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Hanesbrands Inc (NYSE:HBI)
Q3 2020 Earnings Call
Nov 5, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Hanesbrands Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

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

T.C. Robillard -- Chief Investor Relations Officer

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 third quarter of 2020. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and a replay of this call can be found in the Investors section of our hanes.com website. On the call today, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks include those related to the impact of the COVID-19 pandemic and measures 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 or 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 C9 Champion 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 Bratspies, 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.

Stephen B. Bratspies -- Chief Executive Officer

Thank you, T.C. Good morning, everyone, and welcome. I'm excited to be speaking with you on my first earnings call as CEO of Hanes Brands. I'd like to begin by thanking our Board for the opportunity to lead this great company. I also want to thank the entire team around the world for their warm welcome and their assistance as I get up to speed on our business. I'm honored and excited to be leading such a passionate team as we embark on a growth-oriented journey. The global pandemic has clearly created significant challenges and uncertainty. It's impacted everything from our business visibility to our manufacturing, to consumer traffic in our stores and on our website. And it continues with this week's European announcements regarding new lockdowns and curfews. In this unpredictable environment, I'm encouraged by the progress we're making on a number of fronts. I've been impressed with the team, the way they've been able to adapt and respond to the challenges of 2020. We're seeing revenue momentum in our business, and I feel good about our strategic assessment and the progress we've already made toward defining the ambition and strategic goals for the organization. For today's call, I'll begin by sharing some insights about myself and why I was attracted to this opportunity. I'll then speak to the strategic assessment that we began on my first day. I'll offer some thoughts on the process, what we are looking at as well as share some initial observations. And I'll end with a few comments on our current business performance before handing off to Scott for a more detailed review of the results and our fourth quarter guidance. Hanesbrands is a great company. We have iconic brands. We have global breadth and supply chain scale. We have a solid balance sheet. There's a long-standing commitment to sustainability, and we have a dedicated, passionate team with a genuine appetite and readiness for change.

With this strong foundation, I see significant opportunities and potential to drive growth and shareholder value. With respect to my background, at heart, I'm a brand and product person. I believe in providing great products borne directly from consumer insights. I believe in the power of brands to differentiate, tell stories and build lasting loyalty. I'm growth oriented. I like to change and transform things. And I like to think big. To that end, I want Hanesbrands to be one of the most admired global apparel companies, one that is growth oriented and consistently delivers strong shareholder value. I'm also a big believer in communication, being unvarnished, honest and transparent, both internally and with all of you. With that backdrop, I'd like to give you a sense of how I spent my first three months as CEO. The global pandemic has certainly altered my approach. My preference would be to spend the first several weeks traveling, meeting with customers, visiting our stores, touring our manufacturing facilities in Asia, Central America and the Caribbean and sitting with our teams around the globe. While it's frustrating not to be able to get out and meet face-to-face, I've had plenty of interactions with our global team and our customers via video meetings and virtual plant tours. I've done a lot of listening, I've been asking a ton of questions and I've immersed myself in learning about our various businesses. As I mentioned on my first day, we began a detailed, objective assessment of the business. This is what I call the unvarnished truth. It will define our opportunities as well as the challenges we must address to be successful and reach our full potential. The strategic assessment is the foundation on which we will set our ambition for Hanesbrands. From there, we will build our short- and long-term operating plans to achieve our goals. With respect to the scope of the strategic assessment, we are evaluating our entire global portfolio.

We're looking at historical performance, category trends, channel dynamics and competitive landscape across geographies and business segments. We're analyzing our cost structure across spend categories. We're analyzing the current level and mix of our inventory, and we're looking at how we're organized. We're also studying our supply chain, our technology infrastructure and our concept to consumer processes. We're evaluating our online and direct-to-consumer capabilities. We're analyzing our consumer mix, our brand equity measures and our product quality. We're even looking at how we are perceived by retailers. So let me share some initial observations from our work today. This is a great company with a strong foundation that we can leverage. However, in an environment where the pace of change is accelerating, for us to be successful and reach our full potential, we must become a more agile, consumer-centric, growth-oriented company. So what does this mean? It means that we're going to align Hanesbrands to become a company that embraces change, acts decisively, moves quickly and shares a common ambition. We'll have a consumer-centric mindset. The consumer is going to be at the center of everything that we do. We'll become faster and more flexible by simplifying our organizational structure as well as streamlining processes and decision-making, particularly around concept to consumer. We'll commit to growth. For example, we'll support the momentum in the Champion brand globally as well as the growth in Bonds and Bras N Things in Australia, particularly online. And not surprisingly, we need to return U.S. Innerwear to consistent year-over-year growth by applying a more consumer-centric approach to our brands, evolving our supply chain capabilities and capturing new opportunities. Lastly, it means we're going to build certain capabilities that improve efficiency and speed, enable growth and position the company for long-term success. We are looking for opportunities to modernize our technology.

We're looking at segmenting our supply chain to accelerate our time to market and meet the unique needs of our diverse brands and businesses. We must expand our digital focus and capabilities to be able to capture our share of online growth. And we'll invest in talent, filling current gaps while also developing the next generation of leaders. Our investments will be deliberate and targeted. We've already started a comprehensive review of our current cost structure to identify near-term savings opportunities that can be used to fuel some of our investments. I feel very good about the progress we've made. The global team is highly engaged, and there's a lot of energy, excitement and a genuine desire for change. We're working with purpose, and we're moving fast. This will be a multiyear journey that I believe will be rewarding for both our people and our shareholders. You'll begin to see parts of our strategy unfold this quarter, and we look forward to updating you on our progress over the coming months. Turning to our results. Overall, Hanes brand had a solid third quarter, with revenue, operating profit, earnings per share and operating cash flow coming in above our expectations. Scott will provide a more detailed review of our results, so I'll focus my comments on four key takeaways from the quarter. First, we saw good momentum across the business as apparel revenue trends improved sequentially in each of our business segments. We're encouraged by the trends in U.S. Innerwear. Sales, excluding PPE, increased 11.5% over prior year driven by continued point-of-sale strength and broad-based inventory restocking by retailers. Despite shipments exceeding point-of-sale in the quarter, inventory at retail remains below last year's levels. Therefore, we expect some level of retailer restocking to continue in the fourth quarter. We're pleased with the global improvement in Champion as sales increased nearly 130% from the second quarter. Compared to last year, sales declined 9% due primarily to our sports apparel business where COVID-related headwinds have essentially shut down sporting events and college bookstores. Excluding this, sales would have been down 2%. We were also impacted by COVID-driven supply challenges in the quarter.

Absent these two items, Champion sales increased over prior year. We expect the supply challenges to improve in the fourth quarter. And with global spring/summer 2021 bookings up over 2019 levels, we expect Champion's momentum to carry into next year. Looking forward, I'm excited and confident in the global potential of Champion. There's a lot of opportunity for growth over the next several years. The second takeaway is that we're facing second half profitability headwinds, which were mentioned on last quarter's call. The timing of negative manufacturing variances and higher SG&A expense are expected to pressure both gross and operating margins in the fourth quarter. We're also facing additional uncertainty from the latest COVID trends. Third, we delivered another strong cash flow quarter, generating nearly $250 million of operating cash flow. While we now expect to end the year with higher-than-anticipated PPE inventory, we continue to expect to generate positive operating cash flow in the second half and for the full year. And the fourth takeaway for the quarter, we further strengthened our liquidity, ending the quarter with $2 billion of liquidity, which we believe provides us with plenty of operating flexibility in this uncertain environment. So in closing, we're making progress in an increasingly unpredictable environment. We're seeing good revenue momentum in our business. We're moving quickly with our strategic and cost assessment. We're defining our ambition, identifying our opportunities and building our plans to become a more agile, consumer-centric, growth-oriented company. I'm excited to begin this multiyear journey, one that I believe will be rewarding to both our people and our shareholders. Before turning the call over, I want to thank our incredible team of more than 63,000 around the globe for their dedication and commitment to serving our customers during this challenging time.

And with that, I'll turn the call over to Scott.

M. Scott Lewis -- Chief Accounting Officer and Controller

Thanks, Steve. Overall, Hanesbrands had a strong quarter, with the results across all of our key metrics coming in above our expectations. Revenue momentum continued across the business driven by continued strength in point-of-sale trends and broad-based inventory restocking. As expected, margins declined over prior year but less than we were anticipating, and we generated $249 million of operating cash flow, further strengthening our liquidity position. Turning to the details of the results. Third quarter sales increased 3% over prior year to $1.81 billion, with foreign exchange rates accounting for 80 basis points of the quarter's growth. Apparel revenue performed better than our expectation for the quarter. Excluding $179 million of PPE sales, apparel revenue declined 7% compared to prior year. This represents a significant improvement from last quarter's 40% decline as each segment experienced a sequential improvement in year-over-year revenue trends. Adjusted gross margin of 36.7% decreased approximately 275 basis points over last year due to increased inventory reserves as well as negative manufacturing variances, which were incurred earlier in the year, rolling off the balance sheet and onto the P&L. Adjusted operating margin declined approximately 170 basis points over prior year to 12.6% as the gross margin pressure and higher operating costs from COVID were partially offset by ongoing SG&A controls as well as benefits from our temporary cost savings initiatives. Restructuring and other related charges were $53 million in the quarter. Approximately $49 million are nonrecurring costs from restarting portions of our manufacturing network that closed for approximately 10 weeks beginning in March due to the COVID pandemic. We experienced a stronger-than-expected recovery in point-of-sale.

In an effort to meet demand and best serve our customers, we chose to expedite shipments via airfreight as well as temporarily leverage third-party manufacturing capacity. This resulted in short-term incremental cost in the form of freight and sourcing premiums relative to our normal manufacturing cost. We believe this was the right long-term business decision. And in fact, we are already seeing the benefits in the form of newly captured retail shelf space. The remaining $4 million of these costs relates to our previously disclosed supply chain restructuring actions and program exit costs. These actions and their associated costs are on track and remain unchanged from previous disclosures. Our tax rate for the quarter was 17.3%, which was in line with our expectations. And adjusted and GAAP earnings per share decreased 11% and 43% over prior year to $0.42 and $0.29, respectively. Now let me take you through our segment performance. For the quarter, U.S. Innerwear sales increased 41% over prior year driven by a 15% increase in basics, a 7% increase in intimates and the inclusion of $166 million of PPE revenue. Excluding PPE, U.S. Innerwear sales increased 11.5% over prior year due to the continued positive point-of-sale trends and inventory restocking by retailers. In our basics business, we experienced growth in each product category, which drove approximately 170 basis points of market share gains in the quarter. Within intimates, bra sales increased at a double-digit rate. This more than offset the decline in shapewear sales, which is a category that continues to be negatively impacted by the coronavirus pandemic. Looking forward, we have seen positive point-of-sale and order trends continue through October. With these trends, as well as retail inventory that remains below last year, we expect some level of restocking to continue in the fourth quarter. For the quarter, Innerwear's operating margin expanded approximately 80 basis points over prior year to 21.7% driven by fixed cost leverage from higher unit volumes as well as favorable product mix.

Turning to U.S. Activewear. Revenue declined 27% compared to last year, which is an improvement from the second quarter's 52% decline. The vast majority of the year-over-year decline was from our sports apparel business, which continues to be significantly impacted by COVID-related headwinds. Activewear's operating margin was 9.1% for the third quarter. As expected, Activewear's margin declined compared to prior year due to the timing of negative manufacturing variances, inventory reserves for some of our non-Champion brands as well as SG&A deleverage from lower sales volumes. However, I will note that the segment margin improved significantly from last quarter's operating loss. Touching briefly on Champion, sales of the Champion brand within our Activewear segment increased approximately 85% from the second quarter. Compared to last year, sales declined 27%, with the vast majority of the decline due to the COVID-challenged sports apparel business. Despite the challenges in sports apparel, we continue to expect sequential improvement in Champion's revenue trends in the fourth quarter driven by continued point-of-sale growth in key channels and online as well as improved product availability. Switching to our International segment. Revenue declined 5% compared to last year on a reported basis and 7% on a constant currency basis. Adjusting for PPE sales, core International revenue declined 7% as compared to prior year, which is a significant improvement from a 44% decline in the second quarter. For the quarter, International Champion sales increased 5% over prior year. Excluding the impact from foreign exchange rates, we experienced growth in our Americas and Champion Europe businesses. This was more than offset by declines in our European Innerwear, Asia and Australia businesses where COVID-related challenges have slowed the retail recovery. International segment's operating margin declined approximately 100 basis points over prior year to 15.2% driven by deleverage from lower sales volumes, which was partially offset by continued tight SG&A cost management.

Turning to cash flow. We generated $249 million of operating cash flows in the quarter. Looking at our balance sheet, inventory increased 4% over prior year which was in line with sales growth and includes approximately $400 million of PPE inventory. Excluding PPE, inventory declined 15% compared to prior year. Leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis, which was comparable to last year. While liquidity remains our short-term focus in a post-COVID environment, our focus would be to return our leverage ratio to below three times. We further strengthened our liquidity position in the quarter even while reducing debt by approximately $130 million and paying our regular quarterly dividend. We ended the quarter with $2 billion of liquidity above the $1.8 billion at the end of the second quarter. We continue to believe we have significant capital cushion in this uncertain environment. And now turning to guidance. Outlook reflects the continued uncertainty due to the COVID-19 pandemic. Our outlook is based on the current business environment, which, among other items, reflects the lockdowns and curfews put in place over the past week in Europe. Outlook does not reflect any potential impact to the consumer or operating environments should governments or businesses institute additional lockdowns and store closings. I want to remind everyone that all year-over-year comparisons reference our rebased 2019 results. I'll also point you to our press release and FAQ document for additional guidance details. For the fourth quarter, we expect total sales of $1.60 billion to $1.66 billion, which, at the midpoint, implies a 2% decline over prior year. Prior to this week's European lockdowns, our revenue outlook assumed a low single-digit growth.

Included in our sales outlook is approximately $50 million of PPE sales, approximately $10 million of foreign exchange benefit and contributions from a 53rd week. We expect adjusted operating profit of $160 million to $180 million, which, at the midpoint, implies an operating margin of 10.4%. Expected year-over-year margin pressure is due to the timing of negative manufacturing variances and higher SG&A expense. We expect interest and other expense of approximately $50 million and a tax rate of approximately 17.5%. Our guidance for adjusted and GAAP earnings per share range from $0.25 to $0.30 and $0.24 to $0.29, respectively. And our guidance for full year 2020 operating cash flow is $300 million to $400 million, which includes the impact from the higher-than-anticipated PPE inventory. Based on our year-to-date cash flow, this implies fourth quarter operating cash flow of approximately $70 million to $170 million. So in closing, I'm encouraged by how we're managing through the increasingly unpredictable environment. We're seeing good revenue momentum in our business. I'm excited about our strategic assessment we're doing to define our strategy, and I look forward to the journey ahead.

And with that, I'll turn the call back over to T.C.

T.C. Robillard -- Chief Investor Relations Officer

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

Questions and Answers:

Operator

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

Omar Saad -- Evercore ISI -- Analyst

Good morning. Thanks for taking the question. Steve, welcome. Steve, you mentioned in your opening remarks that you're a brand and product guy at heart who likes to think big. So I guess I'll get straight to it. If we think about the company's two core assets, Hanes and Champion, I'd love to -- I know you're still going through a strategic review process, but I'd love to hear, at a high level, what kind of your vision is for these two brands and so what you view as kind of the core strengths of each of them because, obviously, they're different brands.

Stephen B. Bratspies -- Chief Executive Officer

Thanks, Omar. Appreciate it. Yes. I'm really excited to have the opportunity to work with two really amazing brands that, quite frankly, are in different places on their journey. Let me start with Hanes a little bit. Obviously, incredible household penetration, a well-known brand, been around a very long time and has a really, really big installed base. It leads in an awful lot of categories from a share position. And it's in categories that, quite frankly, in many cases, aren't relatively lower growth. So it becomes a big share gain, and we have to think really strategically about where we can gain share and how we can do it. And you'll hear me talk a lot about this idea of consumer centricity and the ability to make that a core value of the company and look through the lens of the consumer at everything we do and make sure they have a positive experience all the way from when they first engage to our brand, all the way through purchase and beyond and usage of the product. That will build trust and loyalty over time. And I think for Hanes, when we look at where it is today, it has really good equity scores. People like it. It's really known for its quality and things like comfort. But when you really start to dig into the business, you'll see that the brand is aging a little bit, and we need to reach a younger consumer that's large. They're growing. They're very influential demo. And we need to make sure that we're developing products and talking to them directly.

That will also -- to step a little bit further just beyond Hanes into our intimates business, really differentiating our brands and really making sure that we're very purposeful in our channel strategies over time of where we want to build the business and how do we do that. So there's some real specific choices to be made in the Hanes world, but I think it's -- you're working off an incredible base, and we just need to fine-tune it for the new markets that it's competing in today. Now Champion, a little bit different position. I'll be honest, one of the main reasons I came here was the opportunity to work on Champion and with the potential that it has. What Hanes is, is highly developed from a market share perspective. When you look at Activewear across the board and you segment it out by category, Champion is more a challenger brand, a small share position and a lot of opportunity to grow share, a lot of different categories, particularly with women over time. And it has a much broader kind of a global presence. And we're seeing really good growth from around the globe. Excited about some of the things we're doing in China and South Korea. But here, you're really talking about a -- while it's not a new brand, it's a young brand platform and one that presents a lot of opportunities to target different consumers, do a lot of innovation. There's some exciting things that are coming around new product platforms that we're trying. The new one that I saw just released around -- it's called Stormtech, which is taking all of our reverse weave technology and making it water repellent. There's some new dye technologies coming. So there's a lot of opportunity to expand this brand into new usage occasions and gain share across all the different segments that it participates in. So a lot of opportunity, a lot of work to do. We're at the beginning of this journey to take us to where we need to get to. But I think both of the brands have just huge future potential. They've been successful, but I think we're just scratching the surface on where that can go.

Omar Saad -- Evercore ISI -- Analyst

That's great, Steve. Thanks. Good luck.

Stephen B. Bratspies -- Chief Executive Officer

Thank you very much.

Operator

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

Adrienne Yih -- Barclays -- Analyst

Great. Thank you very much. And my welcome, Steve, as well. I guess, Steve, my first question is what -- for the two core brands, what's the current consumer perception that you as an outsider have recognized in your work over the next -- over the past couple of months? And then secondarily, such a big transformational change, the shift to digital, can you talk about digital as a component of this longer-term strategy? And how does technology and IT investment play into that transformation? And then to Scott, you had mentioned the change in sort of low single-digit growth -- or growth in sales to a low single-digit decline. I'm wondering if all of that has come from the recent European lockdowns or what you're seeing also in the COVID surge in the U.S. So if you can give us any more color on what the change -- the impetus for the change in that sales direction.

T.C. Robillard -- Chief Investor Relations Officer

Sorry, Adrienne. This is T.C. Your line was cutting in and out. I think we've got what you were looking for. So you're looking for Steve's kind of current kind of consumer perception. The other one was, I think, you're looking at in terms of the transformational change, just kind of how does digital factor into that. And I'm sorry, the last part, you broke out. I think you were -- it sounded like you were talking more around kind of one of the guide items or -- I didn't hear. If you could repeat that last part, that would be great.

Adrienne Yih -- Barclays -- Analyst

Yes. Sorry about that. So for Scott, basically, with the original guidance of slight growth to down -- to now down low single digit, was that a recent -- from the recent changes in Europe and then the COVID surge here in the U.S.? Just some more color on -- do you see that from demand that you're seeing in the channel? Some more color there would be great.

Stephen B. Bratspies -- Chief Executive Officer

Okay. Thanks, Adrienne. Thanks for repeating that. In terms of consumer perception of brand, very positive. And I obviously did my research before I came here to understand and came from, quite frankly, a position that had a lot of insight into a lot of different brands, in what was trending and what wasn't trending and how the retail environment view things and how consumers view it. So I think all the brands are viewed very positive where they're positioned today. But as I said earlier, and particularly in Hanes, I think there's some work to do to reach some new consumers. But you're starting from a positive position. We're not -- there's not an equity decline or penetration issues and things like that. It's more about where do you take them going forward. And kind of moving into your second question, digital will be a big piece of it. In general, it's true with most companies today, we need to become more digital not just in our consumer-facing business by the way but in our internal, how we operate systems, how we go to market. One of the things that we're going to have to spend some time thinking about, and I don't have an answer for you today but it's some work that we're going to do, is be very purposeful on our digital strategy with our different brands and understand how we want to go to market with Hanes versus Champion versus Bali.

The digital strategy and the go-to-market strategy, the channel strategy for digital, may be different by those brands, and we're going to be very purposeful and thoughtful in terms of how we do that. Underlying that, more from a technology perspective, I think that we have an opportunity -- the word I've been using is modernize our technology a bit. That will help us improve our speed and our efficiency, how we go to market, tying these new channels together, tying into our supply chain. We have a big opportunity there to improve how we operate. And then finally, on guidance, we feel good about the revenue momentum in our business overall. And you heard the results from third quarter and how we're building momentum. I would tell you that in the Innerwear business, we expect to continue to have year-over-year growth in that business. Obviously, the restocking is going to be a benefit, but it's not going to be as big of a benefit as maybe we saw in Q3, but we still continue to see the positive trends there. Activewear, we continue to see strong demand for Champion, and we expect to see sequential improvement in our revenue trends there. Clearly, sports apparel is going to continue to be a drag on the business right now, which is obviously highly COVID related. And to answer your last point directly, yes, the most recent announcements in Europe, we took those into account, and it changed our numbers, quite frankly, as to what we've expected in the fourth quarter. So we're trying to be as transparent as we can be and include as much of the data that is kind of coming at us live as we can in terms of what the guidance is.

Operator

Our next question comes from Paul Trussell with Deutsche Bank. Your line is now open.

Paul Trussell -- Deutsche Bank -- Analyst

Hey, good morning. And welcome also, Steve. Maybe I wanted to just first touch base on this quarter's margin performance. Maybe just go into a little bit more detail on some of the headwinds within gross margins and just how we should think about that line item going forward. Also, maybe just talk just bigger picture around PPE and sort of P&L.

T.C. Robillard -- Chief Investor Relations Officer

Paul, I'm sorry, I don't mean to interrupt you. The line just had cut out. We got the second question on the gross margin going forward. Can you -- I apologize, can you just start again from where the next question was?

Paul Trussell -- Deutsche Bank -- Analyst

Yes, sorry about that. It's just about PPE and just the impact to the P&L, the strategy and thought process going forward.

M. Scott Lewis -- Chief Accounting Officer and Controller

Thanks for your question. And so I'll start off with gross margin and hit on your questions there and also speak to a little bit impact that we have on SG&A. So starting with gross margin, we had -- it was lower year-on-year, but we did anticipate this. We actually came in a little bit better than we initially expected. So our gross margin was down 275 basis points from last year. And then within gross margin, we had two main headwinds that were causing the downward pressure. The first was negative manufacturing variances, which accounts for a little more than half of the decline. And just a little bit of background on that, as a reminder, like other companies who have supply chain operations, you have manufacturing variances. As those are incurred, these are capitalized onto the balance sheet, and then they roll off on the P&L and the cost of sales as the inventory is sold. Now these specific variances were incurred earlier this year from lower unit production that we had initially planned, which essentially raises the fixed cost per unit. The other headwind in gross margin, and it actually covers the remainder of the decline, was additional inventory reserves that we recognized this quarter. Now these reserves primarily relate to the Hanes Europe Innerwear business and our sports apparel business. As you move down the P&L, our overall operating margin was down 170 basis points. So you can see we're able to offset some of the gross margin headwind with a lower SG&A.

And that's resulting from this tight cost controls and benefits from COVID-related temporary cost savings initiatives that we put in place earlier this year. Now there are a couple of items in SG&A that are higher. We have some incremental COVID-related costs like cleaning and health supplies that we're incurring to protect our employees and customers, which actually started in the second quarter. And also, in addition to this, and we were speaking to it earlier, we had some costs that started this quarter and will continue related to the developing of our strategic assessment. So we'll have that and those impacts moving forward. Now speaking to moving forward into the fourth quarter on the margin side, the margins are going to be down like we expected. We made reference to that in our last call. We have second half headwinds in our margin. And about half of the decline is going to be in gross profit, and the other half is in SG&A. And let me give you some color around both of those. Now within gross margin, about half the decline is related to the negative manufacturing variances that I spoke to that we incurred earlier in this year that will be flowing through into the fourth quarter. Now one thing I did want to point out is as you -- as we can see the variances that are currently on the balance sheet that will flow through into the P&L early next year that we can actually see these specific headwinds that are impacting Q3 and Q4 will not -- will be behind us as we go into 2021.

Now the other half of the decline in gross margin was actually split between just lower sales volume and product mix. And then going to SG&A, we have several items that are kind of roughly about the same impact on margin. The first is the fixed cost deleverage from lower sales volume. And just as a reminder, about 2/3 of our SG&A is fixed. The second item relates to some -- actually some timing of some compensation-related expenses that -- which, in the fourth quarter of last year, were lower than normal levels. So this is more really a year-over-year comparability item versus 2019, not necessarily ongoing higher cost. And then the last couple of things, which I'd spoke to, that impacted Q3 will also impact Q4 as those costs associated with developing the strategic assessment and those recurring COVID-related costs that we're having.

Stephen B. Bratspies -- Chief Executive Officer

And Paul, let me just talk about PPE just a little bit. One, as the PPE pivot, if you will, inside of Hanesbrands happened, obviously, I wasn't even part of the company yet, but I would say pretty impressive opportunity and move by the company to be able to make that pivot at the pace they were able to do it and replaced a lot of lost revenue that was occurring at that time. And really, what a great proof point of leveraging the strengths and the ability of the organization to move. So I thought that was pretty impressive. The business going forward, we talked about expecting about $50 million of sales in Q4. It's moving very quickly in terms of the market is changing. We see this going forward as there'll be an opportunity for us to continue to sell PPE, but the long-term opportunity really remains unclear at this point. It's a very fragmented market out there. So the way we're positioned and thinking about it is that you should consider PPE kind of a near-term opportunity for 2020 and we're not factoring in. It is a huge business for us going forward at this point. But that could change, and we'll have to see how things progress in the market.

Operator

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

Mitch Ingles -- Raymond James -- Analyst

Hi everyone. This is Mitch Ingles filling in for Matt. Congrats, Steve, on starting on your new journey. So my first question is what led to the European Innerwear decreasing year-over-year during the third quarter, which compares to Champion Europe increasing year-over-year? Also following the new lockdown orders there, what are you seeing in this region quarter-to-date?

M. Scott Lewis -- Chief Accounting Officer and Controller

So is your question around the -- for Europe, the kind of top line sales trends we saw in the third quarter?

Mitch Ingles -- Raymond James -- Analyst

Yes, just trying to parse out the difference between European Innerwear and Champion Europe. Champion Europe increased year-over-year, if I'm correct, and European Innerwear decreased. So just trying to figure out how DTC and wholesale is playing for those two brands over in Europe.

M. Scott Lewis -- Chief Accounting Officer and Controller

Okay. So as we think about those two businesses, again, it actually kind of speaks to what Steve was talking about earlier with our Champion brand. So within Europe, our Champion Europe business, it did perform very well this quarter and largely led by our Champion brand and the strong growth that we had and driven by wholesale and online. And so that really drove the growth year-over-year. As we think about the Innerwear business in Europe, again, it's been more significantly impacted by COVID, and the sales were down more in the low teens. Now there's been growth in the e-commerce, but it was more than offset by just lower consumer traffic and channel mix.

Stephen B. Bratspies -- Chief Executive Officer

And the second part of the question about kind of go-forward on Innerwear, one, we already had good visibility on October in terms of what's coming in. And obviously, we factored that in, and we were pleased with our trends overall coming out of October and momentum. But the announcement this week in Europe obviously changes our outlook going forward. And what we did is we looked back to Q2, the previous lockdown, applied our learnings and what we saw the business do and put that into our go-forward forecast for the rest of the quarter. So good visibility in October obviously, and then we used all of our past learnings to make sure that we got as close as we could and the right forecast going forward for the rest of the quarter.

M. Scott Lewis -- Chief Accounting Officer and Controller

And just, Steve, just one point to add to that, as we were then sizing this for the fourth quarter, applying those learnings that we did and the same trends that we saw earlier this year, it roughly resulted in about $70 million, $80 million. So absent that, we would have low gross sales growth in the fourth quarter.

Mitch Ingles -- Raymond James -- Analyst

Great. And maybe a more long-term question, how are you thinking about consolidation opportunities going forward following the COVID-induced shakeout? And is that part of the strategic assessment?

Stephen B. Bratspies -- Chief Executive Officer

Yes. So we're looking -- for the strategic assessment, I'd tell you we kind of -- we're looking at everything and trying to understand where the opportunities lie for us. We're going to be evaluating all of our different businesses. And this company has a really strong M&A history. And our ability to add new components to the business has worked well over time as we've built the supply chain and put volume through it and taking costs out, and it's been a really, really good model. As we go forward, I think we have to think about using that potential leverage of M&A and thinking holistically of do we want to be behind capability in addition to buying volume and should we be pruning over time. I think when you look at companies who use M&A really effectively, they do both. So we're going to be looking holistically at the portfolio, finding out what makes sense for us in the future, and then we'll talk about actions going forward.

Operator

Our next question comes from Heather Balsky with Bank of America. Your line is now open.

Heather Balsky -- Bank of America -- Analyst

Hi. Thank you for taking my question. Welcome, Steve. Two questions for you. First, as you target a younger consumer for the Hanes brand, how are you thinking about use of marketing dollars? And do you think you need to increase your marketing budget? And then as a second question, I'd love to get your perspective on private label product in the Innerwear category and your view as a competitive threat or if it's not a competitive threat?

Stephen B. Bratspies -- Chief Executive Officer

Sure. Thanks for the question. In terms of marketing spend, yes, I think we've underinvested in these brands, and I think we're going to have to find thoughtful ways to make sure that we are investing -- that the brands get the investment that they deserve over time. And it's something you have to stay on and you have to continue to do, and I'm not sure we've kind of met that threshold and that hurdle going forward. So we'll be looking holistically at how do we thoughtfully increase, probably not consistently across the portfolio, and I think it's just not all brands but pick our bets and lean in and make sure that we continue to develop those brands with the right demographics. Jumping to private label, whether I see private label as a threat. Absolutely, it's a threat. The challenge for us is what do we do about it. And when I -- when you think about my background, I've worked on both sides of the private label business. I've built private label, and I worked in branded companies before, so a pretty good feel for what it takes to compete on both sides. But when you think about private label on the retailer side, they want and expect brands like Hanes that we have to drive traffic to their store. That's our responsibility as a brand. So we need to make sure that the brands are -- they're in demand, they're relevant, we've got the right innovation and that consumers are seeking them out. And when consumers are seeking your brand, they rise up in the importance for retail over time. So I think when you look at the brands this company has, when you look at the capabilities that we have from an innovation and from a supply chain perspective, we should be able to compete very well, build our brands, deliver the right quality and the innovation at a pace that's needed to win against private label. And it doesn't mean private label is going away because it's not. It serves a purpose for the retailer. But well positioned brands that are running appropriately and are valued by the retailer should be able to compete extremely well.

Operator

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

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Hey, good morning. Thank you very much for taking my question. And thank you, Steve, for all the color on your high-level thoughts on the strategic review. With regards to advertising expenses, they shook out around 2% of sales last year. As you think about fueling growth for Champion, potentially Hanes and some other of the brands, how do we think about the investments in advertising? Should we think about it as a mid-single-digit percentage of sales going forward over time? And then to Scott, more near-term questions here. I think in your FAQ, it talks about U.S. Champion ex masks was down 27% in the third quarter. And I think you called out that it should improve in the fourth quarter. Should we assume that it's around down 10% to down 15%? And then should we also think about International Champion actually up in the fourth quarter due to -- largely due to the sell-in into China?

Stephen B. Bratspies -- Chief Executive Officer

So the first part, Laurent, is, yes, your number is right, roughly around 2%, just around 2%. I -- personally, I think that's too low. So we're working on trying to figure out what is right. And by the way, it's not just about spending, it's having the right plan behind the brands to spend behind. So you're not just going to see us all of a sudden just strong marketing money into the market. We're going to be working very closely on building the right brands, positioning the right plans, the right -- behind the right products, and then I do think you'll see that number increase over time to -- I'm not sure what the right number is right now, but I definitely see it being higher. But I don't want it to come across as we're happy with where we are, we have the right programs, we have the right message, we have all the right products and it's just a spending exercise. That will be the end of the process that we get to. So we're going to go through all the brand development work, any repositioning work we need to do and then we would increase spending after we're ready to do that.

M. Scott Lewis -- Chief Accounting Officer and Controller

Yes. To address your question on Champion, so we did see a decline of 27%, which is, again, a large sequential improvement versus the quarter to the second quarter. And as we move into the fourth quarter, we continue to see that sequential improvement on the U.S. side. We have a strong demand there. It's really going to be about -- as we move into the fourth quarter, about improving our product availability that Steve mentioned in his earlier remarks. So again, a lot of positive trends there as we move into the fourth quarter. And even beyond that, as we talked about earlier, into 2021, our spring/summer bookings are above comparable 2019 levels. Now on the International side, again, a similar story there. We're going to see some positive growth, Europe business -- for the business there in Champion. In Asia, again, we've seen some challenges there from COVID this year. But as we move forward, we're expecting things to stabilize in China. We already have expanded our second retail partner there. We expected to add 150 doors this year, which is above our prior estimate of 100 doors, so we're seeing distribution gains internationally as well.

Stephen B. Bratspies -- Chief Executive Officer

And Laurent, I would just add, as we look to the fourth quarter, International Champion, the Europe change this week affected -- is going to affect the numbers. So we were looking for better performance originally. And then we made an adjustment based on the announcement this week of the restrictions in Europe to pull back our look at Champion in Europe for Q4.

Operator

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

Will -- Wells Fargo -- Analyst

Hi. Thanks for taking our questions. This is Will [Phonetic] on for Ike. And Steve, welcome. Can you guys just delve a little deeper into PPE margins and how you're thinking about revenues early next year? And then I guess, on Champion, just to kind of piggyback off of Laurent's question, can you just talk about trends in the U.S. and perhaps give some thoughts on lapping strong Innerwear numbers next year?

M. Scott Lewis -- Chief Accounting Officer and Controller

So I'll start off with the PPE margin question, then I'll turn it over to Steve. And so as far as margins, and this is similar to what we discussed last quarter, we don't have a practice of speaking to profit-level information at a product level. Products within the segments are so highly intertwined, it's really difficult to allocate cost by individual product. If we really think about it from a margin perspective for PPE, it's really -- a better way to think about it is the sales really and the units that we've produced, they really helped absorb and spread our fixed cost from the lower unit sales that we've had this year.

Stephen B. Bratspies -- Chief Executive Officer

And then for Champion specifically, we're pleased with the momentum that we're seeing in the business. Obviously, again, we have that sports apparel headwind that we're dealing with right now. We're not going to talk about 2021 kind of look-forward at this point. But I would just tell you that we feel good about the momentum we're seeing in the U.S. business, it continues to improve. And we'll get past the COVID headwinds, and we expect the brand to continue to do quite well.

Operator

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

Susan Anderson -- B. Riley -- Analyst

Hi. Good morning. Thanks for taking my question. Steve, thanks for all the details on kind of how you see the business, I guess one follow-up there. You talked about embarking on a growth-oriented journey. It sounds like you feel like there's a lot of opportunity across all the brands, especially Champion. I guess I'm curious, is this going to be driven by the global expansion of the brands or in existing geographies or new products? And then also do you think that there's opportunity to grow through acquisitions? Or are you mainly talking about core growth?

Stephen B. Bratspies -- Chief Executive Officer

Sure. Thanks for the question. I would tell you, initially, we're talking about core growth. So think about the portfolio that we have and how do we grow it. As I said before, I think we're well positioned. There's plenty of work to be done, so I'm not trying to make that underplay the work that we need to undertake and what we need to do. But in particular, when I look at Champion, I'm excited and confident in the global potential of the brand. I think there's a lot in front of us. And there's been a lot of good work done in terms of understanding who the consumer is and where we can play. Some new brand platforms, some of them that I mentioned earlier from a product perspective is a big opportunity for us. And getting into new categories. Our -- as I said earlier, our share, when you look at it by category, is not that high. And so we're a challenger brand, and we're operating that way. And we see lots of opportunities in China, in South Korea to continue to build the brand with our partnerships there with Bell and LF. We're seeing real indications of some real growth opportunities there. So we have a lot more work to be done on building it out. Targeting women is going to be an opportunity for us. But we're going to build out a really strong merchandising point of view around the globe that's going to enable us to create leverage for fabric platforms and new product innovation. And I think you're going to see there's a lot of potential in front of us, but we have a lot of hard work to go do.

Susan Anderson -- B. Riley -- Analyst

Great. And then just on the core Innerwear growth, nice job there, I think it was the strongest growth since 2014. How much of this, I guess, do you think is restocking? Obviously, there was a lot of takedown in the first half of the year. And do you expect that to continue in the fourth quarter? And then, I guess, how much is just really kind of getting back to normal replenishment? And then, I guess, how are you feeling about the category in general? I think prior to COVID, obviously, it was going through some rationalization as a lot of doors had closed. Do you think it's healthier now versus what we have seen over the past couple of years given the amount of rationalization we especially had in the first half of the year?

Stephen B. Bratspies -- Chief Executive Officer

Sure. In terms of fourth quarter, I would tell you that I expect there still to be retailer inventory restocking. It will not be as much as it is in Q3. So that 11.5% year-over-year that we posted for Q3, we won't see that high a sales growth in Q4, but we do expect our strong POS momentum to continue. So I think that will play out into Q3 and I don't -- sorry, into Q4, and I don't see that changing. So less restocking but still some and still positive POS strength. And as I said, we've already got some October guidance -- our understanding of our business that we can see from there. In terms of the category over time, U.S. Innerwear overall, the business overall, the categories overall, are not high-growth categories. They're different than -- you're seeing athleisure trends and things like that, that are driving big growth. These are more stable categories over time. But I think they're very healthy categories over time, and we're seeing that in the demand for products. So I think with fewer doors, you have to operate differently. I like where we're positioned in the market, and where we're really strong tends to be where the trend and the momentum is in the market. So I think our position is solid, and I think you'll continue to see a good solid category business going forward. But it's going to be a share gain inside the category in total because per capita is relatively flat. So I like where we're positioned, and I think the category will remain healthy over time.

Operator

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

Michael Binetti -- Credit Suisse -- Analyst

Hey guys. Steve, let me add my welcome, and congrats on the new role. It's nice to chat with you. I want to understand Champion a little bit. I'm a little confused by the volatility here. I think on the last call, the company commented that POS was up 40% in May, 70% in June, July up strongly and then we see the 27% decline this quarter. I know the college bookstore sports business comes into play bigger, but you also commented on the order book for spring/summer being positive in 2019. Wouldn't that sports apparel business need to come back pretty meaningfully by then to support positive numbers?

Stephen B. Bratspies -- Chief Executive Officer

Well, we're not going to give numbers for 2021 as we think about this. But we're just seeing the business rebound pretty quickly. We like the momentum that we're seeing. Yes, I mean, we need the sports apparel business to rebound. And we think it will rebound once we get past this. Whether that's going to rebound by spring, I don't know. It depends upon all the broader things with COVID that everyone's dealing with. But what we're encouraged by is the bookings that we have are up, and that's around the globe. So we're seeing the demand and pull for the product over time. If an individual channel shuts down like sports apparel, we'll have to manage through that. But the businesses that we're running actively and that we're pushing on are responding, and we're seeing really, really good pull-through in demand.

Michael Binetti -- Credit Suisse -- Analyst

Okay. Let me just follow that. When you put on your hat from your last job where you were a big customer of this brand, what do you think were the biggest missed opportunities over the last few years for this brand, any that you think you can capitalize on quickly? And then your initial commentary on your assessment of the business looks like there's some meaningful changes you can make. I mean when do you think -- the financial community here, when do you think we could take a look at the plan? And then the early assessment, we've seen a lot of -- a theme around the industry is smaller business but higher margins. Is that an appropriate theme to think about for this business as well?

Stephen B. Bratspies -- Chief Executive Officer

So let me take them in reverse order. I wouldn't commit to the last part yet of smaller business, higher margins. I think we're still -- we're in the middle of our assessment on where we want to be. The first part of it was around us getting to kind of a common fact base, and we all know where we are. We're -- I'd like to say we're building a road map, but we need to make sure we're all starting from the same place, and that's been our assessment so far. So I wouldn't get to that conclusion yet that we're going to be smaller with higher margin, and we're going to follow that model. We haven't decided on that yet. In terms of when you're going to start to see this, you'll start to see some of our strategy and our actions playing out in the fourth quarter. And we'll continue to update you as we go forward. And certainly, when we report in Q4, we'll give you more direction in terms of where we are and what our models look like. It may or may not be 100% at that point, but we'll certainly give you more clarity on the go-forward at that point. In terms of looking at the brands and things that I think they could have done, I would say these are general and nothing to do with necessarily my previous role, but as I said earlier, I think we need to continue to invest. Brands need to continue to invest behind themselves today. And there's lots of challenger brands out there. There's lots of people pushing. You need to compete for share of voice with the consumer. So I think continuing to invest in the brands is something that I would do. I would say portfolio simplification, these are just complicated categories, and you try to go to shop them at the shelf. There's a lot of complexity, so I think the ability to continue to simplify, reach a broad set of customers but simplify and lean in behind core businesses. And speed, being incredibly consumer responsive and reactive and moving at the pace of the consumer, it's a challenge for lots of different brands right now, and I think it's an opportunity for us going forward. So those are a couple of things that are on my mind coming in. Some are obviously grounded in past experience. But just looking more broadly across the market, I think those are some opportunities for us.

T.C. Robillard -- Chief Investor Relations Officer

Michael, this is T.C. I want to just add and layer in back to kind of your original question, you're talking about sports apparel, because I think some timing stuff might help you here, right? So when you're talking about our order book for spring/summer, and we talked about it being up over 2019, remember, that's going to be your wholesale order book, right? That's not going to take into account any of your DTC that you're doing in that business. And up over 2019, that's -- I mean that's a pretty good place to be considering the environment and kind of a lot of other peers in terms of where that is. The last thing I would say -- sorry, I had my -- our PPE with our mask. The last part of this that I would say is that sports apparel, right, you just think about the big part of that, a lot of that is coming in through the college bookstore, right? That's for fall. That's more of when those bookings are going to come through. That would not be a big part for them to be in the spring/summer. So that might help you with some of that why sports apparel is down. And so sorry, I didn't mean to kind of come back around but just wanted to kind of put a point to that.

Operator

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

Jay Sole -- UBS -- Analyst

Great. Great. Thank you so much and Steve, thanks for the great color today so far. Some of the other questions have touched on this, I want to ask you about it in a different way. But as you go through this in-depth business review, how do you think about balancing investment? Because it sounds like there's a lot of great things that you want to do in terms of product innovation and product marketing and systems and kind of improving a lot of different areas. How do you think about investing and balancing that against sort of the desire to show near-term earnings growth?

Stephen B. Bratspies -- Chief Executive Officer

Yes. Thanks for the question. When we think about investment, and we use that word a lot, we're talking about and we're going to be very thoughtful and targeted in how we do that and make the changes that we need to make. And you should think of these as setting the company up for long-term success. And we're thinking about how do we get to a multiyear horizon here, and we're working on that plan. But when I think of investment, I think of them as unlocks, right? Our investment should be driving growth opportunities. And we're going to be focused on a lot of different things that may -- we may need to put some muscle behind. I talked earlier about modernizing technology. I think we have to look at our supply chain going forward and really understanding how do we make it -- how do we align it to make sure it supports all of our key businesses as we go forward. It was built on one model, and it's incredibly successful at doing that. And it's proven its ability to flex to some extent. But I think we're challenging its flexibility right now as we build out our DTC business in different parts around the world. So we're looking at doing that. But I don't -- what I don't want you to do is think about whether the investment is going to be ramped, and we're not going to be really thoughtful and targeted and thoughtful how we do it. Underneath that, we're starting a cost transformation program at the same time. Some of these are short-term costs to kind of mobilize some short-term efforts to fuel some of these growth initiatives that we're putting into, and some are more longer-term cost initiatives that are restructuring inside and thinking about different ways of working that will present cost savings opportunities. So we're obviously going to be as aggressive on the cost side as we are on the investment side and fund as much of it as we can out of how we operate today. And we'll give you a greater look into that as we go forward of what the details are. But we certainly understand the need for performance and quarter-over-quarter, and we're going to balance the two as we go forward.

Jay Sole -- UBS -- Analyst

Got it. And then maybe one more, if I could. You talked about the advantages that the brands within the portfolio have against private label. But how do you feel about the brands and their positioning versus other national brands that the company comes in contact with and competes against within in places like Walmart and Target and across the retail landscape? What do you think the company's advantages are relative to those competitors?

Stephen B. Bratspies -- Chief Executive Officer

Sure. I think -- I mean the biggest one compared to some of the direct competitors is, I think, our equity is stronger and we have stronger consumer acceptance and position. I think we have a better innovation pipeline and a better innovation history that we can bring. So I think we're well positioned. I like -- we're managing our price position at the shelf with the retailers very closely. But I think on a side-by-side basis, I think we do quite well.

Operator

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

Paul Lejuez -- Citi -- Analyst

Hey, thanks, guys. Welcome, Steve. I'm curious about your online customer, how that customer looks relative to the rest of your customer base. And curious what they're buying, what categories work better for you online? And then separately, can you talk about your manufacturing facilities? At what capacity are they running at right now? If they're not at 100%, when do you expect them to be back at 100%? Thanks.

Stephen B. Bratspies -- Chief Executive Officer

Sure. Taking them kind of in reverse, from capacity, we're running from a COVID perspective, other than kind of day-to-day operating, making sure we separate people and things like that, we're pretty much back and running full up in our network. So that's not a problem for us today. In terms of the online business, it's evolving because we're young in this space, to be honest with you. And we're still trying to work a balance of which brands in which channels. And once we decide that, we'll lean in very heavily. But I would tell you there's good response to our brands online, particularly Champion, and as customers are going and looking and seeking product, particularly new platforms that come in. And if you look -- products play differently. Our more basic, traditional products tend to do extremely well on third-party partner retailers where they go to find that. And some of our smaller intimate brands tend to skew the other way. So the good news for us is, I think, we can shape that as we go forward and have the ability to really make purposeful choices over time. But the customers out there, they're looking for our brands online. We need to continue to build a great online presence, both in our third-party partners and in our own online business as well.

Operator

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

Peter McGoldrick -- Stifel -- Analyst

Hi. This is Peter McGoldrick on for Jim. And welcome, Steve. Within the strategic review and the assessment of category share and inventory penetration, are there any early reads on how this should evolve over, say, the medium term?

Stephen B. Bratspies -- Chief Executive Officer

Yes. I'd say we're learning a lot about where our brands are positioned both by channel, by demographic. And a good example would be the one I mentioned earlier around the Hanes brand is that we've learned a lot about our demographics and where we skew and who our core customer is and where a lot of the growth is in the industry. So we're not -- we cover that part, but I wouldn't say we're perfectly aligned to that right now. And we have the opportunity to go and pivot to target that younger consumer and make our brands younger, particularly the Hanes brand. The art in doing that is not lose that current base and attract new consumers and bring them in. And that's the marketing challenge that we have to go through. But it was -- it's a great insight for us, and it opens up a whole host of new growth opportunities for us as we go forward.

Peter McGoldrick -- Stifel -- Analyst

Okay. And then within domestic Innerwear specifically, do you think the intimates business as level set? Are we seeing sell-in and sell-through both going in the right direction with the foundation from which to grow sustainably?

Stephen B. Bratspies -- Chief Executive Officer

Yes. I think the intimates business continues to improve. It was -- we saw it was up 7%, and we said double digits in bras in the third quarter. So we're pleased with that. The challenge in the business right now is shapewear. As you can imagine, a lot of that business is special occasion, and those occasions aren't happening right now, so that's a bit of a challenge. But the team is even trying to pivot inside of shapewear to make that more of an everyday business and working on some new product innovations to do that. So we've seen some space gains in our business. I think to answer your question directly, yes, I think that business has begun to stabilize. We have a little bit of momentum, but I think there's some short-term up and downs, a lot to manage as we go through that. But we're working hard to make that a very viable, long-term business for us.

Operator

Our next question comes from William Reuter with Bank of America. Your line is now open. William, your line maybe on mute.

Mary -- Bank of America -- Analyst

Hi. This is Mary [Phonetic] on for Bill. So first, what is your exposure to the off-price channel in the U.S.? And how has demand been in that channel?

Stephen B. Bratspies -- Chief Executive Officer

Off-price, honestly, I don't know the exact percentage off the top of my head. I can tell you we have a business there. It's small. And we're thinking -- as we think through our channel strategies and we think through our brand strategies, obviously, that's something that we consider and think about it. But our exposure today is not very -- I don't know the exact number, but it's not very big.

Mary -- Bank of America -- Analyst

Got it. And then given that you are above your leverage target, would this preclude you from opportunistic M&A until things normalize? Or is that something that you are considering prior to reaching that leverage target?

Stephen B. Bratspies -- Chief Executive Officer

I would say, right now, M&A -- acquisitions are not our priority right now. And as Scott said, we'll work down our leverage over time to try to get under 3, which has been our core target. But we're very focused right now on the core business and thinking through what's the right plan to do that, and we'll invest there first. And continue to support the dividend. Those will be our number one, number two priorities. And acquisitions would be a lot less at this point.

Operator

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

Carla Casella -- JPMorgan -- Analyst

Hi. My question -- I have two questions. One is on working capital. There's a big increase in accrued liabilities. And I'm assuming some of that's deferral through COVID, but I'm wondering if you could give us a sense for the biggest drivers of that increase and the timing of when you will have to make the payments.

M. Scott Lewis -- Chief Accounting Officer and Controller

Yes. Thanks for your question. And actually, the accrued liabilities is kind of caused by a number of items, nothing individually that's significant. Again, some things that as we kind of entered into the -- emerging from the COVID crisis, a lot of things we were trying to focus on, of course, is reducing our cash-based expenditures but also deferring, right? That includes royalty agreements, leases for stores where stores were closed where, at this point, conservatively, we're still accruing that, but we're working with the landlords and negotiating abatements and things like that. Some of it is just taxes where, across the world, there's been stimulus packages, one, sometimes reducing cost but sometimes it's the deferring cost, sometimes into the fourth quarter and, in some cases, into 2021. So it's a number of factors, nothing individually significant.

Carla Casella -- JPMorgan -- Analyst

Okay. And it sounds like -- so the majority will be paid in '21, but there may be some catch-up in 4Q?

M. Scott Lewis -- Chief Accounting Officer and Controller

Yes. It will be a combination of the 2. I can't really give you a number specifically, but it will be a combination of the two.

Carla Casella -- JPMorgan -- Analyst

Okay. And then my second question on the business is, have you broken out how much of your Champion business is typically that college business? And on the margin front, you mentioned the mix shift affecting margin. Is that the driver of it? Or is it shapewear? I guess what are the highest margin businesses that were pressured to cause that mix shift?

Stephen B. Bratspies -- Chief Executive Officer

So let me take the first part, and then I'll let Scott talk a little bit about margin. We have a pretty good view of who our Champion customer is -- Champion consumer is and really understand who they are from a demographic and, very importantly, a psychographic perspective because that actually drives a lot of the Champion behavior. And some of that is -- there's two ways to think about it. The college demographic of people of that age are very high consumers of Champion. The actual bookstore business, kind of on-campus college, is not a huge piece of the business. But the demographic around that college is -- that college consumer is quite large.

M. Scott Lewis -- Chief Accounting Officer and Controller

Yes. And just speaking to the mix question. So as we, again, move into Q4, again, we're seeing a few headwinds in gross margin, and mix was one of them, specifically in the Activewear business. It's actually just within the product categories and within the mix between the sports apparel and the Champion business as it just kind of naturally will, a little bit, ebb and flow quarter-to-quarter as mix evolves. And as I think about and you think about gross margin in the fourth quarter, again, the largest piece, roughly half of it, is those manufacturing variances and the rest of it is just deleverage from lower volume and then the mix being another piece of it. And let me just add, again, when you think about our sports apparel business, our total sports apparel business will be roughly a little over $300 million this year. That's not all Champion. So that bookstore business is not fully Champion. There's other parts in that business as well.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to T.C. Robillard for closing remarks.

T.C. Robillard -- Chief Investor Relations Officer

Great. Thank you. We appreciate everyone attending the call today, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 74 minutes

Call participants:

T.C. Robillard -- Chief Investor Relations Officer

Stephen B. Bratspies -- Chief Executive Officer

M. Scott Lewis -- Chief Accounting Officer and Controller

Omar Saad -- Evercore ISI -- Analyst

Adrienne Yih -- Barclays -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Mitch Ingles -- Raymond James -- Analyst

Heather Balsky -- Bank of America -- Analyst

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Will -- Wells Fargo -- Analyst

Susan Anderson -- B. Riley -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Jay Sole -- UBS -- Analyst

Paul Lejuez -- Citi -- Analyst

Peter McGoldrick -- Stifel -- Analyst

Mary -- Bank of America -- Analyst

Carla Casella -- JPMorgan -- Analyst

More HBI analysis

All earnings call transcripts

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