漢佰 (HBI) 2010 Q2 法說會逐字稿

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands second-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). Thank you.

I would now like to turn the conference over to Brian Lantz. Please go ahead sir.

Good afternoon, everyone. 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 second quarter of 2010.

Hopefully, everyone has had a chance to review the newest 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 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.

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 have allowed ample time to address any questions that you may have.

Now, I'll turn the call over to Rich.

Thank you Brian.

We had a very good quarter with both sales and profits growing substantially. We continue to gain share, our new programs are working, and consumers are spending more. I am pleased with our results to date and our prospects for the year.

Turning to the business segments, our three largest segments were up double digits compared to last year. Innerwear sales increased 10%, driven by increases in nearly all product categories. For example, male underwear grew solid double digits, socks and bras grew solid double-digit digits.

As expected, retail sell-through rates have varied week to week and month to month. However, we have seen positive sell-through rates cumulatively since late December.

In terms of operating profit, Innerwear saw very strong profit growth, even with a $9 million increase in media investment in the quarter. You may have noticed our new advertising campaigns for the Hanes Lay Flat Collar and the Playtex Cooling bra.

Turning to Outerwear, sales grew 16% in the second quarter, driven primarily by Just My Size growth, while retail activewear and the Imagewear channel delivered mid-single-digit gains.

Our International business segment increased sales 9% on a constant currency basis, and our direct-to-consumer business was up slightly for the quarter.

Overall, we are driving share gains in all core categories and are delivering strong results with our new programs at retail.

Our strong results -- our strong sales growth creates two short-term challenges. First, as we mentioned on our last call, while we are continuing to ramp up our internal capacity, we have also had to secure additional capacity with outside contractors, both of which are causing incremental short-term costs. Additionally, in order to mitigate the strains the short lead times are putting on our system, we are incurring substantial airfreight, overtime, and other distribution costs to meet these deadlines. In total, these costs may impact us approximately $25 million to $30 million for 2010, all of which is included in our new guidance.

Importantly, even with these costs, we continue to expect to be towards the high end of our 50 to 100 basis points operating margin improvement goal for the year.

Second, to support the higher sales growth, we need additional working capital, primarily in the form of inventory. We expect inventories by year-end to increase in line with our sales growth.

Given our strong first-half performance, we are increasing our full-year guidance for both sales and EPS. We increased our sales guidance based on three factors -- additional new program placements in the back half of the year, higher-than-planned productivity of new programs, and a continued overall increase in consumer spending. If all of these factors come together, we could see sales growth at the high end of our range, which means the second-half sales growth would accelerate versus an already strong first-half result.

We are also increasing our full-year EPS range, due primarily to our stronger sales. As we have said before, as our sales and profit momentum takes us toward the higher end of the range, we will begin to increase investments in trade media spending, all designed to build momentum into 2011.

Turning to our longer-term perspective, it is clear that we are seeing a sustained increase in various input costs such as cotton, oil, and global wages. As a result, we are working with our retailers to offset these increases through both joint efficiency initiatives, as well as finalizing price increases.

The timing and size of the price increases vary by product category. We expect to fully offset the effects of cost push inflation in 2011.

To summarize, what a difference a year makes. During the recession, we continued to invest in our brands and to compete aggressively. That has allowed us to start 2010 with sales momentum. If we continue to meet the strong demand, we may see sales growth accelerate in the second half of 2010 and position us well for 2011.

I'll now turn the call over to Lee.

Thank you, Rich. To summarize the second-quarter results, earnings per share were $0.87, $0.55 above last year. $0.32 of the EPS growth was driven by sales and operating margin improvement.

Let me focus on the sales and operating margin improvement first. Then I will speak more about the impact of interest and taxes in a moment.

Sales, which drove $0.07 of the EPS growth, were $1.08 billion, up $90 million, or 9.1%, compared to last year. Approximately 6 points of the increase was due to space gains, with the remainder due to increased retail sell-through and 50 basis points from foreign exchange rates.

Operating profit increased 46%, which drove $0.25 of the EPS growth. Operating profit margin increased nearly 300 basis points to 11.4% of sales, up from 8.5% last year. Operating profit last year included $13 million of restructuring and related charges.

The gross margin rate, which was a key driver of operating margin improvement, was 34.8% in the second quarter, compared to 33.2% last year. The rate was better than last year due primarily to the benefits of higher sales, cost savings from prior restructuring actions, and lower production costs, particularly offset -- partially offset by higher cotton costs.

Cotton costs for the second quarter were $0.61 per pound, a $7 million negative impact. Cotton costs for the full year of 2010 should average $0.69 compared to $0.55 in 2009, up $33 million.

The third quarter should reflect $0.72 per pound, a $13 million negative impact, and the fourth quarter $0.79 per pound, a $26 million negative impact. The total impact of these increased costs is included in our new full-year guidance.

Second-quarter SG&A expenses were $252 million, or 23.4% of sales, compared to $231 million last year. Media expense increased $9 million compared to last year, when we reduced spending due to the recession. Other marketing and selling expenses increased $5 million, due to the higher sales. Distribution expenses were higher by $9 million, due to increased sales and incremental cost of expediting and re-working product to meet the higher demand.

Turning to operating profit by segment, Innerwear operating profit was $89 million, growing $5 million, or 6.5%, even with absorbing the increased media investment in the quarter. Outerwear operating profit was up $17 million, increasing $10 million, a strong improvement. International operating profit increased $5 million with gains in all regions. Hosiery and direct-to-consumer operating profit declined $7 million in the quarter.

One important impact of increased sales growth is our need for additional working capital. So turning to the balance sheet, we expect to end the year up nearly $100 million in inventory versus 2009, in line with sales increases. Inventories were $1.3 billion at the end of the second quarter, approximately 5% or $61 million higher than the same period last year.

Our cash flow statement reflects $64 million net cash used in operations, which was $91 million lower than the first half of last year, as we have built inventory for additional growth.

EBITDA grew to $247 million in the first half, compared to $142 million last year. Year-to-date net capital expenditures of $13 million reflect gross capital expenditures of $58 million, less $45 million of proceeds from property sales.

The July 3 balance sheet reflects $2 billion of long-term debt, $219 million less than the same period last year and $109 million more than 2009 year-end due to additional current-year borrowings.

Turning to 2010 guidance, we are again raising our full-year guidance. We are projecting full-year sales growth of 8% to 10%. This increase from previous guidance of 6% to 8% is a result of strong first-half sales and the three factors that Rich discussed.

We are also increasing our EPS guidance to $2.25 to $2.35. The midpoint of this guidance is an increase of around $0.10 from the midpoint of previous guidance.

This $0.10 increase consists of two primary components. First, $0.05 of the increase comes from higher sales and operating profit. This net benefit reflects higher incremental short-term costs of $25 million to $30 million to service higher demand with $8 million reflected in the first half. This guidance includes the $33 million higher cotton cost with minimal benefit in 2010 from price increases. Even with these costs, we continue to expect operating margin improvement to be towards the high end of our 50 to 100 basis points goal for the year.

Second, the other $0.05 of the increase comes from below the line -- below the operating profit line, with a $0.13 benefit from a lower annual tax rate being partially offset by $0.08 in higher interest and related charges. Let me explain both more fully.

Let's begin with tax rate. For the full year, we expect the tax rate to be 14% to 15% as a result of the positive adjustment in the second quarter resulting from our first IRS audit since the spinoff, a $0.13 EPS benefit from prior guidance.

The tax rate was 22% for the first quarter, and minus 2% in the second quarter. We now expect the tax rate for the third and fourth quarters to be between 20% and 22%.

Now interest and related expense -- due to the higher working capital needs to support stronger sales growth, interest expense for the full year should come in slightly higher than our last projection. We now expect full-year interest expense and related charges to be $100 million to $153 million, an $0.08 reduction in EPS from prior guidance.

So, to reiterate, the additional $0.05 benefit below the operating profit line is due to a $0.13 benefit from a lower full-year tax rate, partially offset by $0.08 in higher expenses for interest and related charges.

Turning to cash flow, after paying down the $109 million of additional current-year borrowings and investing more in working capital to support stronger sales growth, we expect to generate free cash flow for the year of $200 million to $250 million.

Considering inventory, year-end inventory could be up 10% or $100 million higher than 2009 year-end, in line with our sales increase. Around one-third of the $100 million inventory increase could come from commodity cost inflation with the balance from unit growth.

Moving to debt and leverage, 2010 EBITDA could increase to over $500 million, a 60% increase over 2009. Assuming that we only use free cash flow to pay down debt, we could end the year with $1.65 billion to $1.7 billion in long-term debt. Therefore, our debt-to-EBITDA leverage ratio could be under 3.5 times at year-end, down from 4.6 times at 2009 year-end, a significant improvement and in line with our estimates.

In summary, the second quarter was another strong quarter with increasing sales and EPS.

Importantly, we saw improvements in our largest segments and continue to leverage the growth platform of strong brands and low-cost global supply chain. We feel good about our prospects for 2010 sales and earnings growth and are focused on carrying this momentum through 2011.

I'll now turn the call back to Brian.

Thanks, Lee. That concludes the recap of our performance for the second quarter of 2010. Now, we will begin taking your questions and 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 re-enter the queue to ask additional questions. I'll now turn the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions). Eric Tracy, FBR Capital Markets.

Good afternoon. Congrats on a nice quarter. Yes, Rich, maybe we could just broadly sort of talk about the environment. Clearly, your sales outlook is very robust, if anything potentially accelerating off the first half against which is obviously some concerns out there just in terms of how the US consumer holds up. So, maybe just speak to which percentage of that expected increase kind of comes from continued consumer spending pickup versus some of the share gains and new programs, and sort of your thinking about retailer inventory positioning for the back half.

Okay. First of all, we are seeing consumer spending lift our sales in the first half around 2% or slightly under 2%. So, we had about 8.7% growth for the first half; about 70 basis points of that was exchange rates, 6% was from the new shelf programs that we had talked about. So that leaves the difference to be consumer spending lift. Our expectation is for that to continue into the second half, neither accelerating or decelerating. And so if it gets a little bit stronger or a little bit weaker, it could actually impact our results and bring us closer to the lower end of our range. So the bulk of the increase that we are projecting is actually from further placement of new programs.

The fact that our new programs we placed in the half -- first half are actually outperforming our original expectations a little bit, in essence we are gaining a lot of share. So we feel good about our prospects for 2010; that's why we are raising our guidance.

In terms of your second question about retailer inventories, I think the best place to look there would be sort of our Innerwear business. From a weeks of supply basis, those inventories aren't up substantially. They are sort of in line with sales growth, so they are higher than they were last year at this time, but appropriately higher, given the fact that sales are going up.

As we move forward, it's a little harder for us to track that as it starts to blend with all of the new programs we've placed, so it'll be a little harder to tease that out. We've had good line of sight of that for the first half. So, restocking hasn't been a major portion of our sales growth to date, and it's not a major portion of what we project for the back half.

That's fair. And so kind of the capacity abilities came in the last quarter, talking about 20%, and obviously now sort of calling out the incremental cost associated with that in terms of outsourcing to meet the demand. Again, we should assume that is essentially just an FY '10 event and doesn't replicate in FY '11. Is that fair to assume as you ramp that capacity?

Yes. Let me talk about -- I think we were talking, as you said, about 20% ramp up in capacity. We are now at about 25%, so we've actually taken that up from last quarter. A lot of the incremental costs, as you're saying, are one-time events. I wouldn't say that all of it -- or none of it is going to spill into next year. We see $25 million to $30 million in this year. Lee can talk about how things get hung up on the balance sheet. We could see a portion of those types of costs spill in the next year, but the lion's share of it should not repeat.

Just to bring this to life for all of you, air freight is actually a big portion of this. Our incredible airfreight this year so far is $15 million of that $25 million to $30 million. So that's bringing things both from Central America as well as Asia. So, when you are running with such short lead times, you need to speed it up, and air freight is just a lot more expensive than ocean freight. There is no doubt in my mind that these are the right trade-offs to make. We are investing in our business, we are building our sales, we are pleasing our ultimate end consumers, and it's going to be the right decisions for the long-term.

Okay. Lastly, I'm going to touch on the pricing and see if I can get a little bit more out of you in terms of what -- trying to get the assumptions around -- because you clearly feel comfortable with offsetting the incremental inflationary pressures, be it on raw material, cotton, freight, labor, sort of what the assumptions around those incremental costs are for FY '11? By my math, it would translate all of those sort of variables, incremental costs of call it $60 million to $70 million which I think, again, by my math, implies at least a 1.5%, 2% type price increase to offset.

First, are those assumptions fair? Secondly, is there -- I know there's going to be, depending on category, from no price increases up to sort of higher levels. But on average, sort of what we should think about the price increases could come in FY '11?

In terms of estimating the overall cost, if anything, you are probably a little on the low side because you probably have cotton in there, but you've got to remember we've also got oil. There's just general tightening of capacity in apparel through the entire global supply chain. So I think you're starting to see price increases come through the entire supply chain, not just from commodity costs but also from a supply and demand imbalance.

So there is no question that costs are working their way through the supply chain. You will see a broad-based increase I think in retail prices for apparel in 2011, not just in our categories but across a lot of categories. You will also see it in categories such as home, which is already starting to move up, getting hit with even higher increases in apparel. So I think that's really going to happen and you're going to see prices go up across the board. We are confident that we can actually offset those costs, systemic cost increases.

The only reason I don't want to talk about averages is that things do vary tremendously by category. So, for example, while cotton is a big input on a T-shirt, it's almost irrelevant from a bra perspective, but we are also seeing raw materials in bras go up.

I don't want anybody to zero in on our average as indicative of anything that we are trying to [raise] a particular product category. So for competitive reasons, I just don't want to talk about any of the specific details of the increases. But I'm fairly comfortable we can offset the costs that we are seeing coming in.

Fair enough. Thanks, guys. Best of luck.

Matt McClintock, Barclays Capital.

Good afternoon everyone. I've got a couple of questions. The first one, Rich, conceptually how should we think about shelf space gains in year two? Meaning I understand there's an opportunity to make the space more productive, but should we expect a headwind in year two associated with the comparison against the fill-in of product for the new shelf space?

I think you're going to see both headwinds and tailwinds going in to 2011. As you just called out, clearly, when we ship some pipes during the year, that creates a number that you've got to anniversary. We've got line-of-sight to those things and we are making sure we are putting sales action plans together to anniversary those in 2011.

But you've also got the tailwinds, as you said, first from productivity gains of the space that you already got. Remember, we didn't just get space in the beginning of the year; we've also gotten space at the -- that will go in in fall that will also cascade into 2011. So I think we've got a lot of factors working in our favor to continue to grow in 2011. Specifically how much? Let us get through another quarter or two in '10 and we'll start to give you a line of sight to '11. But I am confident in our ability to grow and hit at least our long-term sales growth goals in 2011 and beyond, if not even more so.

Then you just talked about how cotton is not a large part of the cost of goods for bras. There seems to be at a lot of confusion among analysts in the industry regarding cotton as a percentage of cost of goods. I understand that cotton is some thing like 7% of your cost of goods, but we've heard much higher numbers for some of the other players in the apparel industry. Can you help us understand what some of the larger components of cost of goods are for Hanesbrands specifically, relative to cotton?

Yes, I think, as you think of us versus some of our competitors, if you are just a T-shirt company, cotton is going to be a very high component of your cost of goods sold. But we are not just a T-shirt company. We have broad -- our bra business is a large piece, and there's very little cotton impacts.

You have to really look at the size and the scope and the scale of our business. That's why, between cotton at $0.70 to $0.80 is 7% to 8% of our cost of goods sold. Material is a large piece of our -- it's probably 55% our cost of goods sold. Labor, indirect and direct, is a little under 20% and then there is another 25% that's general overhead and freight, for example in duties. A large component of that material at 55%, 30% of the 55% is actually sourcing finished goods, because we source about 30% of our total sales product.

Thank you. That's very hopeful. Then my final question is just more of a clarification. I think, Lee, you just mentioned that there's going to be a benefit of $0.13 from taxes this year to your guidance. I think, for the quarter, there was a benefit of $0.20. Can you help me understand the difference there between those two numbers, and just to clarify that the $0.20 from this quarter is included in the revised guidance?

When you look at the adjustments that we made in the quarter, it was worth about $0.20. But when you look at annual rate versus our plan, our plan was about a 20% annual rate. The annual rate now is 14% to 15%, so that's a $0.13 benefit.

Now, keep in mind last year's tax rate was -- for the full year was 12%, so this year, it is 15%, so it is going up. It's just lower than our plan at 20% because of -- these adjustments came out of a very positive IRS audit. So the $0.13 is in our guidance. But as we said, it's being offset somewhat, about $0.04, from a smaller reduction in interest expense, and about $0.04 from one-time charges, primarily things like bank fees that we are writing off as we make modifications to our debt structure.

So you think -- sorry, go ahead.

So the net impact of all of that is about $0.05.

Great, thank you very much.

Omar Saad, Credit Suisse.

Thank you. Good afternoon. So, I just want to follow up on that last question from a housekeeping perspective. So your quarter was in line. You're going to get a net $0.05 benefit from one-time items this year, whether it be taxes or some of the bank fee stuff. But you raised the guidance essentially what? $0.08?

Midpoint to midpoint $0.09 to $0.10 actually.

All right, so a $0.09 to $0.10 raise, in-line quarter $0.09 to $0.10 raise, $0.05 of that coming from one-time benefits.

Yes.

Okay, I just wanted to make sure I understood the dynamic there.

Onto something more interesting -- the gross margin, Lee, you gave some interesting detail around that in terms of some of the drivers that -- the puts and takes, the higher sales and the leverage you got there, efficiency gains and then obviously cotton material is a little bit of an offset there. Can you talk about -- with cotton up I think it was, what, $0.61 this year in the quarter versus I think under $0.50 last year, you still had some very nice gross margin expansion. Can you -- is it possible to quantify how much of that came just from the sales, the higher sales, 9% sales growth obviously a really strong number?

Yes. I think, when you look at it, sales is the largest driver. Now, we are still having positive benefits from our supply chain initiatives, and all of that we talked about for the year of $50 million in benefits, cost savings benefits from that, so we are on line to achieve that $50 million. So, while there are benefits throughout the sales really in our business at 9%, sales growth is very positive, and you get very nice leverage.

Now, keep in mind, though, that of the $25 million to $30 million of incremental costs that we are going to see on the P&L this year from this one -- this rapid volume increase, only about $8 million hit in the first half. The balance is going to hit in the second half, and so that's going to drive those operating margins lower, that along with the cotton cost that ramps up in the second half.

But Omar, I think it really does show the power. If we didn't have those issues, we had a little bit either more line of sight to the sales growth that we are now seeing, the earnings power that we'd have from the global supply chain. Also, as we did indicate, those costs will start to go away as we go into 2011, not entirely, but they will start to go away. So I think it's -- we are feeling really good about the performance.

Yes, I mean it's the leverage of the model, right?

Exactly.

-- as drive higher sales through this infrastructure that you've built.

Absolutely, and you see it in this quarter. Unfortunately, it'll get diluted a little bit, but as I said, we are making all the right choices to continue building for the long-term.

Got it. On that front, as you think about leveraging the supply chain that you've built and this infrastructure, distribution and relationships you have with retailers, any update on the M&A front? As you obviously are driving the sell space gains or some cyclical rebound, are there ways to kind of leverage your -- the infrastructure that you've built in terms of making acquisitions on complementary businesses?

We have talked about acquisitions starting to come on our radar screen as a tactic that we can use to create value to use our cash flow. If they fit our criteria in our core category, leveraging our global supply chain giving revenue opportunities and accretive fairly quickly. If we see those kind of opportunities, we may decide to go after them. If we don't see them, we can be very successful on our own, as I think we are demonstrating so far this year.

Since we started talking to people about that strategy, clearly we've had discussions on and off with different companies; we are always going to have discussions with people. When we get to the point where we are ready and we sign a deal, obviously we will let you know. Acquisitions may come along or they may not, but we are very confident in our future.

Okay. Then the last question from me -- as you look at the cotton markets, what are you seeing there? What are you seeing in the yarn markets? I know you guys used to spin your own yarn, but now it's outsourced. What is that marketplace looking like? Where are the -- you know, you talked about the supply/demand not being matched up, kind of the reverse of what it was a couple years ago in the recession when there was not enough demand for the supply. Where are the key points in the supply chain, where supply and demand -- you have a -- from an industry perspective, there is the toughest match.

First, let me talk about cotton. I'll then talk to your yarn comment and then I'll generalize that to sort of the overall industry. Cotton is really interesting. In both the US and world, we've seen the cotton supply be less than demand for five straight years in a row, including the recession of 2009. That has not happened for 50 years. So world supply and US supplies of cotton are at all-time lows. And so while I can't predict the price of cotton on any given day, I do think, over time, long-term, you're going to see the price of cotton continue to rise.

When you look at yarn, the capacity for yarn, there is a huge amount of capacity that's been taken out of the marketplace worldwide and in the US. As demand has picked up, we've started to see yarn prices go up at a much faster rate than cotton prices. So, those that are stuck buying yarn on the spot market, or small suppliers, are really getting squeezed.

Now, fortunately for us, as we got out of the yarn business and sold that, we did do long-term supply contracts, and it's on a cost-plus basis. So, we are not actually susceptible to those swings. But small companies are really feeling the pressure. In fact, it's starting to get to the point where there are shortages, and there's companies that can't even get yarn, regardless of the price. You might start to see more of that happen over the next couple of quarters. That just takes you to the overall world supply of apparel manufacturing capacity.

Right now, I'll tell you there's a lot of different segments of the market that feel tight. I think that's one of the reasons that you're starting to see prices work their way through the overall global supply chain.

So what I believe is that the era of apparel deflation is now over, and we are actually heading into an era or back to the era of fairly low but moderate apparel inflation, maybe of a couple of percent per year on average. I believe that that's actually good for us. That's -- when you have strong brands, you've got the ability to leverage global supply chain, you're going to be more successful navigating that type of environment than a company that is small, has weak brands, and actually has to rely on sourcing partners for success. So I think it all bodes well for us.

Does it create a positive environment from the retailer perspective in terms of their willingness and openness to pricing?

No, there's a lot of retailers that clearly understand that deflation works against them, because their own costs go up every year, so, for them, they need positive comps. If you've got moderate inflation -- I don't mean radical inflation, but of a couple percent per year, it helps their comps and helps their probability.

I will tell you I think that's a growing list of retailers that actually understand that model, because a lot of them are now being forced to raise prices in 2011, because there are such huge increases of cost-push inflation in a lot of supply chains, not just apparel but in home goods and a couple of other categories. So, I think you're going to see that list continue to grow.

Great, thank you.

Jim Duffy, Stifel Nicolaus.

Thanks. Good afternoon, everyone. On the first-quarter call, you mentioned consistent improvement in consumer spending since holiday. During the second quarter, was the improvement any less consistent?

Yes. In fact, what we've started to see -- sort of more fluctuations week to week or month to month. So for example, April and May tended to be a little soft; June came back and was a little bit stronger. So I think we saw a little bit more ups and downs, but cumulatively, since December, we've seen positive sell-through in our core categories, when you exclude the space gains. So we feel that it's sort of still on track.

What we are also seeing is that those key selling times, people do come and they shop and they are buying. Where you get a little bit of the softness is outside of those key selling times.

The next four or five weeks will be very interesting as we enter into the back-to-school season. The last week of July, next week, is when it starts, but really the first two to three weeks of August are where it really kicks in. What we've seen so far is that people show up when they need to shop, and that's our expectation for back-to-school as well.

Hopeful, thanks. Then when you look at the new programs and the contribution to 2010, is there a way to quantify how much of that is pipes versus a run-rate business?

How much of that -- I'm sorry, what? I just missed you.

So when you look at the contribution of new programs to 2010, some of that is pipes, right, and some of it is run-rate business. Is there a way to quantify how much of it is pipes versus like an annual run-rate business, so we can get a feel for the anniversary hurdle into 2011?

Yes. From an overall perspective, I don't have the number off the top of my head. It's going to be a fairly small percentage of the overall 5 points of growth that we originally talked about, which is obviously now a little bit higher with the new programs in the back half. It will be a little lumpy by quarter, and so we've got line of sight of that. There's -- actually the first quarter was probably more pipes than sort of overall replenishment business. We see that. We have visibility for it. We are going to have the right sales action plans to try and overcome that.

I'm quite confident overall, for 2011, as we leave 2010 with momentum, that we can at least hit our long-term sales goals or better for going into '11.

Okay. Then Lee, how are you tracking towards the $150 million in annual cost savings expected over the three-year period? In 2010, are you running ahead or behind the $50 million run rate for that?

We are actually on track for that. I think we are in good shape. We might be a few million low, but for the year, we will be fine.

Then the final question, related to both, is with respect to the plan for 50 to 100 bips per year even margin improvement, given pricing and the other factors like bringing more capacity back in-house, etc., does that still look like a reasonable objective into 2011?

It's way too early to start talking about or trying to give guidance for 2011 at this point. We are just through the first half of 2010. We still need to deliver the rest of 2010 before we start to give you a line of sight to that. As we start to develop that, we'll obviously start to share it with all of you.

Okay, congratulations on a great start to the year.

Ken Stumphauzer, Sterne Agee.

Thank you for taking my questions. Just a couple of things -- first, as far as the inventory build goes, is there anything structurally different with your business right now, or with the programs that you assume this year that necessitates the inventory build? I say that because, if I remember correctly, you guys had built inventory into 2008 and were anticipating being able to drag it down over the subsequent 18 months and build inventory turns.

Yes, there's no structural issues. It's about this kind of significant sales growth. We need inventory to service it because a large portion of our business is that replenishment business, and you need inventory when it sold at retail. So now it's -- when you look at the $100 million that we could be up at the end of '10 versus the end of '09, about a third of it is just cost inflation -- cotton, higher cotton costs and inventory -- which leaves about two-thirds of it to be unit growth. That's just preparing for strong growth in the balance coming into the next year or so. Nothing structural, it's just supporting this business growth.

In fact, if anything, if you use those numbers, that implies sort of an inventory unit growth, if you will, of around 6%. If we could see sales growth of 8% to 10%, we are actually slightly improving turns through the year.

Okay. Then just touching back on cotton and yarn issues, in your Asian cluster, is there anything different about supplying those facilities with cotton? Are you getting them from the same regions? Is pricing different? Is anything along the lines different in that regard?

We get cotton and yarn for Asia two different ways. For our Nanjing facility, we actually -- it makes the most sense and it's most economical to ship US yarn to China. It actually eliminates a whole host of issues like exchange rate fluctuations and so on and so forth. For everything else that we source there, when we buy fabric, we buy local yarn, which is ring-spun. Open end you can get in the Western hemisphere, you can't get in Asia; that's what we ship over. Ring-spun, we get there. So we are not seeing any other different dynamics, other than obviously we are seeing a tightening of supply and we are seeing raw material prices go up, but there is nothing outside of that that's unusual.

Just one final question regarding the shift toward third-party sourcing that you guys need to do to catch up to demand this year. How much of a drag was that on gross profit dollars this quarter, and how much of a drag do you anticipate it will be for the full year?

We talked about $25 million to $30 million of those incremental costs to chase the volume. We basically said about half of it is air freight. The other half is divided really between distribution costs here in the US and then those costs to contractors.

Thanks guys. Best of luck.

Scott Krasik, BB&T Capital Markets.

Thanks. Hey guys. A question on Just My Size -- do you still have a lot of runway there? That was sort of like it was going to be a good number this year but then potentially double that next year. Are you getting that type of commitment from Wal-Mart that you're expecting?

Actually we -- I know what you're talking about. When we originally talked about the program as some of the numbers you're talking about, in 2009, it actually built a little bit larger than we thought. This year, it is built even larger. So it's at about its overall run rate that we talked about, its potential over $150 million. So it's driving a lot of that -- the Outerwear segment increase. It's offset by a couple of things that we lost that would've all been in our previous-year guidance. I do believe, though, it's performing fairly well and we'd probably have further upside for 2011.

Is this their go-to resource for plus size now?

That was the whole idea about the exclusive arrangement that we worked with on Wal-Mart. As I said, things are going fairly well with Just My Size, and everyone is pleased.

Okay, good. Then just I guess a skeptic would look at your comments about having to go to third-party contractors and say, well, you're normally a low-growth business and maybe you are not fully utilized, and then when you actually do grow quickly, you need to go to third-party sourcing, so you never actually capture the full benefit. Longer term, how do you avoid something like this if you do accelerate growth going forward?

I think 2009 and 2010 are highly unusual. I am hoping that the world won't repeat those two years anytime soon. So, we went into the greatest recession in a generation, and so we had to substantially ramp down capacity. As we've come out, we've actually come out much stronger than we expected. I think that's what's really exacerbating the situation.

If we do, in 2012, go into another huge recession, I think we may come out of it with a slightly different way or a little bit more flexibly than we came out of this one. So I think it's more of a unique set of circumstances that led to where we are today.

But I am -- overall, I am pleased with how we have been able to rise to the occasion. While not everything, by any stretch of the imagination, is going perfect, we are trying to make sure we are spending all of the money we can to service our retail partners to the best of our ability in light of all of the strong demand.

No, that's a good answer. Thank you. then just a couple more -- in terms of -- I know you don't want to talk specifics on price increases, but are there any channels of distribution that are less amenable to it than others, or everybody sort of gets it?

In this environment, everybody is clearly seeing, not just in apparel, in a broad set of categories, cost-push inflation work its way through. Now, there's other places, some categories that aren't seeing that. I think broadline retailers are sort of attuned to it more than they ever have been. Like you said, there's some people that understand it, [the] benefits to them better than others. I think, over time, you'll get a broadening of that understanding in the retail environment.

Thanks. Just lastly, Lee, you said you're only giving guidance on GAAP, right? So the guidance was basically $215 million to $227 million on a 20% tax rate, and now it's -- $220 million, whatever, $225 million to $235 million on a 15%. (multiple speakers)

Correct. That's correct.

Thanks guys, appreciate it.

(Operator Instructions). Eric Beder, Brean Murray.

Good afternoon. Congratulations. Could you talk a little about how the C9 business is doing with Target? I've seen some expansion there.

No, I don't want to get too specific about a particular program at one particular retailer. But overall, the Champion business is growing in all components, C9 as well as Champion is growing. When you look at where we started with Target four or five years ago, the business was just in a few categories and in only a few genders, and it has continued to expand over time. They have called it out as being an important component of their growth. Overall, I think we are all pleased with the results, and Champion as a brand has a lot more runway to go.

In terms of the advertising, you've been increasing the advertising spend. You've rolled out the new Michael Jordan ads and I guess some Bali ads. What has been the response to that and kind of where do you now think that you should be in terms of the marketing spend?

Well, I'll just talk specifically about media, because I always tend to focus right on that number as a proxy for some of these other things. I think, right now, inherent in our guidance is spending between $90 million and $95 million of media. I have talked about wanting to get back -- that number back to $100 million and then grow it from a sales perspective at the same rate as sales beyond that. And so that's where I said, if we see further upside or as we get to that higher end of the range, we may choose to increase media spend. We've had it at that level before the recession, and I want to get it back to that level.

There is no question our brands are strong, and they are the strongest where we've got compelling innovation and strong advertising to communicate that to consumers. You mentioned the new Michael Jordan commercial in men's underwear. I talked about men's underwear being up close to 20% for the quarter. So we're seeing a lot of great strength when we've got compelling advertising with new product news. That's also true in the other product categories, like Playtex bras. It's probably the most responsive category I've ever seen to advertising. Literally, the week you break the ad, you see sell-through at retail go up. So, we feel real good about where we are. We need to spend a little bit more but not substantially more.

Okay. One other thing -- you mentioned, I think in prior calls, that you guys are looking to get into the shapewear business in 2011. Is that still true, and what's your thoughts on that?

Actually, we are already in the shapewear business. We have a nice business. In fact, it was up I believe high single digits in the quarter, and we expect that growth to be able to continue into 2011. That whole category has actually been growing, and it's the one apparel category that grew through the recession without a hiccup. So, we think there's a lot of long-term growth potential there. We are in it and we're going to be in it in a bigger way as well in '11 and beyond.

Okay, thank you.

(Operator Instructions). At this time, there are no further questions in queue. I would like to turn the conference back over to management for closing remarks.

We would like to thank everyone for joining us today, and look forward to speaking with many of you very soon. Thank you.

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