business, whether that's Hanes, whether that's Bally, whether that's Maidenform. The challenge for us going forward in the work that we're doing right now is to make sure that we do a very clear segmentation and positioning of each one of these brands. One of the challenges that we have is I think many times our brands overlap a little bit too much and are too close to each other, and we need to push them apart, segment them, and position them to capture the younger consumer. And I think we have the capability to do that, and we're seeing the momentum, you know, with our broad business being up double digits in the last quarter and We're already starting to implement a few things that have been underway, but there's more to be done. But I think we have the brands that we need right now to position it. We need to improve our e-commerce presence and performance that we talked about earlier. We need to make sure we have the right innovation, but we look forward to growing that business, and I think we're well positioned to do it. We have work to do, but I think we have the assets in place that we need.
Scott
Good morning. Thanks for your question. In regard to the scale reduction in the manufacturing capacity, we do not anticipate any manufacturing kind of variance drag as we go into next year. Just recall back when COVID emerged and we did shut our supply chain down and the PPE business was able to absorb and kind of take on that capacity in the interim. And as things were amped back up, we were back to full capacity as we kind of worked through the rest of the year. So, you know, we did have some manufacturing variances in the second half of the year within international and active wear. And we talked about that in the last quarter's call, and we saw that play out in the fourth quarter. But, again, that was a short-term drag. And as we go into 2021, that will be behind us.
Steve Bradsbys
And I would just add to that the idea of we're going to be adding new SKUs. The answer is yes. We're looking at adding SKUs. We're trying to not, you know, we're obviously not going to raise our skew count back to where we were in the past, so we're going to constantly be adding and pruning and managing that as we go forward. But we are looking to add skews to drive growth and more newness in our assortment. And there's different ways of doing that. Some is just new products that we vent. Some of it is back to being a global company. How do we lift and land global styles and share on a more global basis? I think we have an opportunity to be more seasonally relevant with color and print rotations. different silhouettes and fabrications we're looking at for the younger consumers. So the 20% reduction gives us room in our operating model to do more. It simplifies our manufacturing process. It simplifies our distribution process and allows us to be focused on where the true growth opportunities are. So we're looking to grow, and we'll definitely, you know, add SKUs as we need to.
Scott
Yeah, and just one more point on the SKU reduction, and Steve was just pointing out the efficiencies. Again, those efficiencies are going to help drive down costs, actually, with Some of the SKUs that we identified are the lower-performing and shorter run times, and so we're able to kind of offset that with core, higher-volume SKUs. So I would expect, if anything, it will be more efficient over time.
Operator
Our next question comes from Laurent Bezalescu with Exane B&P Pariva.
Exane B&P Pariva
Good morning, and thanks for taking my question. Steve, Scott, could you possibly give us some direction on where champions should grow for first quarter? And then I think last quarter you talked about – bring summer bookings to be higher than 2019 levels for champions. Is that still the case? And then second question, just how did we think about the U.S. activeware EBIT margin since it was down 700 bits for the fourth quarter? How do we think about it for the first quarter? Thank you very much.
Steve Bradsbys
Sure. Scott, you want to start with the margin first? Yeah, sure.
Scott
Definitely. And, Warren, thanks for your question. So from an activeware margin standpoint, and Actually, overall for the quarter, we're actually pleased with ActiveWare's results. From a margin perspective, we talked about this on the last call. We expected margins to be down in the fourth quarter. We had some manufacturing variances that were unfavorable that were incurred early in the year, and now we're flowing through in the second half. That was negatively impacting our margins for the ActiveWare business. Those are short-term headwinds that we had, and as we move into 2021, that's going to be behind us. And so that's going to be a good rebounding from a margin perspective from active wear as we go into 2021. And then, again, just layering on top of that is volumes and top-line increases in growth there. We're going to be able to spread cost even more so to really get our margin expanding back to where it was before.
Steve Bradsbys
Good morning, Laurent. In terms of Champion, we're feeling really good about the business and where it's going, and yes, bookings continue to be up and strong as we go forward, and we're expecting good performance from Champion in the first quarter. The big headwind that we had that we talked about in the third quarter was around our sports and college licensing business, and as activities are muted and people aren't attending events and college bookstores are closed, that obviously remains a headwind for us, but when you look at the quarter, and you look at Global Champion being 11%, and then up 18% when you back out that challenge sports and college licensing business, you can see the impact there. But we feel good about Champion in the quarter. We think we're going to continue to have momentum, and consumers really reacting. Innovation is working, and the channels are working for us as well. So we're very bullish on Champion going forward.
Operator
Our next question comes from Michael Benetti with Credit Suisse.
Michael Benetti
Hey, guys. Good morning. Thanks for all the details today. You know, I guess jump all, but could you speak to the guidance for the first quarter? Sorry to focus on the near term for a minute, but it points to an operating margin that's above the first quarter of 2019. You know, a lot of us are trying to model to pre-COVID levels. So I'm trying to think, you know, maybe you could help us with gross margin versus SG&A in the first quarter, just so we can think about how those businesses or how those lines compare to the first quarter of 19 as well. And is that, you know, being above those margins, is that the sustainable dynamic as we try to roll through the next few quarters after one Q, understanding that you don't want to guide us yet for the full year? I'm just trying to get a better picture of what this business looks like on the other side. And then Steve, you know, when you look at the potential options early on in the strategy to exit the Europe business, is the comment that you can self-fund these transformation initiatives, does that assume that you have the savings initiatives that you're looking at have enough savings to offset any potential dilution from the Europe business? You know, I'm assuming there's some stranded costs, even though you said it's got margins below the corporate average.
Steve Bradsbys
Sure. Let me go first, and then Scott, you can go back. So, yeah, we are kicking off a very substantial cost savings initiative that we think can help transform our cost structure over time and substantially self-fund our investments, separate from, you know, any changes we made to our portfolio. I want you to think about the investments or the self-funding of the investments from a cost savings initiative, kind of our ongoing-based business. And I think you should include that in 2021 as you think about your modeling. Those cost savings start today and our investments start today. So I think you can connect those in 2021 as we go forward. HEI, depending upon, sorry, when I refer to HEI, our European interwear business, that's our internal word, sorry about that. Our European interwear business, you know, we'll see where that goes. And as I said, it's early, but that would be, you know, separate from our cost savings initiative. That's not how we're tending to fund investments going forward.
Scott
Excellent. And good morning. Thanks for your question on our Q1 guidance. And let me kind of first step back. I know you were asking about the margins, so I think it's important to understand kind of the broader view of kind of what we're looking at from a top-line perspective. That's going to actually drive margin performance as well. Again, like I said earlier, we're off to a strong start to 2021. We have some really good momentum across the business, and you can see that in our – actually, in our segment top-line guidance with double-digit growth expected for U.S. interwear, both in U.S. activewear and international. We're expecting mid- to high-single-digit growth in the first quarter. So, again, really continued momentum, the underlying momentum that we saw in the second half. Now, with that being said, we are still facing the unknowns, and we have – continuing headwinds from COVID and some operational challenges. But again, we are very overall very optimistic as we go into 2021. From a margin perspective, again, we are anticipating a big bump as far as a profit improvement, 550 basis points over the first quarter of last year. And I think it's important to understand when you're comparing to 2020, of course, there's a lot of noise in 2020. In the first quarter of last year, I had some COVID charges that we incurred. The first part was in gross margin, where we had a $12 million negative manufacturing variance from shutting our supply chain down back in March timeframe, and that started for a couple of months. And we also had a bankruptcy charge with a load to a retail customer of $11 million. So those two things were in the margin last year that would not repeat for the first quarter of this year, not anticipating. The balance of the improvement is a mix between gross profit and SG&A. Going back to the SKU reduction initiative, we're actually seeing the benefits already in the first quarter of that. We're expecting lower excess and obsolete inventory charges. And we're also anticipating the savings from the supply chain restructuring actions we've done recently as well. So we're seeing savings flow through the P&L now. And we are going to have some incremental costs as you think about the first quarter. Like I mentioned, we have some operational challenges, and these are widespread supply chain and logistics constraints that the industry-wide is seeing, the poor congestion and product availability issues. And it impacted us a little bit in Q4, but also is going to continue through the first quarter. And that includes incremental costs like higher freight and some repackaging costs where we're trying to leverage existing inventory, repackaging that to meet customer demand, to kind of work through that and meet deadlines there. From an SG&A perspective, it's really mostly about just leveraging the top line growth and leveraging those fixed costs and getting the higher, kind of spreading that cost over a larger sales volume.
Steve Bradsbys
So, and I would just add on top of all that. So, Scott, I think that's a really good, you know, kind of where we are today. But, you know, as we kick off the full potential plan and we work towards this and, you know, when we get together in May, our investor day, we'll share a much longer term view of it. But, Our goal and our intent is to be a higher growth, more consistent growth company that delivers higher levels of profitability over time. So we're building a long-term plan that enables that, and we feel like we're going to have a good story to tell you when we get together in May, and we'll be able to put all the pieces together to show you how we get there.
Operator
Our next question comes from Susan Anderson with B. Riley.
Susan Anderson
Hi, good morning. Thanks for taking my question. I was wondering if you could talk a little bit about the performance of C9 on Amazon in the quarter. I guess how's the consumer resonating with the brand and how's it performing versus your expectations? Sure.
Steve Bradsbys
Good morning, Susan. Yeah, C9, you know, our full-year sales were in line with our expectations. We are focused on Amazon right now. We're looking at the business in total. It's part of our global champion brand strategy, and it's really trying to understand where we can drive champion and how C9 fits into that strategy as we go forward. We do know that there's still good consumer equity and loyalty in the brand, and we're looking to see how we manage that in the long term. But to answer your question directly, it's performing to our expectations on Amazon and what they expect and what we expect going forward, and both are pleased with the business.
Susan Anderson
Great. And then just if I could add a follow-up, I'm curious how you're thinking about the long-term growth of the segments, particularly interware, which is just inherently a lower growth business? I guess after we get past the restocking, how are you thinking about kind of the more normalized growth levels for that segment of the business? Thanks.
Steve Bradsbys
Yeah, I'm not going to give you what the long-term number is for our growth right now. What I would tell you is, yes, traditionally interware in total has been, you know, modest growth business, but there are segments of the business that are growing much faster than others, and one of the things that we've done in our assessment of the business is really go back in and understand what product categories, what consumer groups, ages, channels, demographics are growing. And we have a much more granular understanding of that today than we've had in the past. And I think what we need to do and what we will do is we will target those opportunities specifically so that there's growth underneath and when you pull back the covers. And the key is to be able to have the right brand, the right product, the right pricing structure, the right channel approach to go after those opportunities. So our plan is to have consistent growth in our interwear business, particularly our U.S. interwear business going forward, which will be an inflection point for the company as we move forward. And in May, we'll talk a little bit more about that.
Operator
Our next question comes from Paul Trussell with Deutsche Bank.
Paul Trussell
Hey, good morning. Thank you for the caller. I guess wanted to maybe just see if there is any additional information you can provide around what you've seen year to date. You know, you spoke about momentum across the business in 4Q. Maybe just more specifically on what you're seeing from the different divisions and the different geographies, you know, particularly Europe quarter to date.
Steve Bradsbys
Sure. Good morning, Paul. In total, we feel good about the business and performance. You saw it in Q4, consistent performance across the business, whether that was interwear, activewear, and strength in our international business. In total, that was driven by Champion, and our Australia interwear business is really performing, and we're very pleased with that business. We appointed a new leader there, Tanya Deans, who's going to take that business to the next level for us, so we feel really good about that. Europe and Asia are headwinds, and we're headwinds in the fourth quarter, particularly Europe with a lot of, you know, there's closings, there's openings. It's moving back and forth, but that's been a bit of a headwind for us in the inward business. The champion business in Europe has held up well, and we're pleased with that performance, and we continue to see that performing over time. But the European market is a challenge, and Asia is a challenge in total. There's different parts. Japan was a very big headwind last year. We are starting to see potentially some good news coming out of Japan of some opening, but that certainly was a headwind. But the other side of Asia, you know, in China, we like where we're headed with the champion business and our partnerships there to build both online and physical retail in China with the champion business. So the portfolio, it's mixed around the globe, and, you know, it's really a week-to-week type environment to understand what you know, government closings where there's spikes in cases and things like that. The good news for us is, you know, I feel like we're managing through it very well. The supply chain has held up very well through this and our ability to, one, you know, we have manufacturing different places around the world, controlling a lot of our own supply chain has helped and allowed us probably to provide better service maybe than some of our competition, which has certainly helped us, and for some longer-term space gains as we go forward. So, I think the organization is managing through it. I'd be remiss if I don't take a second and thank our entire organization for the really hard work that they put in in the last year and continue to put in to position us to be successful in a difficult environment. So I feel good about where we are, and we continue to manage it very closely, and we have all the processes and controls in place to make sure that we can thrive in a very challenged, difficult environment.
Paul Trussell
Appreciate it. And then on, you know, PPE, certainly understand the strategic thought process. Maybe could you just remind us or give us some numbers to kind of think about as you cycle that business year over year, what was the impact, you know, to the P&L from a top line and EBIT contribution standpoint over the last 12 months?
Steve Bradsbys
Sure. Appreciate you following up on that, Paul. The PPE one, this is a challenging one for us, obviously. You know, we have finite resources as a company, and, you know, we really want to focus when we see the best growth opportunity. And the market's changed. You know, back in the third quarter, we did, you know, just under $180 million of sales, and Q4 was 28. So it's declined pretty significantly. You know, sales trends have changed, as I mentioned. Competition's different. Consumer's changing in what they're looking for. And the type of product is a lot more novelty and different things like that. It's not where we want to go. In terms of the impact, you know, in sales it was roughly a billion dollars for the total year, which is obviously a big number. But I would tell you, you know, while we're writing it down and it was a big sales contributor in 2020, we don't see it as a headwind in 2021 from a sales perspective.
Operator
Our next question comes from Jay Sol with UBS.
Jay Sol
Great. Thanks so much for taking my question. So Steve, I just want to clarify something from one of the earlier questions. You know, when you say that the multi-year cost savings program is intended to substantially self-fund the investments necessary, you know, what exactly do you mean by substantially? Does that mean like entirely you'll cover the cost of investments with the cost savings or there will be some incremental investments on top of the cost savings? And then secondly, When you think about R&D and advertising, traditionally R&D is maybe 50 bps of total sales, advertising is a little bit less than 3% of total sales. With the cost savings program, do you intend to take those percentages higher? Can you just tell us where you see those two line items within the P&L moving? Thank you.
Steve Bradsbys
Sure. Let me take the questions in reverse order. So in terms of R&D and advertising, I think we have an opportunity to invest there, and I think we have an opportunity to spend more, particularly in advertising. If you look back, you know, historically back to, you know, 2013 to 15, you know, we spent in the 3.2, 3.5% range. 17 to 19, that was down, you know, in the low twos. And then this last year, we were at about two. Now, 2020 is a, you know, different year, so there's a lot going on there. But I think we're underspending in corporate advertising as percent of sales. And, you know, it varies by brand. It varies by part of the world that we're in. But fundamentally, I think we have an opportunity to have our brands work harder for us and do more and expect for us to invest in that. And a lot of that comes along with R&D. You know, product development is a big opportunity for us as we go forward. So you should look for us to invest in those areas as we go forward. In terms of substantially self-fund our investments, I don't know the exact number at this point to be perfectly honest with you, I know we're going to be making investments. I know we have line of sight to some significant cost reduction opportunities over time, and this is going to be a journey. It's going to be a couple years to get there. Will we be able to self-fund 100% of it? I don't know at this point. Our goal is to self-fund as much of it as we possibly can, and we think we will be able to self-fund a substantial portion of that.
Operator
Our next question comes from Ike Boruchow with Wells Fargo.
Ike Boruchow
Hey, everyone. Just two quick ones for me. One, in the first quarter, basically, the share count is guided to come up by a couple million. Just kind of curious what's going on there. And then, Steve, maybe I'm not understanding. Can you clarify when you're saying the PPE was a billion dollars and you're lapping it without that revenue recurring, but you don't view that as a headwind? I'm just not sure I'm understanding how you're describing it.
Steve Bradsbys
Sure. Let me start with the PPE. It was about a billion dollars. When I say it wasn't a heavy win, I think we'll be able to lap it with our base business and our current businesses to go forward. So it's, you know, obviously a big number, but we see the opportunity as markets open up to cover that billion dollars of sales that we had in the past from that category.
Scott
Yeah, and from a share count standpoint, we're not anticipating any large fluctuations in our share price or the stock price. outstanding shares. Really, the function of the share count can be a mix of stock price. We also have our long-term incentive plan as share-based. So as you have grants, investing, that tends to kind of make the share price and the outstanding shares kind of fluctuate over the year. But nothing significant to call out.
Operator
Our next question comes from John Kernan with Cowan.
John Kernan
Hey, good morning. Thanks for taking my question. So, Stephen, maybe just on U.S. Interwear, In the back half, even X the PP&E sales, organic growth, much better than trend in the first half, and certainly on a multi-year basis. Maybe talk to the specific drivers of what is producing the better organic growth in interwear. And then just on the competitive dynamics within the category, what's your view on private labels? You did talk earlier a little bit about some of the DTC branch. What's your view on the overall competitive environment with private label?
Steve Bradsbys
Sure. In terms of interwear and the momentum that we have there, there's a couple things going on. Obviously, there was particularly in Q3, you know, a lot of restocking going on and the momentum behind that. We got some benefit out of that in Q4, and there'll probably be a little bit going forward. But obviously, that starts to wane over time as everyone catches up. We've seen good POS performance, you know, consumers pulling the product. And some of that's from space gains that the team has had. Some of it's through, you know, I think we've simplified our assortment in certain accounts that has really helped us improve performance. And, you know, our inventory and stock has been pretty good from a relative perspective. So executing the fundamentals of the business and the innerwear has helped us, and I think it's an opportunity for us going forward. I still think we can get a lot better at it. And as we add new products and as we execute the fundamentals and the basics of the business well, we should see momentum and growth there. In terms of private label, yeah, it's a competitive category. And, you know, we're looking at all the different brands. But being the top brand and the top share brand is a good position to be in. And, you know, I've mentioned this before, but for me private label is – It's something we need to think about, but we need to do our jobs as brands and as brand leaders. And when we do the right thing for our brands, when we're producing high-quality products that consumers want, when we manage price gaps and we have a reasonable price and good value, which we should be able to do from our low-cost manufacturing, if we continue to invest in our brands the way we need to, I think we'll hold up extremely well versus the private label environment. You know, retailers want brands like Hanes, like Bally, like Made Warm to drive traffic to their stores. That's why they have brands, so that people come into their stores. So our part of that equation is to make sure that we're innovating, that we're messaging. Back to the advertising discussion we just had a minute ago. We're getting our message out there. We're making our brands incredibly relevant and brands that are in desire. And if we do that, we drive traffic to retailers, and retailers, you know, are happy with the business over time. So... We need to act like the leading brands that we are and put the foundation behind that. And if we do that, I think we will compete very well with private label, along with all the other brands that are out there.
Operator
Our next question comes from Jim Duffy with Stiefel.
Jim Duffy
Good morning. Thanks for taking my question. I wanted to start by congratulating Hanes Brands Organization on the A-list recognition for sustainability and reducing the carbon footprint. Great work there, guys.
Steve Bradsbys
Thank you.
Jim Duffy
Steven, I think of Haines Brands as having been in the process of tightening the belt over a number of year period. What are the further areas of where you find savings to fund the investment that you're talking about? Can you highlight some of the opportunities? And then Scott, I know you're not giving guidance for all 21, but can you share thoughts on tax rate given the changing business mix going forward? And then Scott, what's behind the increase in accrued liabilities in the fourth quarter?
Steve Bradsbys
Let me start. Jim, first of all, thank you for the recognition and the call-out on sustainability, something that is very important to us, something that we're very proud of, and something that's really ingrained in the DNA of the company, and we're going to continue to do and strive and continue to improve in that place. And I think you're going to see us start to talk about it more and ingrain it into our brand. It's ingrained in the company. We need to ingrain it in our brands going forward, which is an opportunity for us to be increasingly relevant to younger consumers over time. In terms of cost program that you talked about, you know, Hank has had a lot of programs over time in the past, and I've learned a lot about those and the approach that they've taken. Here's what I'd say is the difference to you. In the past, a lot of the cost reduction programs have just been about reducing costs, and they're kind of isolated programs. This cost reduction program is going to be tied into the full potential plan, and it's integrated into the the strategies and all the initiatives, the 20 initiatives that we talked about to help find savings over time. So it's not just – it works horizontally across the organization, finding lots of different opportunities from how we're going to work differently. This is about changing the work, and that enables us to reduce costs over time. But we're looking at all the big buckets. I mean, you look at our P&L, the big buckets are around, you know, SG&A, and we're looking at all the non-labor activities around SG&A, and obviously part of COVID changes how we think about operating our business going forward, so there will be some opportunities there. Our labor model, as we think about segmenting the supply chain and going to market differently and serving consumers differently. And then the other big line is, you know, obviously cost of goods. So we're doing a really in-depth look at sourcing and procurement optimization. How do we get more efficient? But we're doing it through the lens of the full potential plan. It's not a standalone cost initiative. And I think that's what really makes it different, and that's what's going to unlock a lot of costs for us going forward.
Scott
Thanks for your question. So on the tax rate, again, we are expecting a 16% tax rate in the first quarter. Not at this time I can give you anything on the full year. But, you know, we're always working with our advisors to really try to, you know, optimize our tax rate just under the rules and regulations that exist that we have. Again, it can ebb and flow a little bit over the time, as you mentioned, the mix of income, but we always try to kind of manage that from year to year. From the standpoint of accrued liabilities, it's really more of a function of the strong fourth quarter results that's driving the accrued liabilities up. You have the higher sales volumes that creates higher trade incentive accruals at the end of the year, higher taxes payable at the end of the year. That's really largely a portion of what's driving the the higher balance there. And then you have some just timing items that can tend to go back and forth over the year. But that's really what's driving it is the higher performance in Q4.
Operator
Our next question comes from the line of Steve Murata with CL King Associates.
Steve Murata
Good morning, Stephen Scott, NTC. One quick question, Stephen, regarding the e-commerce excellence. One of the challenges in the owned DTC channel over the years has been shipping costs versus lower average AURs for Hanes brands. How do you think about that going forward in particular, by the way, in the recent season when shipping costs have increased? Have you cracked the code there? If not, how do you think that code will be cracked going forward?
Steve Bradsbys
Sure. It's a great question. The short answer is no, I don't think we've cracked the code on how to do that yet, and it's something that obviously we're thinking about as we build out both our own e-commerce and partner with our third parties. Shipping costs are a major part of the P&L, so we have to be smart about SKUs and how we offer pack sizes and how we go to market on that. But I would tell you it's not something we've solved at this point necessarily differently from all of our other competitors that everyone is struggling with as we go forward. But as we build this business, we're building it through the lens of how do we do it in the most profitable sense from SKU assortment, what's our SLA that we want to have over time, We're looking at all of those different things, but it's work to be done as we build that e-commerce excellence because that's certainly a headwind that everyone faces, and we have to understand exactly how we want to play and where we want to play on that paradigm. It's not something that we've necessarily locked in on or figured out yet at this point.
Steve Murata
That's helpful. I'll take the balance of my questions offline. Thanks. Thank you.
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
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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