漢佰 (HBI) 2009 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands second quarter 2009 conference call. (Operator Instructions) Thank you, Mr. Lantz, you may begin your conference.

Good afternoon, everyone, and welcome to the Hanesbrands Inc. quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress after the second quarter of 2009. Hopefully everyone has had a chance to review the news release we issued earlier today. The news release and audio replay of the webcast of this call can be found on the invest or section of our hanesbrands.com website.

I want to remind everyone we may make forward-looking statements on the call today, either in our prepared remarks or the associated question-and-answer session. The statement are based on the 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 most recent forms 10-K and 10-Q as well as our news 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. Also, any references to gross margin, SG&A, operating profits, or earnings per share on today's call will focus on our results excluding restructuring and other actions unless otherwise specified.

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

Thanks, Brian. Both the quarter and year are unfolding as we expected and we're managing through the recession very well. I'm particularly pleased with our operating margin rate. While down from last year's Q2 rate, our operating margin was 9.8%. Better than 2008 full-year rate of 9.7%. That is quite an achievement preventing margins from deleveraging in the face of sales declines.

I'm also pleased with our people's ability to successfully manage through the very difficult recession by cutting costs, tightly managing inventory, protecting cash flow and aggressively pursuing incremental sales opportunities. Their capabilities and proactive management are making me feel quite comfortable about the rest of the year. And it's not to say we won't have challenges and the results won't necessarily deteriorate, but it's to say that I'm confident in our team's ability to handle whatever situation and to deliver the best possible results. Our stated assumptions back in February was that the recession would continue through all of 2009, but eventually overlap itself in the fourth quarter. Our sales seem to be following that trend. Sales seem to be settling into a stable run rate which implies that Q3 may once again see single sales declines.

From a Q3 profit perspective, due to the tailwinds of commodity costs and further cost savings, our expectations are that operating margins shouldn't deleverage and, therefore, could be similar or better to-- or better than the second quarter levels. Therefore, if we experienced sales declines in operating profits similar to the second quarter, third quarter operating profit could be flat or better than last year. Let me now turn to our Q2 sales results and comment on competitive dynamics by segment. Overall sales declined 8% in line with what we projected on our last call. Sales declines improved for three of the four major segments, specifically by segment, innerwears mid-single digit sales decline continued down 4% versus Q1, 6% decline. Our back-to-school innerwear promotional offerings are stronger than last year, more specifically, we have substantially increased in-store presence in all of our major accounts. The retailers are using our leading national brands to try to drive traffic.

For holiday, we're also focused on big promotional programs which should be secured over the coming months. A little later than usual, several retailers are waiting on back-to-school results before locking in commitments. For 2010, we're right in the throes of locking down major space and distribution gains over the next 60 days and what we're seeing is positive. We have already confirmed new program launches and expanses for the Hanes brand at major accounts such as Penny's, Kohls, Target and Wal-Mart. For example, the commitments we already have for men's underwear add two to three points of growth on to this category in 2010. We're also seeing expansion of our large intimate apparel brands. Next month, we will launch Playtex 18-hour bras at Macy's, making it the only bra brand in the United States with the power to sell across the mass, mid-tier and department store channels.

For Bali, we have strong commitments for our new back-to-beautiful styles across a broad set of accounts and for Barely There we secured incremental new programs at key accounts. Importantly, our brands are expanding with upscale retailers, a difficult feat for any brand. This movement upstream speaks to the effectiveness of our brand investment the past few years. We'll be able to discuss in more detail about all of our prospects for 2010 in late fall. Turning to the outerwear segment, sales saw improvement as expected, down 11% versus a decline of 21% in Q1. The turnaround in outerwear is well underway with sales expected to improve over the next several quarters. Based on advanced bookings, we expect total outerwear sales trends to further improve to mid single digit declines in Q3. Within outerwear, the Champion brand had another quarter of double-digit increases and we expect this momentum to continue with confirmed space and distribution gains in both sporting goods and department store accounts for 2010.

Casual wear sales in the retail market were substantially lower for the quarter as expected; however, these declines are behind us with the upcoming fall advance order book much closer to last year's levels. Fleece orders are particularly strong and above last year's levels. Even more importantly in terms of the retail casual wear business for 2010, we have finalized a multiyear agreement with Wal-Mart to significantly expand our Just My Size brand and casual wear, especially in tees and fleece In 2010, this contract could provide 50 to $75 million in incremental sales, growing to $150 million over time. In the last flights of our outerwear segment, the wholesale spring channel continues its decline; however, with our costs now at parody or better due to our supply chain moves and a multiquarter cotton cost advantage, we're seeing our share grow. The June ending market data shows shares for the total channel down 15% in units. Our Q3 sales to wholesale distributors were only down mid-single digits and we gained over a point of unit market share.

This quarter's performance caps three consecutive quarters of unit market share increases. In our international segment, sales declined 20% but only11% in constant currency with the lion shares of clients coming from Europe. The currency effect should begin to diminish in Q3 and Q4. With the recession hitting later in the other parts of the world, we expect the double-digit decline rate excluding currency to continue for the remainder of 2009. Finally, our hosiery business declined 14%, lower than the 20% declines of the previous two quarters. To recap sales, we seemed to be at a stable run rate implying that we may again see single-digit declines in Q3. It's a little less clear how the fourth quarter will unfold as we overlap the recession.

As we said in February, on the pessimistic side, we could see single-digit sale declines continue or optimistically as we overlap last year's Q4 declines, we could see flat sales. There is an even more optimistic scenario where, on top of flat sales trends, retailers build rather than pull down inventory prior to Christmas. At this point exactly what will happen is unclear. We will gain knowledge and form a better opinion after we see our back-to-school sales (inaudible) performance. Due to our comfort with the current run rate and the positive space gains for next year, we are not taking any major short time interplants and we definitely have the need for increased capacity in 2010. Therefore, as we announced last quarter, we will start up our [Nangene] textile facility on October 12. We expect cost savings from our new supply chain to accrue through at least 2012.

Turning to the financials. We deliver an operating margin of 9.8% driven by our sequential quarterly improvements in gross margin and tight SG&A control. Given our comfort with how the year's unfolding and what we perceive is the weakness in some of the major competitors, we feel the time is right to prudently invest an incremental $10 million or so in spending initiatives in the second half to take advantage of share opportunities and cement further gains in 2010. And we're comfortable that we can deliver a reasonable level of profit even with this spending. We also ended the quarter with $56 million less inventory than the start of the year. We're on track to reduce inventories $150 million this year to $1.15 billion and we remain firmly committed to paying down at least $300 million of debt in 2009.

Additionally, we're developing plans to pay down another $300 million of debt in 2010. It's tough times like these that test organizations and our people are truly rising to the occasion. For their collective efforts, we're overcoming this recession and laying a solid foundation for a successful 2010. Now I would like to turn the call over to Lee Wyatt.

Thank you, Rich. Sales declined 8% and operating profit declined 19% in the second quarter. We are pleased with these results in this environment and they confirm our modeling assumptions for the full year. As we presented it in February and reiterated on our last quarterly call. As I review our results for the second quarter, I will reconform goals, or clarify any implications for the full year. Sales for the second quarter of $986 million decreased $86 million from the same quarter last year. This decrease was in line with our previously-announced projections.

Restructuring and related charges were $13 million in the second quarter. Year-to-date restructuring and related charges are $37 million. And represent more than 75% of our total 2009 projection. These charges were incurred primarily as a result of plant closures and consolidation actions. Total restructuring and related charges since the spinoff are $247 million. As projected, approximately half of the charges have been non-cash. The restructuring charges will be completed in 2009. We'll finalize our estimates for the final charges during the coming quarter. The gross margin rate for the second quarter was 33.2%.

The second quarter rate was below our expected 2009 annual rate due to lower margins in the outerwear segment and higher oil-related costs that offset lower cotton prices. Future quarters should benefit from significantly lower oil and cotton costs and improvement in the outerwear segment margins. We're still committed to our previously-stated goal of improving our gross margin by 10 to 100 basis points for the full year. With the higher end being less likely due to the incremental investment spending that Rich mentioned earlier. Gross margins rate should improve sequentially each quarter, which could also drive sequential improvement in our operating rates. Cotton costs for the second quarter were $0.49 per pound and approximately $9 million positive impact.

The third quarter should also reflect a cost of $0.49 per pound, approximately $12 million positive impact. The first quarter should reflect a cost of $0.47 per pound. Approximately $18 million positive impact. We now have visibility to cotton costs for the first quarter of 2010 that should reflect a cost of $0.52 per pound, approximately $15 million positive impact over the $0.74 per pound in Q1 of 2009. Turning to SG&A second quarter SG&A expenses were $230 million or 23.4% of sales. $36million lower than last year. The quarter reflected tight cost control, including $19 million of lower media expenses, $17 million lower I.T. and other SG&A expenses. And $8 million dollars of savings from prior restructuring actions. That offset $8 million higher pension expanse. The total first half media and IT. reductions amounted to $52 million and exceeded our reduction goals.

The non-cash pension expense for the full-year is expected to be $21 million. Therefore, pension expense will be unfavorable $8 million each quarter in 2009. Impacting full-year EPS by $0.27 per share. Our current lower overall spending rate could keep the second half SG&A rate 200 basis points better than the first half depending on sales, even as we return media spending to normal levels. Operating profit of $97 million for the second quarter resulted in an operating margin of 9.8%, which was higher than the 2008 full-year margin, and a substantial improvement over the first quarter operating margin. Interest expense for the second quarter was $45 million, $7 million higher than the same period last year. We anticipate the interest expense for 2009 will increase approximately $13 million above 2008 to around $168 million.

Our income tax rate in the second quarter was 22% and earnings per share were $0.42 for the quarter. Turning to the balance sheet, inventories were $1.23 billion, $56 million less than we began the year and $107 million below the second quarter of 2008. Our goal is to reduce inventories by $150 million to $1.15 billion or less by year-end. We're in compliance with all debt covenance and our debt at quarter end was $2.22 billion. We have fixed or capped interest rates on 81% of our debt for 2009. Our goal continues to be to pay down at least $300 million of debt in 2009. And as Rich mentioned, we're developing plans to pay down another $300 million of debt in 2010. Our cash flow statement reflects $27 million net cash provided from operations year-to-date. Consistent with normal seasonal business trends. Year-to-date net capital expenditures were $69 million, and for the full-year, we expect net capital expenditures of $105 million.

In summary, the second quarter results were very much as we expected. Sales declined at a rate within our projected range, we executed our cost savings initiatives and aggressively managed SG&A expense. On the balance sheet, we reduced inventory and, again, held them under plan. We continue to generate adequate cushion to meet all debt covenants under a wide range of economic conditions. The second quarter results were good for this environment. And further confirm to us that our expectations, planning assumptions and goals for the full year of 2009 remain reasonable and appropriate. I will now turn the call back to Brian.

Thanks, Lee. That concludes our recap of our performance for the second quarter of 2009. Now we will begin taking your questions and will continue as time allows. Since there might be a number of you who would like to ask a question, I would ask you limit your initial questions to two or three and re-enter the queue to ask additional questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator.

(Operator Instructions) Your first question comes from Eric Tracy from BB&T, your line is now open.

Good afternoon, guys. Congrats on the nice quarter.

Hi, Eric, how are you on doing?

All right. Rich, if I could, maybe just focus a little on the top line obviously very, nice sequential l improvements across almost all categories and you alluded to some of the programs that you're picking up. One, can you talk about the timing of how maybe some of those should manifest and secondarily, back to the kind of core Innerwear segment sort of share and pricing dynamics at work that you're seeing?

Okay, so, first, let me talk about some of the programs that I mentioned. A lot of the specifics that I was talking about were really about 2010. Major space changes in the innerwear category and actually for a lot of the outerwear as well. Happened in that February to March timeframe and retailers are locking in those commitments starting now through fall. So, we're right in the throes of it.

We're very pleased with what we're seeing, we're seeing, I think, right now, a lot more gains and very, very few losses. Some of that will ship a little bit in this year but -- here but the bulk of it is 2010 and beyond. We'll have a better line of sight to that and probably talk about it on the third quarter call. In terms of the innerwear business right now, it's continuing in the mid- single digit decline rate rate, we're down 4% this quarter versus 6% in Q1, That business is a little less volatile than some of the other pieces and that is what we're seeing.

We're comfortable with the price increase that went in place in February. It's been working pretty much as we expected and we intend to see the hundred to $125 million of benefit that we talked about when we locked it in. There is clearly some ups and downs there that are sort of minor and that is why we held back some money to be able to address that and that is why we gave the range. It's unfolding as we expected.

So, to kind of put to bed some of the chatter out there in terms of your pricing again relative to fruit, didn't take pricing and potential share grabs, that they might be taking and generally speaking, I know there are ebbs and flows (inaudible) with the categories, generally speaking that is not taking place?

Oh, yes And, let me tell you. There are always puts and takes and probably the two places we're seeing a tad of share erosion, that we have addressed or beginning to address is an average figure bras, which I have been talking about the last number of quarters. We haven't done doing very well and we do have plans in place to expand the Barely There brand with some space gains for next year that should help to turn that business around. There, we lost a little bit of share.

The other place in actually in socks, we lost a tad of share to Fruit of the Looms licensee, who is Renfroe. We've already put things in place to address those discrepancies beginning in back-to-school and expect that to turn around. The last couple of years, our share has been -- our overall underwear share has been fairly stable. Our goal is to drive the types of space gains, especially with upscale retailers that I was talking about earlier to get us on continued share gain over the next couple of years.

Yes And then just on the kind of low end of private label, too, within the major mass retailers, we heard the Starter and Danskin programs. Any visibility you have to how that is evolving.

Let me first just talk about overall Private Label. In the Innerwear categories , Private Label has its place, always had its place. Its share is relatively stable. We are not seeing any increases in share in Private Label in the innerwear categories due to the recession or trading down. You specifically mentioned Danskin and Starter which, are at Wal-Mart. Danskin is actually more broadly distributed than just at Wal-Mart. Those are their performance active wear brands and it really doesn't overlap with our core businesses at all. So, they're doing whatever they're doing with the brands and that is not a big impact on us

Okay, last and I will hop off, Lee, maybe address kind of gross margin, came in a little bit light of what we're expecting. I get the oil piece and sounds like outerwear margins came in light as well. As we look to that back half to sort of puts and takes, and I get cotton, could you possibly quantify a little bit of tailwind of one oil to just continued supply chain sort of manifestation and maybe what else gives you comfort to getting into that 10 to 100 basis point range, still because I think at least based year to date . it doesn't seem like it might be tracking. What gives you comfort to get to that range and secondarily a little bit of color on the reinvestment behind that and have that tempe the upside of that

I would tell when you we look at the plan for the first half h that our gross margin came in within 20 basis points of plan So, it's right on track with where we thought it was going be. The kind of things you reiterated for the second quarter, the outerwear mix shifted down the margin. That goes away after the second quarter and as we replace the fleece businesses in the second half so that all goes away. The other thing we'll see is the cotton we've talked about . Third and fourth quarter, cotton should help us by 12 or $18 million respectively.

The oil took the entire first half to get it to a positive and we see the second half being positive 10 to $15 million. Price increase is still out there in the second half which will help us and again that outerwear. We have not changed our perspective on gross margin. It will continue to increase sequentially and you see that in the first to the second quarter and again we still confirm the goal of 10 to 100 basis points and you might get some 20, 30 basis points from the top of that with some of the reinvestments if we have that opportunity that Rich mentioned to drive business next year, but it's in that range of 20 to 30 basis

Your next question comes from [Jim Duffy from Thomas Weisel ] Your line is now open.

Thank you, hello, everyone.

Hi, Jim, how are you doing?

Quite well, thanks. Just to focus on the SG&A lines, I want to make sure that you understand what you said. You talked about second half SG&A potentially being 200 basis points better than the second half of '0ity error?

No, we basically said it would be up to 200 basis points better than the first half of '09.

I see. Okay. What type of revenue performance is that statement based on?

Well, and, again, you will have to make your own assumptions there. We still think that the assumptions on revenue that we talked about in our February meeting of that 5 to 8% decline in the full year is in that range.

Okay. And then looking towards Nanjing and the October 12th launch date, what type of additional costs should we be building into the model associated with that in the second half of the year and do those kick in?

The Nanjing plant you shouldn't consider anything as incremental cost. Shouldn't be material at all.

Okay. Final question, there is commentary from Wal-Mart about them working with large vendors and trying to get them to shift media dollars towards promotional spend with Wal-Mart. Is that a dialogue you have had with them and, is there any color you can provide on your perspective on that would be helpful.

We're -- we have built our media plans totally independent from our overall trade plans. There are programs with different retailers where if they're running commercial, they'll include you for a fee. That is true at Wal-Mart. That is true at Target and other accounts. Any specific initiatives that you talking to, we haven't seen or heard or anything like that. We're very comfortable with our media. It's designed to go after and support our brands independent of retailers. We have trade programs where we set aside trade dollars to work with retailers to help drive incremental revenues through those accounts. Some times that shows up in price off support sometimes it can show up as fixturing sometimes it can show up as media support but it all comes out of that one bucket.

Okay. Final question, I will let someone else judge ump in. I was positively surprised by your $300 million debt reduction objective in 2010. Is there any change to your thoughts on Target letdown operating leverage ratio? That you feel is appropriate for the company?

Right now what we're doing is our strategy in this environment is just to continue to use the free cash flow to pay down debt and that will take our operating, our leverage down. For now, we think that is appropriate and as we move into 2010, we will revisit whatever leverage ratio should be going forward.

Very good. Thank you.

Thanks.

Your next question comes from Omar Saad from Credit Suisse. Your line is now open.

Thanks. Good afternoon.

Hi, Omar.

I actually wanted to follow up on the inventory side. I was -- the inventory number came in a little bit better than we thought it would at least that we had modeled. Do you care to talk about the dynamics the rest of the year. I know you have the target out there. Seem like you're already approaching that target or do you need to start to build inventory in certain pockets to get ready for some of these programs. Sounds like you're lining up for last year.

We're tracking right to our goal of $150 million improvement. As you indicated, we picked up $50 million of the $150 million goal so far. We have two quarters yet to go. You're right on. If we have increasing programs that we have to support in the first quarter, especially if it shifts in January, you will have the inventory and house in December. Those are minor swings. And it's well within the guidance that we gave when we put our goal out of $150 million. So we would be able to absorb additional inventory to support those programs and still hit the $150 million goal.

Got it. Got it. And I want to dig in more on the top-line. The new program. A couple of years ago when you guys spun off, you were long-term goal for low, single digit. Had a long run, long-term revenue growth rate. Given that keep of goal, I want to nail you down a bit. If you could talk a little bit more detail bout the various programs, the new business with Penney's and Macy's, Some of the stuff you're doing in Playtex and Bali and the Just My Size. and also, just given the environment of what has happened the last six, nine months, do you expect retailers to restock? How are you thinking about that and planning for it? What are your conversations with retailers? What have those conversations been like?

At the end of the day, I think this validates our strategy in investing in the brands and making them stronger because you don't see brands moving upscale very often. In fact, normally what happens is people start with them at upscale and they take them down scale over time and eventually they die a slow death. By investing in our brands, we're seeing incremental space gains and commitments from more upscale retailers. We're feeling really good about that. In terms of what it exactly means for 2010, we need the next 60 or 90 days to actually get a much better handle on that so we can measure all the puts and takes. But this is one of our major strategies to help us hit our long-term growth goals and we're still firmly committed to that not only on the sales side but the profit side as well. If you're asking specifically are we thinking of changing our long-term growth goal or anything look that, let us get out of the recession or closer to the end of the recession before we start thinking about what those long-term growth goals may actually be. My goal is to make sure we're well-positioned in '10 to achieve those goals.

Retailer de-stocking, anything changing there? Restocking or destocking.

At the end of December, our retail inventories, our inventories at major retailers were $30 million below the prior December. As of a few weeks ago, they were $25 million below the prior year. So, we're seeing retailers maintain strict inventory controls so it hasn't changed that much. They're managing very conservatively. One of the reasons we want to watch back to schools sale through, if you actually do see an uptick, they may decide to loosen the constraints a little prior to a holiday or stay at the low levels. There is not a whole lot of change in the environment.

Okay, and then on the new programs, some of the things you're seeing retailers do to stimulate sales. Do you think -- are retailers higher-end. Are they trying to take a brand and bring them up scale to give their consumer, do you feel like they're trying to give their consumer a better value proposition in their brand offering? Is that why the likes of Macy's and Penney's and some of these moderate or upper middle tier channels are taking brands like Hanes and Playtex You think there is a philosophical change by some of those higher end retailers who want to bring more value in their product offer ing.

First and foremost, I think a lot of the retailers are realizing that consumers have brand preferences when you have a strong brand and if you don't have that brand, you're not going to sell something to them. First and foremost, they realize that if they have our strong brand they can ultimately sell more to their consumers. There is also no question your other hypothesis is also right on, which is . our brands tend to be moderately priced in the overall marketplace and people are more value conscious, and that's a good thing for us. At the end of the day, it's not for the retailer about selling things at low prices because the prices won't be that low. It's about selling things that people want to buy and our brands are what people want to buy. If they don't have them, they're not going to get the

Okay, I will let someone else ask. Thanks. Good luck.

Thanks.

Your next question comes from Todd Harkrider from Goldman Sachs. Your line is now open.

Thanks for taking my questions.

Certainly.

Going back to the goal of paying down another $300 million of debt in 2010, do you believe the bulk of that is going to be from working down inventory levels further or earnings improvement in.

When you look at the normal precash flow in any annual period, it's 2 to $300 million just from normal operations Only a small portion of that would be working capital. That is why we're working against that $300 million number. Clearly, we still have opportunities over time to continue to take inventory down as we improve our terms, so, that can always play a role there. But two to $300 million is normal cash flow for us.

Okay and congratulations on getting increased retail penetration for the Champion brand. Earlier this year, there was a lot of press coming out that universities dropping one of your competitors from doing your licensing apparel business. Were you able to capitalize on that as well and did you pick up any of those schools?

Champion's been increasing its sales for double digits. seven out of the last nine quarters and even in the quarters it was not up double digits. It was still up. The Champion brand is increasing its overall brand equity. We have been constantly increasing penetration and gaining space. That is the major reason why we're seeing games and expect that to continue in 2010. At the end of the day, the specific college business that you're talking about, we actually licensed out the Champion brand to a company called Gear for Sports and they have the exclusive rights for Champion in the book store business. So they may or may not see more impact from that than we would. We're seeing, I think, great space gains because of the strength of the Champion brand and it's growing in both the sporting goods channel as well as department stores.

Okay. And I didn't hear what your adjusted EBITDA stands out for the bank covenant purposes and if you feel comfortable staying in compliance at the end of the year with the leverage ratio thing.

Yes, to hit the highlights of our covenant calculation, covenant EBITDA was $538 million. Covenant debt was $2,086 billion, given around the 3.8 calculations versus a 4.2 requirement. We had over $40 million of EBITDA cushion. The second quarter was always going to be the tightest quarter. We're comfortable that that cushion will grow in the second half and continue into '10. So we're very comfortable with our covenants at this point.

Okay. I appreciate it. Good luck with Nanjing Thanks.

Thanks.

The next question comes from Scott Krasik from CL King & Associates. Your line is now open.

Thanks for taking my question. To hit on the gross margin, what was the dollar impact from the outerwear? Do you have that?

Yes, that kind of mixed with somewhere, 15 to $20 million, probably.

I would have thought the mix just toward the heavier innerwear business would have benefited you more. Is there anything going on with the gross margins in you innerwear business in the quarter?

I, I think we do have a little bit of a mixed shift in the sense that we're selling from a company perspective less hosiery which carries a nice margin, probably sold less bras as a mix on innerwear and that would mix you down. Those would be the two that stand out as mixing down the gross margin.

Okay. And anything from your supply chain initiatives? In terms of benefiting gross margins You usually give some dollar -- .

Yes, our gross margin in the second quarter was benefited by $13 million from initiative savings.

Okay, that's great. And how much longer, you mentioned Nanjing should benefit for several years. Are you going to be able to continue to get some meaningful amount of gross margin savings from the supply chain?

Absolutely. It's not just Nanjing that will pay benefits over the next couple of years, it's the entire supply chain. We're just getting it into place. The real benefit comes from optimizing and is in place and that is the major thing that's going to be supporting our goal of increasing operating margins 50 to 100 basis points a year for the next three to five years into the future.

Okay, and then a couple more. What was the media spend saving from SG&A year over year?

For the quarter?

For the second quarter. Yes

Media was down $19 million in the second quarter versus last year.

That is helpful. It's sort of early, Rich, it's sort of early, but does Wal-Mart actually appreciate the fact that your brand will be in more mid-tier department stores? Does that drive more traffic because that validates their offering. Is there a negative correlation?

Everyone loves strong brands and there is no question I won't talk about Wal-Mart specifically, but, mass retailers tend to like when brands are distributed mid-tier and department store, no question about it. I think it speaks to the strength of the brand that it can co-exist in all those channels. I think Playtex is the best example. It's in, the same product throughout all of the channels and it's a big advantage of being in five or six I think Playtex can actually be close to 7,000 points of distribution throughout the United States.

Sure. What are you going to do on the product side? I assume it's not going to be the same product. You price yourself below Jockey and the mid-tier department stores?

Actually, if you go to-- if you, look at what is in Wal-Mart, Target and Kohl's for Hanes underwear, you will see what we would call red label. Which doesn't have any (inaudible) on it. You;ll see premium at Target, you'll see classics at Kohls, So, we use a sub brand differentiation strategy across accounts and clearly there are some product differences and the product might be heavier or softer cotton. In more of the upscale accounts and therefore, we charge more for it as does the retailer. There is some differentiation. At the end of the day, it's still Haines,and that is what is the most prominently displayed.

Okay, great. And just lastly, your comment about holiday promotion yet to be finalized. How delayed is that this year? What type of impact do they have? Does it impact margins in any way?

No, it took a little bit delayed, normally you would be locking it in to the exact commitments now Things are more in flux just because people are waiting as log as they can for a read for back to school and we in general have the commitments, it's just that we don't have the final commitments locked in. Doesn't cost incremental margin and we're ready to go no matter what and I think people want to see what happens through back-to-school to decide how bullish they may decide to get or not.

Okay, great. Thanks. Good luck.

Thanks.

(Operator Instructions) We have no further questions, gentlemen. Thank you.

We would like to thank everyone for attending our quarterly call today and we look forward to speaking with all of you again soon. This concludes today's conference call, you may now disconnect.