漢佰 (HBI) 2010 Q1 法說會逐字稿

Good afternoon. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands first-quarter 2010 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Brian Lantz, you may begin your conference.

Good afternoon, everyone, and welcome to the Hanesbrands Inc. quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2010.

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

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 the 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.

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

I will now turn the call over to Rich.

Thank you, Brian. We had a very good quarter with both sales and profits growing substantially. We are gaining share, our new programs are working, consumers are spending more, and it shows in our results.

During the recession, we made the decision to continue investing in our brands and in our supply chain. That decision is paying off. Our brands are stronger than ever, and the global supply chain that we have built has the resiliency to serve as upside. We feel very good about our momentum for all of 2010.

Before I review our sales results by business segment, let me comment on the overall consumer spending and retail sellthrough. We have seen consistently positive sellthrough rates since Christmas, slightly above both our plans and prior year.

While consumers are still value conscious, we are also seeing their willingness to trade up products and channels. This behavior has been consistent across all of our categories in the US. Additionally, domestic retailers seem increasingly optimistic and are raising both inventory and pre-booked order levels.

Turning to business segments, innerwear sales increased 8%, driven by increases in all product categories. Male underwear grew double digits. Intimate apparel grew [middle] digits, and socks grew low single digits.

In terms of operating profit, innerwear saw strong profit growth, even with a $6 million increase in media investment in the quarter. You may have noticed our new advertising campaigns for Hanes sustainable products and the Bali Comfort-U Back. Given our strong start to the year, we intend on increasing media and trade spending an additional $5 million to $10 million this year.

Turning to outerwear, sales grew 11%, driven primarily by Just My Size growth, while retail activewear in the imagewear channel delivered mid-single digits gains.

Our international business segment increased sales 6% on a constant currency basis and saw gains in all geographies except Japan and Europe, where both economies are still struggling from the recession.

Our direct-to-consumer business had mid-single digit gains for the quarter despite significant weather disruption.

To support all of this growth, our supply chain is up to the challenge. We are continuing to ramp up our internal capacity, especially in our Nanjing textile facility that began production in October and is currently ahead of plan. We've also secured additional capacity with outside contractors. In total, we have increased capacity 20% over 2009's low production levels.

On the negative side, we continue to see higher cotton and oil costs. As we have said before, if we see systemic inflation, our strong brands give us the ability to price. With the sustained increases we are currently seeing, we would need to increase prices by 2011. We will continually assess the situation and move when we deem appropriate.

Turning to guidance, right now, we see the potential of having a great 2010, and we are beginning to focus on building momentum for 2011. While we have taken up the low end of our full-year EPS range significantly, we have moved the upper end of our range to a lesser extent. As we have said before, as our sales and profit momentum takes us towards the higher end of the range, we will begin to increase investments in trade and media spending, all designed to build momentum into 2011. So to summarize, we've had a great start to what should be a great year.

Lee?

Thank you, Rich.

As we previously announced, we will now only report financial results on a GAAP basis and compare to last year's GAAP numbers. Last year's financial results, excluding actions, are reconciled on Table 4 of our previous earnings releases, which can be found on our website.

To summarize the first-quarter results, EPS were $0.37, $0.57 above last year. $0.42 of the earnings growth was driven by improved operating profit and $0.15 was due to lower restructuring expense.

Sales were $928 million, up $70 million, or 8.2% compared to last year. As we expected, 6 points of the increase was due to space gains with the remainder due to increased retail sellthrough, retailer inventory builds, and foreign exchange.

Operating profit was $86 million, or 9.2% of sales, compared to $16 million or 1.9% last year, driven primarily by increased sales and operating margin. Operating profit last year included $25 million of restructuring-related charges.

Turning to first-quarter sales by segment, as Rich mentioned, innerwear was up 8% and outerwear was up 11%, driven primarily by our space gains with retailers but also by improved retail sellthrough. International increased 17%. The impact of foreign exchange rates accounted for 11 points of the international increase. Direct-to-consumer increased 4%, and hosiery declined only 5%.

The gross margin rate was 35.3% in the first quarter. The first-quarter rate was higher than the 2009 rate, due primarily to the benefits of our higher sales, lower commodity cost, lower manufacturing cost, and restructuring-related costs last year.

Cotton costs for the first quarter were $0.52 per pound, a $13 million positive impact. Cotton costs for the full year of 2010 should average $0.69, compared to $0.55 in 2009, up $34 million.

The second quarter should reflect $0.61, a negative impact of $7 million; the third quarter, $0.72, a $13 million negative impact; and the fourth quarter, $0.80, at $27 million negative impact. The total impact of these increased costs is included in our full-year guidance.

First-quarter SG&A expenses were $242 million, or 26.1% of sales, compared to $223 million last year. Media and other marketing spend increased $13 million compared to last year when we reduced spending due to the recession. Distribution and selling expenses were also higher due to increased sales.

Operating profit was $86 million, or 9.2% of sales, compared to $16 million or 1.9% last year. Innerwear operating profit was $75 million, growing $28 million, or 58%, even with a $6 million increase in media investment in the quarter. Outerwear operating profit was $5 million, increasing $19 million, a strong improvement in what is historically a low-volume quarter for the segment. International operating profit increased to $2 million, and hosiery operating profit increased $1 million. Direct-to-consumer operating profit declined, as planned, as we invested for growth in our stores and Internet businesses.

Interest expense was $38 million in the first quarter, the same as last year. Our tax rate was 22% in the first quarter, same as last year.

Turning to the balance sheet, inventories were $1.18 billion, $118 million less than the same period last year. Inventories were up $134 million compared to 2009 year-end as we built for the seasonally stronger second quarter and back-to-school period to support our new programs and due to slightly higher work in process due to the Haiti disruption and Nanjing.

Our cash flow statement reflected $39 million net cash used in operations, a $19 million improvement over last year. EBITDA grew to $107 million in the first quarter, compared to $36 million last year. Gross capital expenditures for the first quarter of $28 million were more than offset by $40 million of proceeds from property sales. The April 3 balance sheet reflects $1.93 billion in long-term debt, a $35 million increase from the 2009 year end.

Turning to 2010 guidance, we've revised our full-year guidance upward. We are projecting sales increases of 6% to 8%, which translates to $225 million to $300 million incremental sales. We are also increasing our EPS range to $2.15 to $2.27, driven primarily by our expectation for increased sales. This guidance also assumes the higher commodity costs previously mentioned, increasing costs of procuring additional product, the incremental media and trade investment that Rich mentioned, and no price increase.

Turning to cash flow, we expect to continue to generate strong cash flow for the year, approaching $300 million. We may need to invest more in working capital if we see strong sales growth for 2011, but at this point, it is too early to project any minor changes.

In summary, the first quarter was a great quarter with a stronger-than-expected sales and profit. Importantly, we saw improvements broadly across all major segments. We are beginning to leverage the growth platform of strong brand and low-cost global supply chain. We feel good about our prospects for 2010 sales and earnings growth, and are already focusing on carrying this momentum to 2011.

I will now turn the call back to Brian.

Thanks, Lee.

That concludes the recap of our performance for the first quarter of 2010. Now, we will begin taking your questions and we will continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your initial questions to two or three and then reenter 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 Instructions). Eric Tracy, with FBR Capital Markets.

Good afternoon, guys. Congrats on a tremendous quarter.

Rich, maybe if I could just start with the top line, obviously a really solid number here, both in terms of the new programs, the traction you've got there as well as replenishment coming through a little bit earlier than perhaps you expected. Maybe just talk to each of those, particularly on the new programs, if you're seeing signs or visibility to potentially picking up sort of additional space around those.

First of all, a lion's share of our sales increases are obviously from the shelf space gains that we talked about. We had always discussed a 6% increase in the first half from those and we in fact saw 6% in the first quarter.

What we didn't expect was actually stronger consumer spending and having it actually begin to impact us in this quarter, so that was actually a pleasant surprise. That's the majority of what you're really seeing in terms of the sales above that 6% level.

In terms of the new programs, it's really in the very early stages, so in some cases we're only getting a few weeks of a read. In other cases, we do have a month or two.

The good news is all of the early reads show the programs are working and on track to being able to hit their goals, pleasing both us and obviously our retail partners. Those programs, as consumer spending may continue to go up, actually have the chance for exceeding their plans. So we're feeling really good about the new programs that have already been launched.

We have a number of them yet to go out in Q2, and that's why the entire half we talked about as a 6% increase from shelf space gains. So, we should see about 6% in the second quarter from shelf space gains as well.

So our full read on the programs really won't be until actually as late as June and July to get a real good handle on it. But we're feeling good about it.

Okay. Then for, again, Rich or perhaps Lee, just on the gross margin, obviously a huge lift over last year just in terms of the buckets that you outlined, higher sales. Lee, maybe you could just go through sort of the contribution of those things you discussed. I know more cotton and its impact but maybe just on the manufacturing side, what kind of contribution we saw from that.

(multiple speakers)

Yes, there were several things that impacted the first quarter. Recall -- remember that our operating margin was only 4.7% last year, so we're going against some pretty nice comps. But there were a lot of favorable things. Obviously, the sales growth was a piece of it. The cotton, $13 million, was a piece of it. There are other commodity costs that were probably just as much a contributor as cotton. We had some timing, favorable timing, probably about $5 million in the first quarter. So great first quarter, but you're going to see some of these things that don't continue, like cotton and oil-related. Those are going to -- as we talked, those are going to diminish the first-quarter performance going forward.

We talked (multiple speakers) million of cotton for example.

So I mean, ex the commodity piece and you outlined sort of the cotton -- how we should expect, but on the balance of the year, I mean, again, that's why I was trying to sort of dig in on the supply chain realization that maybe came through in Q1. I mean, that should continue to play out, should it not?

Yes. Remember, we talked about, in our investor day, $150 million of gross cost savings over the next three years, with maybe a third of that in 2010. We are starting to see that.

Okay. Then just lastly, with respect to cotton and the impact exposure, particularly in the back half of the year as it relates to pricing, Rich, maybe just talk through, again, I think previously there was maybe some thought to be able to offset that higher commodity with pricing sort of in line. It sounds like now maybe that won't happen until 2011. Just again discussions with retailers around that -- any color on that would be great.

No, actually we haven't talked about what the timing for price increases would be at all. What we did say is that the guidance we give -- that we gave does not assume a price increase. That does not mean that we won't take pricing when we deem it appropriate. In fact, that's one of the things I was talking about. You need about a good at least 90 days on the retail side to be able to implement a price increase and you need to talk to retailers about a month or so in front of that.

The supply chain is starting to feel price cost pressures working its way through the supply chain that start to show up in people's fourth quarter. So at this point, it would be premature to be talking to retailers about price increases.

There are other segments where price increases actually happen a little bit more regularly. For example, in pre-booked orders in our outerwear segment, you actually will constantly have those discussions as you hit each and every individual order that you're talking with retailers. In the imagewear channel, for example, pricing could happen very quickly.

So, we are saying that we will take price as we need to because we want to make sure that we are passing on the systemic inflation that we are seeing, but we've got flexibility to do it when it's in our best interest.

Omar Saad, Credit Suisse.

Congratulations as well. Nice job.

I wanted to follow up on the capacity comment you made, Rich -- 20% more capacity. Can you give us a little bit more detail where that's coming from and where you expect your capacity to go, especially as Nanjing ramps up this year, give us an update on kind of your inventory flow, how much you have to outsource and how much you're going to be able to do yourself.

Yes, so if you remember, last year, we had consciously cut production below even 2009 sales levels to draw down inventories. So we always knew we were going to have to ramp up production substantially for 2010, even if sales stayed flat to 2009. So when you take that and you add in the shelf space gains and then you add in the upside on consumer spending, that's why we are seeing this 20% increase in overall production capacity.

For -- the good thing is, when you look at it, while in the first half we've talked about being "relatively sold-out" -- now, that doesn't mean you can't sell any more; we do have about $1 billion of inventory, so there's always a little bit of upside in any given quarter. But we talked about that being the case in the first half, but at our first-half run rate, we had the ability to meet substantial upside in the second half of the year. As we've now started to take up our guidance, we feel very comfortable being able to service upside business.

In terms of what categories you asked, it's really across the board. As you saw, innerwear was up 8% in the quarter; outerwear was up 11. Our total guidance going forward, consumer spending is really lifting all boats, clearly some areas to a lesser degree, but they are all actually feeling the positive impacts.

Okay, then two more questions, one on the M&A environment. There have been some big high-profile deals announced in the sector. I know it's something you've begun to think about a little bit more as you delever the Company and you think about effective uses for the free cash flow. Any update you'd like to share with us there?

No. As we talked about on investor day, our strategies are to invest in our brands, grow our top line, use our supply chain to improve our operating margins, generate cash. One tactic of using that cash could be acquisitions, so we've never really talked about it as a strategy. It's really more of a mere tactic. So, we are always having discussions with people as we started to think about this, but we said we would do it if the timing was right and things meet -- met our overall criteria.

At this point, I want to make sure that we are 100% focused on delivering the upside that we see as potential in 2010. It doesn't mean that we won't always be talking to people about acquisitions -- we will -- but we need to focus on executing our business in the near term. If anything specific happens, obviously we will announce it when we are definitively ready but at this point, it's going to remain a tactic and not a growth strategy.

Okay, great. That actually brings me to my last question, talking about upside in 2010, focused on delivering this year. You talked about kind of capping the upside a little bit. Let's take any sort of upside that comes from a rebound in the economy, reinvesting in the business, marketing, product development, etc., channel development. How should we think about, or how are you thinking about kind of sales in 2011, 2012 and beyond? What do you think the appropriate kind of organic growth rate is for this Company, once we are out of the recovery here, or do you see the recovery, at least in intimate apparel spending and basic apparel spending, lasting into 2011 and beyond?

Let me talk about sort of the long-term growth rate, but start with that last comment, which is "Have all of the categories fully rebounded yet?" I think the answer is not yet. They are all trending in the right direction, but some have rebounded sooner than others. In fact, men's underwear is one of the first ones that started coming out of the recession, and that market actually flipped positive in late 2009. We grew that business in 2009 and it's up double digits in the first quarter for us. So that's sort of leading. As you implied, the intimate apparel is coming out a little bit later than the men's categories.

So we need to have a little bit more visibility on exactly how sort of the coming-out of the recession is going to play out and how much strength and for how long we are going to have. As we continue to monitor sellthrough, we will be able to continue to better gauge that and we will make sure that we share that with investors.

But from a long-term perspective, we believe that we can deliver between 2% to 4% with really a goal of 3% to 4% growth consistently year in and year out. We can do that by, in the US, continuing to make marginal share gains. You know, the overall category grows in units, on average, about 1%, and I believe we are now going to enter in more of an inflationary environment in apparel rather than deflationary environment, and that could add another 1% or so to our top line.

Then when you take the international strategy that Gerald Evans laid out at our investor day, and we think that we've got the opportunity to grow that about 10% or so a year over time, you can easily get and bridge to that 3% to 4% topline growth consistently year in and year out. That's our goal and that's what we want to make sure we've got plans in place to deliver.

But in the meantime, obviously we're talking about upside beyond that through 2010 and how far it lasts into 2011. We will need another six months or so to really gauge that.

Jim Duffy, Thomas Weisel Partners.

Rich, I guess, just to follow up to those last comments, and maybe it's premature, given what you just said, but based on what you see from new programs and new customer relationships, can you speak to any of the programs you are particularly enthused about and where you think there may be opportunity to build on them in 2011?

Yes. Actually, I think momentum breeds momentum, and as we continue to have these new programs work, especially if they continue to, some of them working well above customers' expectations, retailers then come to you first to look for the next idea to help drive sales into 2011 and beyond. So, I actually do think that there is upside to continue that.

Like I said, it is early. Some of them are just hitting. We need another quarter or so to really get a good handle on how successful they are. But usually, if something's going to fail, you actually know it pretty darned fast, and we are not seeing any of those types of things.

That's good to hear. Lee, for 2010, how much of the volume that's planned in your guidance would you expect to be serviced by third-party capacity?

Jim, you cut out a little bit at the end. Third party?

I'm sorry. I am looking at your guidance for 2010. How much of that volume would you expect to be serviced by third-party capacity?

You know, overall, we outsource about a third of our total production. That 2/3/, 1/3 split is about sort of our ideal balance. It's a little bit more weighted towards the outside this year as Nanjing was ramping up and so on. It's not radically off of that percentage. That's why we've got the ability to flex up our overall capacity, is because we already have that infrastructure in place to source such a large volume.

Is there any way to quantify the margin concession, kind of incremental margin concession you may be feeling, given the greater use of third-party capacity this year? I'm trying to put it in the context of what you might be able to reclaim next year. As Nanjing comes online, you bring more of that capacity in-house.

Yes, you know, as we think about '11, as we get closer to '11, we will share those as we go through that with you in terms of kind of the guidance. That will be built into the guidance and we will probably share a little bit more of that with you then, but not now.

Okay. And then --

I'm sorry, Jim. Your supposition, which is where there could be further cost savings to be had from that over time, is absolutely spot-on.

Okay, great. Good to hear.

Then, for clarity purposes, on the pricing, you mentioned 90 days. I presume that's for innerwear. Does that have to occur with any specific change in season or store sets? Is there kind of timing restrictions to that, or can it occur at any point, given 90 days notice?

It varies by channel and by category. And so, for example, in the intimate apparel, especially in bras in midtier and department stores, all of that product is ticketed, so you need to be really thoughtful about when you go in and actually implement and execute that kind of price change, because you actually have to touch about 5 million pieces out at retail and reticket it with new pricing.

Other categories are a little bit easier to do. For example, a men's underwear at mass doesn't require that kind of effort.

What you wouldn't do is sort of do it in the middle of a key selling period. So, you wouldn't increase price in the middle of back-to-school or in the middle of holiday. That's why you will have a tendency to do something either between back-to-school or holiday, or at the beginning of their retail year, which would be early in 2011.

Are there any incremental costs associated with a price change that you would need to cover with higher prices?

Oh, yes? I think we even quantified the last time -- we can run easily $5 million of costs just to execute a price increase.

Okay, very helpful. Thanks very much and congratulations on a nice quarter.

Eric Beder, Brean Murray.

This is actually Jennifer filling in for Eric today. I just wanted to add my congratulations on a great quarter.

Can you maybe provide a little bit more color about what happened in the hosiery segment? Looking back, just what segments do you think you could have done a little bit better?

Actually, given the long-term decline of hosiery, we are very pleased with only a minus 5% decline. That industry has been in double-digit long-term decline for about 15 years, and so we are very pleased with it. I think that's a category that, as we talked about overinvested day, long-term we think it's starting to -- may start to bottom out as it's now about the size of a specialty business. We've even got plans in place to try and help it bottom out and maybe even one day grow.

In terms of any categories that we weren't pleased with, actually we were pleased with our performance pretty much across the board. I did mention, in my prepared comments, the two places that were negative were Japan and Europe. They actually went into the recession on a lagged basis and they look like they're coming out a little bit more slowly. But in fact, I'm pretty sure both of them were right on plan. I know Western Europe was. So we are pleased right across the board.

Okay, great. You know, for domestically, you talked about the return of consumer spending and how you are seeing consistently positive sellthrough rates. At this point, do you feel comfortable enough to believe that it is sustainable, or I mean how are you thinking about that?

Absolutely we feel it is sustainable, and that's why we actually raised our guidance and said that we think there is at least 1 to 3 percentage points of sales growth this year from a consumer spending rebound. What led us to that conclusion is that, first of all, it has been pretty consistent since Christmas, so that's a pretty long period of time. The second thing, and I actually think the most important, is we were seeing that strength in periods of time that aren't key selling periods.

So we saw a little bit of strength at back-to-school, but it came for a few weeks and then sort of dissipated. The fact that we saw the sustained increase in January and February and early March, when people don't normally get out there and shop, is what told us that it was something macro going on.

Okay. Finally, just going back to pricing, if you do choose to increase the prices, can you maybe help us understand or quantify how much you want it to or expect to hike up prices, or you know, in which segments of the business you plan on raising? Is it just innerwear or --?

Well, where we would take price is going to be commensurate with where the cost push inflation is coming, right, because that's the outside catalyst that you need to ensure that you're not putting yourself at a competitive disadvantage. So, that's where we would take price. 1 In terms of the overall amount, it remains to be seen. In fact, once we've settled on amounts, the first people we would communicate to would need to be our retailers, not some sort of broad, general communication. We are working through it. We are trying to best understand exactly how to use price to our best advantage in this year and going into 2011. We are quite confident. We have taken price before and we can do it again.

I will say the one area that I still have talked about is my goal this year is to get media up to $100 million to help continue building momentum into 2011. I think, with this increase, we will see it in the low to mid $90s million, so we still have a little bit more to go. If we do get pricing in 2010, one of the first places we will use it is to get that media up to what I believe is the right rate.

Ken Stumphauzer, Sterne Agee.

Just briefly, I actually want to clarify something. The property sales you had that flowed through the cash flow statement this quarter, that did not roll through the P&L? Is that correct?

I'm sorry -- property statement -- so property sales didn't flow through the P&L. That's correct.

No, it did not. It flows through to the cash flow.

Okay. Then secondly, I should preface this question by saying I know it's early, but the programs that would typically be shipped in Q3 and Q4 that you guys will be bidding on, when will you have some visibility into what the net wins or losses will be like for that time of year?

In our outerwear business, which is where we actually have a lot of those types of commitments, about two-thirds of that segment is pre-booked with commits. We already have some visibility into the third quarter and actually are -- even some visibility into the fourth quarter. That's all included in some of our upside guidance -- or the guidance that we actually talked about. As I said, we are seeing retailers begin to increase overall inventory levels and increase pre-book order levels.

Okay. Then just finally, following up on that, as far as the inventory restocking scenario goes, (inaudible) you guys quantified the new programs as being 6% of 8.2% growth. Obviously with sellthroughs being positive for the quarter, I imagine that inventory restocking was very modest. Is that something that you are assuming will accelerate throughout the year once inventories continue to be drawn down?

Well, first of all, let me put an inventory build at retail into perspective. In terms of weeks of supply, it's going to be, at most, one week or probably less. So in the scheme of a full year, yes, it could impact our sales $20 million to $30 million. That's actually what we saw the impact was in 2008 when retailers pulled those inventories way down. So while it is meaningful in a quarter, it's not going to be wildly meaningful on a full year. So we shouldn't try and overestimate what that impact is.

What we are seeing now with retailer inventories is that they are higher than last year, although the weeks of supply isn't radically out of line, so they have been increasing them but they've actually been increasing them in relationship to their overall sellthrough increases. So, again, they are not out of line and there could be a little bit more short-term upside. How meaningful it would be for the full year sort of remains to be seen, but it's not going to be that great.

Then just one final question. Lee, you had alluded to the fact that part of the EBIT margin, the lower EBIT margins in the direct-to-consumer business was due to investments you were making in the business. If you could just elaborate on what precisely that is?

Yes, that is really -- the bulk of that is around opening stores or expanding the footprint in our stores. We opened, last year, 20 Champion stores and we are now starting to increase the footprint on some of the stores from 5,000 to 10,000 or more square feet. So it is that overlap. You know, these were planned and we are pleased with the performance, but that's what it is. It's just investing into the future, as well as some prospecting for customers for the Internet and catalog business.

Scott Krasik, BB&T Capital.

Good afternoon, guys. I guess, Lee, if I look at what the second quarter looks like from a volume perspective, a sales volume perspective, it seems fairly similar to Q2 2008. Cotton is roughly the same, maybe slightly cheaper than Q2 2008. Is that a decent proxy for how margins can look?

I think you have to walk through that detail. Specifically, we do know that cotton is going to cost us a little bit more, and oil will probably cost us a little bit more in the second quarter of '10 than it did in the second quarter of '08.

Actually, cotton, you paid $0.63, and here you are paying $0.61, so that's why I don't know how oil looks. But -- and then SG&A has been running lower, I guess. You had taken so many costs out last year that even with media spend -- I'm just -- consensus estimates right now are below what you did in the second quarter of '08 but it seems like there's a lot of reasons why they should be above that.

It may be a reasonable proxy. We earned in the $0.60-plus range in the second quarter of '08.

Right. Okay, good. Then, just a question for you, Rich. I know specifics around the price increases are few. Have you explored other methods, i.e. reducing the size of value packs, or tweaking the amount of promotional assistance around these seasons as a method of raising prices without affecting the actual ticket?

Yes. No, that's not -- from a long-term consumer perspective, that's not a very good idea. If you've got cost increases, one of the things that consumers consistently tell you is what they want to do is keep getting the same quality level that they always have been, even if they have to pay a little bit more.

You know, let me be crystal-clear about pricing. We've got strong brands. We've demonstrated we've got the ability to price, and we are confident in our ability to price going forward. One of the reasons we are being vague about it is the first people that will be communicated price increases are our retail partners. We will not try and communicate those types of -- that type of information broadly to the investment community and others before we talk to our retail partners.

As we go through the year, understand what our cost situation is, we will talk to our retail partners about how to best manage cost inflation. When we do that, we will announce all of those plans to you. So I am purposefully being vague about what our plans may be for pricing, but we've got a process that we need to go through.

We're feeling really good about this year, and what we don't want to do is inadvertently screw it up through a communication problem by not going through the proper channels when dealing with pricing.

That's fair. Then I guess, on the last quarter, somebody asked you about the activewear business and you talked about how it -- when it comes back, it snaps back. The fact that activewear was up mid-single digits last quarter, is that reflective of that? Is it on the com? What's your view there?

I'm not sure I made those comments concerning activewear. I might've made those comments concerning either the overall innerwear market, such as men's underwear, or I could've made them about imagewear. I don't think I made them about activewear.

Do you want me to comment about both of the other categories?

We are feeling really good about our overall activewear sales situation for the full year. Imagewear does tend to. That [screen per] channel does tend to snap back pretty quickly. Remember, it went into the recession and declined double digits really fast. That market is starting to turn around. We are seeing about a -- that market is I think up 6% in the overall quarter, so about mid-single digits. Innerwear also tends to come roaring back and I think you're seeing that in our sales already in the first quarter up 8%.

Carla Casella, JP Morgan.

My questions have been answered. Thanks.

Bill Reuter, Banc of America-Merrill Lynch.

In terms of your guidance, how many shares outstanding are you guys assuming?

About 97.5 million.

Okay. By my calculation, I'm coming up with an EBITDA number in the low $500s million. Does that sound about right?

That's a reasonable number.

Okay. In your prepared remarks, did I hear you guys say you expected inventory to be a use of cash this year?

What we've said about cash flow, first of all, was that we would have a strong cash flow year again this year.

In terms of inventory, it is higher in the first quarter as we build for the seasonal second quarter and back-to-school and then the space gains and all of those things.

We don't know enough. It's too early right now to know what year-end inventories will be, and so what the total use of cash will be, either generating or use for the year. Until we understand what 2011 sales prospects are and, be honest, fourth quarter of '10 sales prospects -- that will dictate the level of inventory. So it's a little too early to know that. We will know it mid-summer as we move through the summer and then we will talk about it.

Okay. Still, the previous commentary regarding expecting $300 million of debt reduction in 2010, is that still something you guys are kind of looking for?

Yes, in the prepared remarks, we said strong cash flow year, approaching $300 million.

Okay. All right, that's all for me. Thanks.

Todd Harkrider, Goldman Sachs.

Congratulations on the good quarter.

You talked about weeks of supply remaining the same at the retailers. Can you talk about, qualitatively, if that's increased out-of-stocks at all, and if you think increased sellthrough will be enough to get them to loosen up more, or any other factor that might push them to increase the (inaudible) supply?

You know, I think different retailers have different opinions on how much they are willing to increase overall inventories, so it's really hard to have a blanket statement across all of them. Some of them, the numbers I was talking about are sort of in aggregate, so there's some puts and takes. You've got some retailers that are little more bullish, have actually increased inventories at a faster rate than sellthroughs going up, and you have others that are sort of lagging on that. So there's no really one-size-fits-all for them.

I do think they are getting increasingly optimistic and are more and more willing every day to actually take on higher inventory levels. The best evidence of that is the fact that they are increasing those pre-booked order levels for later in the year.

That sounds good.

Then, since it has been several, a couple of months since we talked about managing and just the cost savings there and all of that, are you seeing any incremental benefits, whether it be on the cost side or the inventory front, more than you might have expected a couple of months ago?

You know, from Nanjing, you've got to remember it's about a 18-month ramp up. We started in October. So it's still at less than a third of that first Phase 1 production capacity. So it's not going to have any net benefits in 2010. Really, the benefits from it start to flow into 2011 and 2012.

We have seen so far actually that the startup costs are slightly less expensive than we had originally planned. It wouldn't be material to our overall results, but I think that is a positive sign. We are feeling really good about how that management team is ramping up that plan.

Okay. Then since operations are running very smoothly and things are going very well and the acquisition targets are taking second fiddle, which makes sense. But with the equity markets rallying and multiples starting to creep up, do you still view $200 million as the optimal size, or would it be at the higher end of your $100 million to $300 million target, or how would we look at that if you pull the trigger on something?

That would always be -- we were giving that sort of dollar figure to help people sort of gauge the size that we would be talking about. We weren't ever -- we go out, we'd start with the -- making sure that it's something that we could create a lot of value with. Size, the overall size would sort of be secondary.

Okay. I appreciate it. Good luck with the rest of this year.

All right, thank you.

Ken Stumphauzer, Sterne, Agee.

I apologize if you guys actually said this in the prepared statements, but would you anticipate net CapEx to be for the full year now?

You know, we've talked about coming into the year net of about $50 million. As we see this, if we see the need to expand capacity a little bit as the sales continue to grow, you could add another $10 million or $15 million to it, nothing material, nothing major, but you could move it up by $10 million or $15 million.

Okay. Then secondly, as far as the potential for debt retirement, if you could give any kind of qualitative commentary about what you would think as far as cadence, if that would all be fourth-quarter weighted or if it's something you would be looking at earlier than that?

Yes, our cash generation generally happens in the second half and primarily in the fourth quarter.

This concludes our Q&A session. Presenters, I hand the program back over to you for any closing remarks.

We'd like to thank everybody for participating in our call today, and we look forward to speaking with all of you soon. Thank you very much.

This concludes today's conference call. You may now disconnect.