漢佰 (HBI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter fiscal 2007 Hanesbrands investor conference call. My name is Melanie and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session at the end of this conference.

[ OPERATOR INSTRUCTIONS ] As a reminder, this call is being recorded for replay purposes

I would now like to turn the call over to Mr. Brian Lantz, Vice President of Investor Relations. Please proceed, sir.

Good morning, everyone, and welcome to the Hanesbrands, Inc., quarterly investor call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2007.

Hopefully, everyone has had a chance to review the news release we issued earlier today. The release and the replay of the webcast of this call can be found in the investor section of our Hanesbrands.com website.

Before we begin, I want to remind everyone that we may make forward- looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC such as our recent form 10-K as well as our press releases and other communications. The Company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

With me on the call today are Rich Noll, our Chief Executive Officer and Lee Wyatt, our Chief Financial Officer. Rich will give a summary of our business performance and trends for the first quarter. Lee will then provide further detail on the period and various aspects of our financial performance. Following our prepared remarks, we've allowed ample time to address any questions that you may have. So now, I'd like to turn the call over to Rich.

Thanks, Brian, and thank all of you for joining us today.

We've now successfully completed the first quarter of our first full year, which is the foundation for achieving our long term growth goals for sales, operating profits, and earnings per share.

Our performance was on track with our expectations for the quarter as we increased sales, made strategic advances in our operations and generated cash for investments in our business. We are off to a solid start in our first full year of independence.

Now let me touch in more detail on sales, margins, restructuring progress and cash flow. Our sales increased slightly in the quarter, up 0.7% . The increase was primarily a result of growth in the outerware segment which resulted from double digit gains for Champion activewear and increases for Hanes casualwear. The innerware segment, where retail sell through trends improved in the first quarter, sales were generally flat.

Importantly, we continue to make progress on our strategy of building our largest and strongest brands in core categories through innovation in key items. For example, we continue to leverage the Hanes ComfortSoft platform across mens, womens and childrens product categories.

In March, we launched a new national television, print and internet advertising campaign for our Hanes All-Over Comfort Bra featuring Jennifer Love Hewitt. The television spot debuted to a very wide audience on American Idol. And, since the campaign was launched, we have seen strong retail sell through of the All-Over Comfort Bra.

Driving growth platforms across categories is a major element of our strategy as it enables us to meet consumer needs and leverage advertising dollars.

Champion, our second largest brand, continues to be a strong performer, helping drive sales growth in our outerwear segment. During the first quarter we benefited from increases in the depth and breadth of distribution for Champion in both the mid-tier department store and sporting goods channels. For example, we have experienced meaningful space gains across channels with our moisture management double dry performance tee and our Champion seamless sports bra, which is designed to provide both a high level of motion control as well as superior comfort. We will continue to bring Champion's uniquely compelling combination of style, performance and value to consumers through a more impactful and cohesive retail presence.

We are gaining traction as a result of these focused brand building efforts, and continued investment behind our largest and strongest brands is key to our ability to achieve our long term growth goals.

Turning to profit, our operating profit margins, excluding actions, the key measure which we use to assess our performance was 08.6% of sales for the first quarter of 2007. These results were in line with our expectations. We experienced anticipated cost increases, yet also saw benefits from our cost reduction initiatives of consolidating our organization and globalizing our supply chain.

The execution of our action plans is on track. In this past quarter, we announced plans to close two domestic textile facilities and two domestic distribution centers. We also ended operations at three facilities for which clothes or plants had previously been announced. I would like to reiterate that these decisions are never easy, but they are necessary for Hanesbrands to remain healthy and competitive.

I would again like to acknowledge the many hard working employees who continue to diligently perform their duties in the facilities affected by our restructuring initiatives.

Lastly, our cash flow from operations in the quarter allowed us to make an additional voluntary $42 million pension contribution.

In closing, we entered fiscal 2007 clearly focused on our key strategies which are to reduce costs, increase investment in our strongest brands, and generate cash. We believe we have a powerful business model to create value and are establishing our baseline performance in 2007 from which to achieve our long term annual growth goals of 1% to 3% sales growth, 6% to 8% operating profit growth, and double digit EPS growth.

And now, I'd like to turn the call over to Lee Wyatt, who will review our financial

Thank you, Rich.

Let me begin with sales. Sales for the first quarter, which is historically our lowest volume quarter of the year, increased 0.7% to $1.04 billion. The overall increase in sales was primarily due to a 6% increase in our outerwear segment. This increase offset generally flat sales in the innerwear segment and declining sales in other segments, primarily hosiery.

To review operating profit, we will begin with GAAP operating profit, which includes the impact of restructuring and spin-off actions.

Next, to better understand business performance, we'll review operating profit excluding action, which adds back $20 million of restructuring and spin-off actions, as calculated on Table 4A of the earnings release.

GAAP operating profit decreased by 28% in the quarter to $69 million or 6.6% of sales, down $27 million from last year. The decrease is primarily due to restructuring and related charges for plant closures of $22 million. $5 million of these charges in the first quarter were non-cash. Non-cash charges are primarily accelerated depreciation and they are included in cost of sales and can cause volatility in our gross margin. Cash charges are primarily for lease buyouts and severance and are reported on a separate restructuring line on the income statement.

As stated during our previous calls, we expect to incur approximately $250 million in restructuring and related charges in the three-year period following the spin-off. To date, we've recognized $55 million in restructuring charges.

Operating profit, including actions for the quarter, as calculated on Table 4A of the earnings release is $89 million, up $13 million from last year. The decline was driven by anticipated increases in cotton cost of $10 million and $5 million increase in investment in our business initiatives and incremental standalone costs.

Cotton prices which had been around $0.45 per pound in the first half of 2006 returned to the historic average of around $0.55 per pound in the second half of last year and the first quarter of this year. The resulting operating profit, excluding actions, was 8.6% of sales in the first quarter.

Now, I'd like to turn to net income. Net income was lower in the quarter, as was expected, as a result of the Company's independent structure. Net income for the period was $12 million, down $63 million from a year ago. Net income for the quarter reflects increased interest expense, a higher effective tax rate, and reduced operating profit, when compared to the same quarter last year. The higher interest expense will continue to effect our comparisons to last year until we reach the anniversary of the September 2006 spin-off.

Interest expense increased in the quarter to $52 million, from $3 million a year ago, as a result of debt incurred as part of the spin-off. During first quarter, we successfully re-priced our $1.3 billion term loan [B] facility to reduce the rate 50 basis points to LIBOR + 1.75. The effective tax rate for the quarter was 30%, which reflects our structure as an independent company.

Diluted earnings per share for the quarter was $0.12 on approximately 97 million shares outstanding.

Now, let me turn to the balance sheet and cash flow. The March 31 balance sheet reflects strong liquidity as we ended the period with $149 million of cash and our $500 million revolving credit facility remained undrawn, and we are in compliance with all debt agreement covenants.

Long term debt at March 31 remained at $2.5 billion with approximately 70% of our debt at a fixed or capped rate. And we are filing the registration statement to allow our $500 million floating rate notes to be publicly traded.

Our under funded pension liability for qualified plans was reduced to $131 million at March 31 and reflects an additional voluntary contribution of $42 million in the quarter, another indication of our continued ability to generate strong cash flow.

We mentioned in our last call that our intent was to contribute at least $40 million to our pension plans in 2007. With this first quarter contribution, we are now 84% funded across our qualified pension plans and we now have no significant mandatory funding requirements until 2010.

Our cash flow statement reflects the net use of less than $1 million from operations, that's after the $42 million pension contribution, and this met our expectations for the quarter,

Capital expenditures of $7 million in the quarter were partially offset by proceeds from property sales of $3 million. While capital spending will be uneven between quarters or even year-to-year, we continue to anticipate that over the long term, capital expenditures will be roughly equal to our level of annual depreciation of approximately $110 million.

In summary, our operating performance was on track in the first quarter of 2007.

One side note. There are aspects of timing of our business that historically cause results to vary from quarter to quarter. These factors include the timing related to back-to-school or holiday shipments, promotional spending, and investment behind our business initiatives.

So, with the completion of the first quarter, we now have begun to establish our baseline annual performance.

I'll now turn the call back over to Brian.

Thanks, Lee.

That concludes our recap of our financial performance for the most recent quarter. Before we begin taking questions, I want to take this opportunity to reiterate that Hanesbrands will continue to follow a policy of not providing quarterly or annual guidance. However, our intent is to continue to use these quarterly conference calls to communicate our performance and help investors develop an understanding of our Company.

Now we will begin taking your questions and will continue as time allows. Since there may be a number of you that would like to ask a question, I'll ask that you limit your questions to two to three per caller at a time, so that as many of you can get an opportunity to pose questions as possible. I will now turn the call back over to the operator to begin the question and answer session.

[ OPERATOR INSTRUCTIONS]

And our first question comes from the line of Omar Saad with Credit Suisse. Go ahead.

Thanks. Good Morning.

Hi Omar. How are you doing ?

Good, good. Thank you. On the sales performance, you kind of looked incrementally versus last quarter and periods prior to that. You know, clearly a meaningful change in the trend. I know you've been cutting some of the unprofitable businesses and closing down, I think you've cycled that. But, could you help me get a feel for how much was driven by that versus some of the underlying businesses' improvement?

Certainly. Overall, we're pleased with the sales results and the sales trends. You're right. We have cycled as of the ending last quarter, all of the businesses that we've overlapped. I also talked last quarter, a little bit about how we did see a lot of softness in the innerwear category, mainly across the entire mass channel. And we were hypothesizing that that was due to the fact that a lot of them pulled back from our categories in terms of promotion and secondary locations as they focused their attention elsewhere during holiday.

Our data and our share and everything suggested that in fact was the case. It primarily was related to holiday. And, in fact, the mass channel in some of our categories for just that period, lost a substantial amount of share. We're helping our retailing partners understand what the implications of those pullbacks were. They do in fact understand it, and we're working with them to get back to traditional levels of promotion and secondary location for the key back-to-school selling period as well as holiday. And I think we'll see much better results over time.

Great, that's helpful. And in terms of the run rate, we look at your SG&A line. Clearly, there's been -- there's some increases driven by ---you're clearly doing work, investing in your business, investing behind some of these marketing initiatives that seem like quite the appropriate thing to do. In terms of that run rate, should we start to see a cycle come of those costs as we cycle kind of the spin-off date, in terms of the incremental costs of being a kind of independent public company? How should we think about that? You know, historically, versus going forward.

Yes, I think as we think about SG&A or gross profit margin, we really want to, during the 2007 as we kind of establish that baseline performance, point you back to operating profit [XA] because there are still movements between those two columns -- two metrics. So, I think that if you continue to focus on operating margin XA we think that's the best comparison for the year. I think next year will get easier, once we've established the base this year. And again, 8.6% rate was on track for us this quarter. And, Omar, let me talk a little bit about the costs and so on and so forth. We had talked, actually I think it was back on the October call, that in fact, we would incur incremental stand-alone costs as well as selected investments behind our initiatives. And that our goal for our baseline year in 2007 was to be able to offset those with our cost savings initiatives because we have been doing this for quite a long period of time. That is still our goal. Our baseline results will obviously be what they are. But that is still our goal, to try and accomplish that objective.

Okay. Okay. And, the last question. In terms of your underlying margin structure. If I want to kind of [tease] out the cotton impact, did you disclose how much that impacted kind of on the operating margin line?

Yes, what we've basically said was for the first quarter, the cotton impact was about $10 million.

Okay. Helpful, very helpful. Thank you very much.

Our next question comes from the line of Jeff Edelman with UBS. Go ahead.

Thank you. Good Morning.

Hey, Jeff. How are you doing.

Okay. And you.

Two questions. One, were there any timing issues with shipments in the first quarter? And, would this have any impact as we looked into the second quarter?

Yes, I think as we look at shipments for the first quarter and one of the questions is, what about Easter timing. We really didn't see any significant timing shifts because of Easter. Although, in our business, you know, there are always quarterly shifts in timing that varies from quarter to quarter each year, but really never effects the total year sales. So, didn't really see anything material.

Okay. And then, secondly, on the cotton cost. If you look at spot cotton prices, they were rising throughout last year and right now, pretty stable with the prior year. Could you sort of go through your costing, your pricing -- and you said the quarter was in line with expectations so I guess my question is, you expected to see pressure from higher cotton prices? And does that get alleviated soon? I'm a little unclear on that.

Sure, and I think as we talk about cotton pricing, I think perspective is really critical, here. So, as you look at the last five years in cotton pricing, the average has been somewhere between $0.50 and $0.55 a pound, in that range.

In the first half of 2006, cotton pricing was actually lower at around $0.45. In the second half of 2006, and then in the first quarter of 2007, that pricing had returned around that average $0.55 a pound. So, we've actually had three quarters now of pricing around $0.55 a pound, which is kind of that average. So, we anticipated that, we built that into our model and our thinking.

Okay. Now, historically, have your costs and selling prices moved in tandem when we have that fluctuations or is this just a fluctuation that we will probably see in the margin on an ongoing basis ?

Jeff, this is Rich. From a long-term perspective, you know, built into our thinking is that sort of long-term average cotton price of around $0.55ish or so. When it dips down a little bit below that, we enjoy the benefits of it. When it dips above that, on a short term basis, obviously, it'll constrain the margins a little bit. So, the short term swings you're not going to see it sort of work itself through -- sort of the industry.

If we started to see a systemic change of cotton prices over the long term, either substantially up or substantially down, I'm very confident that that would work its way through the entire marketplace, both in pricing and the whole host of other things. But, the short term swings, quarter to quarter, or even year to year, you're not going to have them work through the industry that quickly.

Okay. Thank you.

Our next question comes from the line of Brian McGough, with Morgan Stanley. Go ahead.

Yes, thanks.

Hi Brian.

Hey. So, over the past couple of years, you guys have walked away from a lot of low margin business. How I'm doing the math, it's at least 2 to $300 million, maybe more. And, I'm sure it was low margin, and in part just because you had a high cost structure that dictated that it was low margin. So, I guess, what I'm wondering is, now that you're fixing your high cost structure, how long do you think that it is going to be until you can more aggressively go after the business you've walked away from over the past couple of years?

Well, let me talk a little bit about the characteristics of that business. Some of it was private label, some of it was business where we started to go after small niche products with new brands, with new products, and new ways. And so, the characteristics of those businesses, I think, even with an extremely better cost structure, would still be not part of our business model, which is to drive our largest, strongest brands and core categories by driving innovation and key items.

So, I don't think that it is safe to say that we walked away from that because we had a high cost structure. It was really off strategy. That business has been gone for quite a while. We cycled the effect through last quarter and you won't see that in our numbers going forward.

Okay. Would you talk, just for a minute, about what happened in the quarter with the Family Dollar business? And, I know you probably don't want to get into specific customer interactions, but can you give any color about how that whole turn of events played out?

Yes, in the dollar store channel, you have two major players, Dollar General, and Family Dollar, obviously. And there are always some puts and takes on gaining programs or losing programs and so on and so forth. I think one of the things you might be specifically referring to is Family Dollar actually did a press release on March 20th, announcing that they were taking the Hanes brand in a much larger way and being a primary supplier of their innerwear business and they are very proud of the fact they have such a national brand to partner with. We're very excited about that long term relationship.

From an overall standpoint, though, those puts and takes between the businesses, we don't see any material difference in total top line sales in the short term, between 2006 or 2007. I do believe that this stronger partnership with Family Dollar will set the stage for us to have continued growth with them over time.

Great. Okay, thanks guys.

Sure, thanks.

Our next question comes from the line of Eric Tracy with BB&T Capital Markets. Go ahead.

Good Afternoon. Mainly, just focus again on some of the segment breakdown in terms of sales, sort of at the higher end, the lower end, outerwear seem sequentially to be accelerating much faster than was expected. Maybe just provide a little bit more color where that incremental opportunity gains were being derived from.

And then on the other end, hosiery seemed to be down a little bit more than expected. I know there is going to be a kind of lumpiness on a quarterly basis, but is there any overall trend for any of those segments that we should be thinking about for the balance of the year ?

Yes, first let me talk about outerwear. We're very pleased with the trends in that business and one of the major drivers there is the double digit increases we're seeing in Champion and C9 by Champion, which is an exclusive arrangement we have with Target. We're seeing a lot of traction with the Champion brand and we're getting a lot of great reception, from both consumers as well as retailers with our new products, such as the double dry tee I talked about, expanding both the breadth of our distribution as well as the depth in a lot of channels. And, we expect those types of trends to continue with the Champion brand.

In terms of sheer hosiery, you know, that business has been in decline, from an industry prospective, between 8 and 12 % a year, well over a decade. And we expect that decline to continue. This quarter, hosiery was only down about 5% or so. I would not read into that any more than the typical quarter to quarter fluctuations. Our plans are still to be thinking about that business in long term decline of that 8 to 12 % range.

Okay. And then just back on outwear real quick. In terms of the C9 obviously having a lot of success within Target. Any other retailers kind of stepping in and wanting to do very similar type programs? Obviously, not taking the C9, but something very similar on the Champion line. How does that sort of play out?

We're seeing a lot of receptivity by retailers of wanting to expand the Champion brand.

I'll move C9 off to the side, because, as you've said, it's doing extremely well.

We don't have a desire, nor do any other retailers have a desire to have a specific sub brand under Champion be their exclusive pervue. We do see a desire on both mid-tier department stores and sporting goods, wanting to expand the breadth and depth of distribution with Champion and that's where our major focus is, outside of the Target relationship that we have with C9.

Then, maybe turning here a little bit. There has been some speculation sort of out in the industry in terms of one of the larger mass retailers, Wal-Mart in particular, possibly looking to do sort of private label offering sooner rather than later. At least, again, the [chatter] picking up more on that and possibly turning to one of your competitors for that. Can you comment at all? Is there anything that you're aware of on that or is there anything that we should be thinking about particularly within the Wal-Mart--?

Yes, in terms of the long term trends, you know, the private label business and the innerwear segment -- which is I think what you are probably talking about the most -- have been fairly stable. Some categories, such as socks, there is a higher percentage of private label than there is in some of the other categories, and we don't see any dramatic changes in that arena.

Private logo is always a factor. One of the things I would say is that consumers vote every day that they prefer brands. You'll see in certain categories such as mens' underwear, where we tend to have a pricing premium to the next largest brand, Fruit of the Loom. They tend to have a pricing premium to private label. But these pricing premiums are more on the order of 5%, sometimes up to 10%. They're not as big as you might see in other categories in consumer products where you can see 50% pricing premiums or 100% pricing premiums. So, we don't expect those types of dynamics to change dramatically any time soon.

Okay. So, there is nothing specific with again, one of the larger, be it Wal-Mart or a Target, that is for some reason looking to do private label beyond sort of opportunistic categories, such as socks, but more fully looking to do private label within that innerwear category.

Yes. those types of programs --- are you talking about innerwear or outerwear ?

Innerwear.

Oh, innerwear. Those types of programs, they're constantly remixing what they've got on the wall. They will bring in some other brands. They will emphasize some -- certain of their brands for a period of time or whatever. But we're not seeing any dramatic shift in how they've been thinking today, say, versus over the past five or ten years.

Thanks, guys.

Our next question comes from the line of Kevin Fuller with Magnatar. Go ahead.

Hey guys. How are you doing? I was just trying to reconcile I guess on the dollar store channel. Were you in the Family Dollar before or is this all incremental business?

The -- we had -- if you went back a couple years ago, we weren't in Family Dollar at all. Over time, we've started to build a relationship with Family Dollar and it's I think culminated in the announcement that I was talking about in March, where we're now their primary supplier for innerwear across the underwear category in mens' and womens' panties and kids' as well as in the sock business as well. So, I think it's sort of an evolutionary process that just sort of culminated.

Okay. And just so I can try to quantify the -- you know, in terms of modeling, trying to quantify the impact here. I mean, what's -- you net out the 8,000 Dollar General stores where you lost the business and add back the 6,000 Family Dollar -- I mean, is that enough to offset that or how should I think about that?

We did, in fact, have some business in Dollar General. However, we weren't the primary supplier of those products in Dollar General. So, you can't only just look at the size of the firms, you also need to look at the amount of the business or the space that we have. At the end of the day, when we net it out from '06 to '07, it is not a material change in overall sales. Actually, it could be up fairly slightly but not a material amount.

Were there any logistical issues with Dollar General? Or what was their reasoning for not -- for kind of pulling the product out?

You know, I can't speculate exactly what the reasons were in Dollar Generals' minds for making changes. I know what the reasons were for Family Dollar and it was all about they wanted to have a stronger national brand be their primary lead.

I will say that that those -- like a lot of places, competitors compete very fiercely and gains in one sometimes may end up saying that the other person does not want to be as strong in that brand, and you get a lot of those types of interplays and they happen all the time.

And the last question. In terms of all the kind of restructuring going on -- and I imagine that it is taking up a lot of management's resources. Have there been any kind of supply chain or customer issues, given some of the distractions, at any of your major customers?

You know, our plans and our execution is right on track. We're very pleased with the performance. You're absolutely right. We're undergoing a tremendous amount of change through consolidation and moving the supply chain. We've been closing a number of facilities and ramping up the facilities in the Caribbean basin. And things are going very, very well. We've got a lot of people focused and dedicated to managing these big shifts and our service rates remained as high as they have ever been.

Great. Good Luck. Thanks.

[OPERATOR INSTRUCTIONS]

And our next question comes from the line of Manny Winetroth with Intricacy Advisors. Go ahead.

Hi there. On your real estate position I see you have 13.5 million square feet in the United States and as you're in the process of closing down a number of facilities in the States, so I guess 1 million square feet, and then Stratford road is going to be sold. Could you comment on what your sense is of the value of your real estate position?

You know, overall, we are continually remixing, obviously, the portfolio of real estate we have as we exit facilities. And, in fact, I think Lee Wyatt talked about our capital expenditures for the quarter on a gross basis were $7 million, but we've realized $3 million from the sale of facilities, so on a net basis it was only about $3 or $4 million. So, you're absolutely right.

Those types of plants, like the one on Stratford road that you're talking about, we've already estimated in sort of a write-down value. I'm sure we'll be able to sell that property for something that's -- a good price. For most of you, you would not realize it, but that plant happens to be located in a fairly desirable retail location and I'm sure we'll have some success selling it. But, I don't think it's material in terms of our overall restructuring efforts or our ability to generate cash flow.

Okay, great. Thanks a lot.

And then, in terms of the marketing spend, for innerwear especially. Is it working? Because I'm not seeing huge innerwear growth, at least this quarter.

It's absolutely working. We just launched the Hanes All-Over Comfort Bra on TV with Jennifer Love Hewitt. We're seeing very positive sell through results from that. In terms of driving these major comfort platforms, this is a very new part of our strategy, and focusing our dollars on these major platforms and it takes a long time for it to start to lift the entire boat, if you will. But, we're very pleased with the results. We have quantitative measures to look at how effective the advertising is in terms of driving sales and we're very pleased so far.

Thanks a lot.

Ladies and Gentlemen, please stand by for your next question. And our next question comes from the line of Kevin Sikes with Goldman Sachs. Go ahead.

Hi. Thanks for taking my call. Question on just where you're seeing strength on a channel basis. Is it stronger in mass than it is in department stores or in mid level department stores?

Yes, I think the major strength that we're seeing overall -- not just in terms of our sales, but I'm just going to talk about sort of the innerwear and outerwear categories in general.

The major strength is in the mid-tier channels right now. They seem to be quite strong. Department stores, you know, have their ups and downs over time. But the mid-tier is very, very strong.

Mass has actually been a little bit weak. I think a lot of that is driven by the holiday problems that I was talking about, as they pulled back from apparel essentials and focused their efforts elsewhere. It was clearly impacting their overall sales results and actually share in a lot of our categories. I would say, I believe, that those are short term phenomena and you'll start to see the mass channel come back over the next couple of quarters.

And with that, are you still seeing strength in intimates?

Overall, we're very pleased with all major segments of our business, including the womens' intimate apparel, across a number of channels.

All right. When you think about sort of new products [unintelligible] -- when you think about your business, do you think about -- do you measure it to sort of what percentage of your business is coming from new products, maybe products that are introduced in the last 18 to 24 months? And then, do you have a metric that we can guide to?

I think the best metric will be how our total top line sales grow, relative to our long term financial growth objectives of 1% to 3% of sales.

We are changing the model in which we're operating where we used to introduce a whole host of new products on a continual basis, but not focus our efforts behind big, major platforms. That's the thing that we're doing now. The idea with this focus on platforms is to clearly use innovation to drive sales increases in that particular product, but also start to lift the entire franchise. And so, the best way to see that is through our overall sales lift after our baseline year of 2007.

Okay. And, just with respect to the Dollar stores, and maybe the whole channel mix. Is there pricing consistency between the products and how do you manage that with consumers more and more shopping in different channels, in various channels?

I'll just talk about sort of the relative channels -- mid-tier, mass, and department stores -- and sort of their pricing algorithms, if you will.

Dollar stores have a tendency to want to make sure the price per package is fairly low. So a lot of times what they'll do is go to smaller pack sizes. A lot of their consumers, every dollar really counts and so they can't have the ability to go in and buy ten pairs of socks or you know, six pairs of underwear. So, they'll tend to go towards lower pack sizes to get that price point right for their consumer.

Mass, on the other hand, is all about value. And they'll try to drive value through having many very large pack sizes and slightly lower price per garment.

And mid-tier is about offering better products with higher quality and their sort of a combination of higher price for better product and also higher volume and pack size.

So, you do keep different products for the mid-tiers than for the mass? It wouldn't be the same exact product, if you will.

Yes, that's absolutely true. For example, if you went into a mid-tier store, you would see Hanes Classics, which is a heavier fabric, tends to be a ring spun cotton, higher quality product that they charge more for, than you would see, maybe in a traditional mass store.

Thanks, that's helpful.

Just so I'm clear on the comments about cotton. If spot prices stay where they are -- roughly around where they are now, for the balance of the year, what kind of annual impact would you expect for cotton or [balance] of your impact?

Yes, again, as we think about cotton, we actually saw that cotton prices increased in the second half of last year to the $0.55. So we've had now three quarters of that. And it is staying around that $0.55 right now.

So, this should be the last quarter then of an impact of the size that you indicated, the $10 million?

Well, this would be the fourth quarter of the cotton increase.

Okay. Great. Also, on the cash flow -- the cash flow from operations being negative, was that primarily the $42 million pension contribution? Or am I not thinking about that right?

No. You're thinking about it exactly right. It was a negative $1 million operating cash flow, but you add back $42 million in the pension contribution and we were up.

Really, when you think about cash flow this year versus last year, I'd make two comments. First, we were consistent or flat with last year, except for the $42 million pension contribution and the impact on that income of the higher interest and restructuring charges. So when you add those back, we're basically flat.

Okay. I appreciate that. Thanks, guys.

Operator; Our next question comes from the line of Clark Orsky with KDT Investment Advisors. Go ahead.

Thanks. I just had a question on inventories, they came in a little higher than I thought. I just wondered if you can comment on your comfort level with the inventory and where you might see that level at the end of the year.

Well, let me talk about first quarter inventory. It was slightly below the same period last year, so it was actually a little lower than last year. It's higher than the December quarter end, as we build inventory now for back-to-school. I think in the first quarter inventory was where we expected it generally to be. I'll also say that last October, right after our first quarterly call after the spin, we did announce that we had a goal of improving our working capital by about $100 million by the end of 2007. And, Lee, I believe we're about half way to achieving that goal so far and we'll keep focus on improving our working capital, especially along the dimension of inventory.

I would state though, those involved, process changes, system changes, and a whole host of things to make improvement there -- because we've got to improve, but we've got to also ensure that we don't negatively impact our business with service. So, it has to be done in a very thoughtful, evolutionary manner.

Okay. I appreciate that. Thanks.

Ladies and gentlemen, that does conclude our question and answer portion of the call today. I would now like to turn the call back over to Mr. Lantz, for any closing remarks. Please proceed, sir.

Thank you. We'd like to thank everyone for attending our quarterly call today and appreciate your support. We look forward to speaking you again at the close of next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect your line.