漢佰 (HBI) 2011 Q1 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands First Quarter 2011 Earnings Conference. 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'll now turn the call to Brian Lantz, Vice President of Investor Relations. Please go ahead.

Good morning, 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 2011. 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 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. Before I turn the call over to Rich, remember, as we stated last quarter, in this inflationary environment there are certain aspects of our business that we intend to refrain from discussing in great detail for competitive reasons. Specifically, we will refrain from disclosing details regarding cotton-purchasing practices and forward-looking cost positions, and we will not discuss specific timing or amounts of pricing actions. I will now turn the call over to Rich.

Thank you, Brian. We are off to a very strong start in 2011. Our brands are strong and performing well, and it shows in our Q1 results. We're growing our top line both organically and with our Gear for Sports acquisition; and this growth allows us to leverage our supply chain and SG&A overhead and to drive profit growth. We beat our internal expectations in Q1 and expect a lion's share of that improvement to stick; and therefore we are raising our full year guidance by $0.10.

Let me give you a few of the highlights for the quarter. First of all, I'm very pleased with our first acquisition, Gear for Sports; and I'm increasingly excited about Gear's potential. They had a great Q1, with strong bowl game sales and record sales for the NCAA Final Four. Additionally, they've had improvements in their supply chain, and cost per units dropped 7% due to increasing offshore production. The combination of strong sales and lower costs resulted in a 30% profit increase on a pro forma basis. Longer term, we feel very good about our ability to deliver the expected cost synergies and EPS increases in 2012.

Our International businesses also performed particularly well in the quarter, with both sales and profits increasing substantially. Notably, sales for Brazil, China, and India each grew nearly 40%.

For our Domestic business, consistent brand investment in advertising and product innovation are driving performance and setting the stage for future gains. In fact, 5 of our key brands are currently running on TV. Hanes commercials featuring Michael Jordan continue to run extensively on sports programming such as the Final Four, and Champion was a sponsor of the ACC Tournament. Turning to intimate apparel, we launched a major new Hanes campaign for No Ride Up panties and ComfortFlex Fit bras, with spots featured on Dancing with Stars and The Today Show. Playtex also broke 2 new TV ads on shows such as Grey's Anatomy; and Bali continued to drive the successful One Smooth U bra with commercials on Modern Family and The Oprah Winfrey Show. Speaking of Oprah, if you tune in to tomorrow's show, you're likely to see Hanes there featured as well.

With our continued support behind innovative products and compelling advertising, we will continue to see double-digit sales growth for the remainder of the year. So to recap, we had a great first quarter by growing our top line through a combination of organic growth and tuck-in acquisitions. This allowed us to leverage our supply chain and overhead, and to drive profit growth. The result? We beat our own expectations, and we expect a lion's share of that improvement to stick. Lee?

Thanks, Rich. First-quarter performance was strong and exceeded expectations. As Rich mentioned, we're growing our top line, and we're leveraging our infrastructure to drive profit. I'll briefly highlight how we delivered these strong results. Sales grew $109 million, or 11.7%, with the highest growth in the Outerwear and the Innerwear segments, up 37% and 24%, respectively.

Gear for Sports represented $46 million in sales, or 19 points of the 37% growth in the Outerwear segment. Innerwear segment sales were flat the last year due to over $30 million in new program shipments in last year's first quarter. Operating profit grew $16 million, or 19% compared to last year, with the operating margin increasing 60 basis points to 9.8%. Sales growth, price increases, operating efficiencies, and leveraging of SG&A expenses offset higher cotton and commodity costs. Operating margin was 13.2% for Innerwear segment, 7.7% for the Outerwear segment, and 15.9% for International. Interest expense was $3 million higher than last year, due to the higher working capital, and the first-quarter tax rate was 20%. The resulting EPS was $0.49, $0.12 or 32% above last year.

Working capital and long-term debt were both above prior year, but on plan. The increased inventory levels represent the normal seasonal build for back to school, the Gear for Sports acquisition, and higher cotton and commodity cost.

Free cash flow was better than expected, and EBITDA grew 15% to $123 million. For the full-year, we continue to expect free cash flow to be between $100 million and $200 million. We also expect to reduce our year-end debt levels by the amount of our free cash flow. In summary, we had a strong quarter, our performance is sustainable, and we've got a positive outlook for each of our largest segments. We exceeded our expectations in the quarter and should keep much of this excess. So, we're raising our full-year guidance, increasing EPS $0.10 to a range of $2.70 to $2.90, and sales guidance is now $4.9 billion to $5 billion. I'll now turn the call back to Brian.

Thanks, Lee. That concludes the recap of our performance for the first quarter. Now we will begin taking your questions and will continue as time allows. Since there may be a number of you that would like to ask a question, I'll ask that you limit your initial questions to 2 or 3, and then reenter the queue to ask additional questions. Now I'll turn the call back over to the Operator for the question and answer session. Operator?

(Operator Instructions) Matt McClintock from Barclays Capital.

Yes, hi. Good morning, everyone, and great quarter.

Hi, Matt. How you doing?

My first question, Rich, is you highlighted a little bit of the strength in Brazil, China, India, and we've seen a couple of quarters now of pretty good growth in your International business. And I was just wondering if you could maybe go into some more detail on how that business is maturing and what's driving that? Is that the Nanjing textile plant ramping up or what's really -- some of the drivers there?

Our overall strategy is to duplicate the success we've had in the United States in both the Innerwear and the Outerwear segments in our 6 key markets of Canada, Mexico, Brazil, China, India, and Japan. And we've been doing that now for a couple of years, and we're continuing to build momentum, and you're seeing it in the results. I feel really good about our overall business there. We have strong positions in Canada, Mexico, and Brazil. In Brazil, we're number 1 in men's underwear. That business is performing very well; their economy's held up really well. And so, our strong brands in those categories in those countries are taking hold.

I think overall you're going to see continued strength in our International segment, and I expect that business to be up in the teens this year. About the only spot that we have to worry about is Japan, where we have about a $75 million or $80 million business. While it was strong in Q1, we are expecting that to actually be down in Q2 and Q3 because of the horrific things that have happened there. But that's a relatively small part of our business. The rest of it -- doing really well, and we expect that trend to continue.

Great. And then one more question, if I may. You've had a lot of success, it seems, with the acquisition of Gear For Sports, and it appears that the market's heating up with the recent acquisition of Gold Toe. Can you maybe just give us some of your maybe updated thoughts on the M&A environment, what you're seeing there, and could we potentially see something like that, like a Gear For Sports or something like that happen this year?

And I'll first start and I want to put acquisitions for us in perspective; they're not a major part of our strategy, but they clearly can be part of our overall strategy. We have a lot of opportunity to grow our business organically. As we grow that top line, we can leverage that supply chain and SG&A to drive profit growth at a faster rate. And clearly, tuck-in acquisitions like Gear For Sports can help accelerate that. So, we're always on the lookout and we always will be. And if we see something that fits our criteria and we think is a compelling value and can create a lot of shareholder value, we'll take advantage of it like we did with Gear. But we don't have to do that to be successful.

Let me spend a minute or two and talk about Gold Toe, as I'm sure it'll come up. Gold Toe's one of those companies that has perennially been for sale. I've actually looked at it personally at least 5 times in my career, including this most recent time. And while on the surface it hits a lot of our criteria, it doesn't hit them quite as strongly as we would like because we've always believed that the long-term growth potential of that brand is fairly limited due to its very specific nature in socks, and it's position, while strong, is mainly in department stores. And so, we've always ended up passing on that particular acquisition. But we do think that there may be some others out there. We'll always keep our eyes open. But right now, we're going to continue driving what we have.

Thanks a lot, Rich.

Eric Tracy from FBR Capital.

Hi. Good morning, guys, congrats on a great quarter.

Good morning, Eric. How you doing?

All right. If we could focus on the Innerwear category, and maybe talk a little bit on the quarter, I know you had some difficult compares from last year, but maybe how we should think about that business progressing? And specifically, just as it relates to price and demand elasticity, obviously a big question mark, particularly as the year progresses, but Rich, maybe just give us an update on your thoughts there?

Yes. Overall, we're pleased with the business. There's a couple of things that are unique to the quarter that are driving the flat sales results that you see and also the profit declines. Remember, last year we had a huge amount of space gains and fixture fills that happened in that first quarter in the Innerwear segment. In fact, it was about $30 million. And the good thing is they were able to overlap those and keep sales flat. When you correct for that, the rest of the core business is actually up about 7%. So, we feel good about its ability to continue driving growth later in the year.

From a profit perspective, it's quite simple. We're starting to see the inflationary impacts in the Innerwear segment. Those price increases didn't hit until about mid-quarter or so. So the margin -- there's a little bit of margin correction. That's going to correct itself beginning in Q2 and throughout the year.

Lee, is there any more specifics you want to shed on that?

No, I think it's just that simple. When you get into the second, third, and fourth quarter, you'll see the full pricing impact in the quarter. And we're projecting all those -- in our guidance, we're projecting those to be up -- profit to be up in each of those quarters.

And then, just from the elasticity perspective, what you're seeing from the unit volume? And again, remind us of what's embedded in guidance for the balance of the year, because I think you guys seemingly have been pretty thoughtful about -- particularly as the year progresses and some of these higher price increases come through, potentially impacting unit volumes.

Yes. We clearly have substantial negative impacts from unit demand fall-off as prices continue to increase throughout the year built into our guidance. At this point, we're not really seeing any negative impacts from elasticity, but we do anticipate them for later and back-to-school and into holiday. But we have all that built into our plans.

Okay. And then Rich, I want to follow up a little bit on the international front, specifically China. I know we're really early days to be quantifying or laying anything out specifically, but we've obviously heard a lot of the apparel vendors out there talking about the opportunity, yet seemingly feel like you guys have the infrastructure now in place to sell into that region and seemingly a pretty meaningful opportunity. Is there a way to just somewhat frame it for us in how we should think about that playing out over time?

And I won't just limit it to China, but I think all of the major developing markets that we are in have a lot of long-term growth potential. And I think the -- clearly our categories are used by people around the world. They're purchased with increasingly frequency as household incomes go from very low levels to middle levels and people enter the middle class. So that's why we're very focused on developing markets of Mexico, Brazil, China, and India, and we feel good about where we are and what the long-term growth potential is.

I think it's important to remember, and we've been operating in Mexico for a while, we have number 1 shares in intimate apparel and men's underwear there. In Brazil, we're number 1 in men's underwear. But we have a lot of opportunity to continue to fill out our product categories that we're good and have expertise in to continue to grow. In China, we're focused on building the basics business first, and we'll probably launch a much bigger initiative against intimate apparel probably later next year. I see many, many years of growth in front of us. And feeling really good about our potential and the ability to take western brands and marketing techniques into those markets, coupled with strong advantaged supply chains. So we have a cost advantage. And you have those 2 things and you can grow pretty substantially.

Okay. Thanks. Just real quick, lastly for you, on Gear For Sports, $46 million top-line contribution, accretion in the quarter, I think it's a seasonally low quarter.

Yes, that's true. It was $46 million in sales, about $0.03 in EPS, but it is a very low profit quarter for them. It'll be their third quarter is the large one. But it was on plan, so we're good.

Okay. Great, guys. Thanks. Best of luck.

Jim Duffy with Stifel Nicolaus.

Yes. Good morning and congratulations on the great start to the year.

Thanks, Jim.

Lee, I was very surprised by the SG&A -- .

Jim, you're cutting in and out a little bit, could you speak a little louder, please?

Okay.

Thank you.

I was very surprised by the SG&A rate in the quarter, up only 4.5% year-to-year. Is that modest SG&A growth rate just timing of SG&A spend in the year, or how should we think about that on a go-forward basis? Were you guys marketing during the quarter? It sounds like you are on TV here during the second quarter; help us get our arms around SG&A in Q1 and how it looks for the remainder of the year.

SG&A was on plan for us in the quarter. We still marketed, we're still in our marketing -- that kind of guidance around $90 million to $100 million a year, we're on track for that. When you really look at the increase of about $11 million in SG&A dollars, bulk of that was just Gear adding on. We did a very -- I think a very nice job of leveraging SG&A, which is our theme here, drive volume, leverage supply chain and SG&A.

You might see SG&A dollars go up a little bit in subsequent quarters, but you're going to continue to see nice leverage. At a 24% SG&A rate in the first quarter, that's typically the highest SG&A rate we have for the year on a quarterly basis. We'll continue to leverage it, but you'll see the dollars come up a little.

Okay. Is that $11 million figure for Gear a good quarterly run rate number to think about for Gear SG&A?

Yes. I would think about their SG&A for the year a little bit higher than that run rate because, again, this was a low quarter -- .

Seasonally, yes, (multiple speakers)

Probably closer to $50 million on an annual basis for them for expenses.

Okay. Rich, you mentioned your thoughts about elasticity in the guidance, does that reflect elasticity from the standpoint of retailer ordering patterns? What are you seeing at retail in terms of sell-through rates in response to the price increases that were instituted in the first quarter?

So, elasticity -- and so, basically your question is elasticity from a consumer perspective and then from a retailer perspective --.

Correct.

-- and what's in our guidance and what are we seeing. From a retailer perspective, retail inventories are about where they should be in aggregate based on our sell-through. We're not seeing any move up or pull down in aggregate on retail inventories. However, what is interesting is that retailers are taking very different approaches to managing inventory as cost increases start to hit them throughout their entire apparel floor. Some are being extremely conservative and others are actually being pretty aggressive, using it as an opportunity to gain share. I think they'll all start to normalize later in the year, and we clearly did anticipate in our guidance somewhere during the year we'd see unit levels drop on, in aggregate, for retailers.

Remember that's only a one-time effect because what drives our shipments in total is what the consumer take-away is, since mainly computers do most of the ordering. At this point, we're not seeing any consumer elasticity impacts. Remember, the price increases at this point are relatively small. We expect that they'll increase in magnitude for back-to-school and holiday, and we have that all built into our plans.

The good thing is, we're also seeing a pick up in overall consumer spending and confidence that may help mitigate that a little bit. We're seeing consumers actually start to travel back up scale in terms of retailers, and show a predisposition to begin spending higher prices per unit. And so, that bodes well for the economy throughout the year.

That's a good indicator on the economy. That pricing that you have secured through the remainder of the year, at this juncture are you confident that covers your cotton costs into '12 based on your current visibility?

Yes, we feel real good about where we are from a pricing perspective. In this environment, prices are changing so often it's almost a continual conversation with retailers rather than a big one-time event. We have the lion's share of our pricing secured. We feel real fine about it, and remember, we price on a run-rate basis, not to try and make a fiscal year. And so, we look at what we think the go-forward rate is from an inflation standpoint, both with cotton, oil, and wages, as we put in prices; that should take care of not only '11 but then cascading into '12. We're fine from a pricing perspective.

Okay. Great. Final question, and I'll let someone else jump in. Cotton locked in through the remainder of the year; can you help me understand the mechanics of this? Is that something you do through the futures market, or given your purchasing scale, can you arrange a contract outside of that market?

Cotton lock for the rest of the year, we've dollar-cost averaged it, and I wasn't exactly sure of your question. I didn't quite catch it on your question relative to the market?

I'm just wondering the mechanics of that. Is that something you do through the futures market that we, the investors, are tracking, or can you arrange a contract outside of the futures market given your scale and purchasing power?

We really work directly with the merchants, and we give them prices to lock and they actually do futures contracts, so we typically don't own the contracts, we let the merchants do that on our behalf. But it's a future, it's not an over-the-counter derivative-type structure. It's a straight future.

From a scale perspective, there would be -- no one would actually sell it below what the futures market would be, and nobody would have enough world scale to have that kind of leveraging clout. It would be like somebody trying to buy oil at less than the spot price of oil; it just doesn't happen. Everybody's pretty well faced with what the market prices are that are shown on the big board.

I understand. Thanks for that.

Thank you.

Ken Stumphauzer from Sterne, Agee. Your line is open.

Good morning, guys, thank you for taking my questions. Just a couple of them quickly, on gross margins, quarter-over-quarter were exceptionally strong. Did any of the rushing costs that you've seen in the past 3 quarters spill over into the first quarter? And if so, could you quantify it?

Yes, this is the excess service cost that we talked about last year. There was just a little spill over, just a few million dollars, but they're finished now and it was not material in the quarter. But they're behind us.

Okay. So, you're confident that even with sales growth accelerating throughout the year that it's not going to be a recurring issue in future quarters.

No. Recall last year that was about having visibility quickly on the order pattern and the growth of sales. Now we have history and we understand it and we shouldn't have those recurring.

Okay. And then, just following up on Jim's question regarding SG&A, there's been a lot of volatility in the past 3 quarters. I think last quarter in dollars it actually grew $24 million or mid-teens, and in the quarter before that it was in the low-single digits. Can you explain what the volatility has been in the past couple of quarters? I want to affirm what you said earlier, Lee, are you implying that for the duration of this year it should be flattish in dollars ex the Gear For Sports acquisition, or is that the kind of thing that should tick up as we progress throughout the year?

Yes. Let's talk about the fourth quarter, because there were 2 items that created the increase in SG&A dollars in the fourth quarter. One was Gear, and that was just about $11 million, and the second was an $8 million one-time gain that was in the fourth quarter of '09 that reduced SG&A in the fourth quarter of '09 that didn't recur in '10. So there's $20 million of shift, fourth quarter of '10 versus the fourth quarter of '09. So when you back that out, I think you eliminate a lot of that volatility.

In terms of the first quarter, in our SG&A dollars, we're up about $11 million. Gear was actually $12 million of SG&A in the first quarter. So if you back out Gear, relatively flat in dollars. I would tell you, though, that through the balance of this year, Q's 2, 3, and 4, you're going to see us leverage our SG&A rate, dollars will drift up some. It won't be -- dollars won't be flat with the prior year. They'll drift up a little, but the rate will continue to improve as we drive sales and we leverage that SG&A. Dollars up for this year some, but nice leverage as a percent of sales.

Okay. And then just one last question regarding inventory build, obviously it's a double-edged sword. On the one hand, you don't have the rushing or transient costs, but on the other hand, it's [crimpling] operating cash flow. Should days of inventory stay elevated like this for the duration of the year?

No. When you look at the inventory build in the first quarter versus the end of the year, it's all basically back-to-school seasonal build. We do this every year. That will come down. We're still on track for our guidance on inventory, and just to reiterate that, we basically said inventory in '11 will be up about $50 million versus year-end '10. That the components of that $50 million are -- inflation costs takes it up about $100 million. We will improve turns, which will benefit us about $50 million, so the net increase in inventory we think for the year is about $50 million. We feel very good about that. In terms of cash flow, we're still consistent guidance with what we gave you last quarter, and that is $100 million to $200 million of free cash flow this year, and we'll use that to pay down debt.

Thank you. Best of luck.

Thanks.

Eric Beder from Brean Murray. Your line is open.

Good morning. Congratulations. Great quarter.

Thanks.

Hello?

Thanks. Appreciate it.

Could you talk a little bit about Gear? How quickly do you think the synergies that you're projecting from Gear are going to come? Is it mostly going to be in this year? And in terms of expanding their footprint, how are you looking at doing that for Gear?

There's a couple of things. When we announced the acquisition, we talked about them adding around $0.20 of EPS this year, and then an additional $0.10 in 2012 for a total of $0.30. Most of the synergies you're going to see show up in next year. Reason that is, is they start to actually happen around mid-year, they begin to happen, and they get hung up in inventory, I believe, Lee, and then they start to spill out in 2012 because most of them are through the supply chain. We feel real good about our ability to continue to do that, and believe that $0.10 should be there, there's nothing that should be standing in its way.

From growing their overall top line, they were a management buyout, they were highly leveraged, they were fairly constrained in capital, $1 million of additional capital for them really frees up a lot of capacity for them to go drive sales. They have a lot of opportunity in their existing channels by driving the brands and the portfolio products they have as we help to plug them into their supply chain, get their cost structure right, help them drive offshore; they can use that to just fuel growth in their current channels. You're starting to see that, and it's starting to take hold a little bit in Q1 and you'll see it take hold throughout the year.

Okay. In terms of the Just My Size program, and the program with Walmart, how are you seeing response by your competitors to your price increases that you did? Are they matching your price increases or are some people holding out to try and gather potentially more share?

Every single company in the apparel and footwear space is having to deal with this huge inflation. No one is immune. Every company in their own way, tactically, is going about it a little differently. There are some companies, including big branded global players, that are -- seem to be surprised by the magnitude and the speed that it's coming. So, you get some that are a little bit behind. But everybody, in fact, is dealing with it.

Whether they're big-branded suppliers, weak-branded suppliers or private-label suppliers. Prices are going up across the board and across all categories in apparel, footwear, and home. No one's really going to be able to have a long-term advantage by not dealing with this. In fact, anybody who's trying to do it slowly actually gets their P&L crimped, and they actually have less degrees of freedom to actually compete. We feel good about where we are from a pricing perspective and working with our retailers and they understand what's coming.

Final question is in terms of your continued improvements in the supply chain, the ability to continue to drive gross margin expansion, are you even more confident or less confident or how you feel about the ability to continue to drive those gains with a new China plant as it keeps on ramping up?

Our business model's really simple. We keep driving that top-line growth this year through a combination of organic growth and tuck-in acquisition. That allows us to leverage this big supply chain that we've built, as well as our SG&A, and that should allow us to drive EPS growth at a much faster rate. And we see that ability to do that for the next, at least 3 to 5 years into the future. We feel real good about our long-term financial growth goals of EPS growth of 10% to 20%, and that's how we'll do it. Drive that top line, leverage that supply chain and SG&A, and that should allow us to drive EPS at a faster rate.

And finally, just an accounting question, what is the average interest rate on all your debt right now?

If you look at all in rating, including amortization, I'd use about 7.5%. That's the actual interest paid, but there's some amortization of fees and the like, so use about 7.5%.

Okay. Thank you.

Scott Krasik from BB&T Capital Markets. Your line is open.

Hi. Good morning. Thanks for taking my call.

Hi, Scott. How you doing?

Good. The Outerwear segment obviously was the standout. You have a lot of different businesses rolling up there, so can you just break down a little bit more how did the wholesale business perform, Just My Size, there was an article, a lot of articles saying that Walmart's going to allocate more space to apparel, and Just My Size can benefit from there. Maybe just a little more color on that segment?

Yes. Overall, obviously Gear's a big part of their increase, but when you take out Gear, pretty much everything was up for the quarter, so everything's doing fairly well. Some pieces are doing better than others. I don't want to get into the specific increases on Just My Size versus Champion versus the wholesale channel, but we feel good about the overall strength in that segment for the quarter and for the year.

Was there any business that lagged one versus the other?

I think everything was up in the quarter, wasn't it, Lee?

That's right. 37% for the quarter for everything, even when you back Gear out, everything else averaged up 18%.

Good. Okay. And then, in terms of the operating margin there, because again, that's a segment that's been all over the place, are we now in a mode where all the operating margins of each of the businesses are going to look similar and there won't be as much variability?

That's always been our goal in that segment, was to increase the operating profit rate. Gear does that. Gear comes in at a higher rate. But everything -- all the rates are higher, you're seeing some price increases there, which are helpful. And the sales volume just drives the efficiency that Rich talked about in the leverage. Very pleased with that, we see that rate being better year-over-year.

Okay. That's helpful. Innerwear, the only thing you called out specifically was some intimate business that underperformed a little bit. I knew you guided to higher operating margins in that business, but is there anything going on competitively or things that could continue?

No. Like I said, when you correct for that $30 million of fixture fill that went out last year, the rest of the business on average performed fairly well. The intimate apparel business in the full figure area and full figure bras was actually a little soft. We're seeing that actually in the overall market, it's not a share thing. That market came back a little bit sooner in a recession, it seems to be softening a little bit. But I think that's going to be a short-term thing. We have a lot of product innovation and advertising, and I'd expect that to turn around in subsequent quarters.

Okay. And then, just lastly, I know you don't want to get into specifics on your assumptions around elasticity, but given what you've seen in the first 3 months, have your opinions in terms of the success of your price increases changed for the third and fourth quarters or the outlook?

As time goes on, as we see more and more companies across a wide set of apparel and footwear industries deal with price, we feel more and more confident in our ability to not only secure the price increases, but have the retailers understand that this is absolutely necessary to do. We're fine from a pricing perspective. Retailers understand it. I think as the media continues to focus on it, consumers are going to understand it. Overall, I think we're done with deflation in this industry, and we're going to go into a period of moderate inflation. That's good for companies that have strong brands and supply chains that give them visibility such as ours. We're going to be able to manage through this very well.

Assuming the economy doesn't take a turn for the worse, maybe your assumptions were even slightly more conservative than they would be if you put them out today?

I think we're feeling good about our ability to deliver our guidance for the year. In fact, we feel so good about it with the results of the quarter, we're taking it up $0.10.

Okay. Thanks.

Thank you.

Susan Anderson with Citi. Your line is open.

Hi, guys, congrats on a great quarter.

Thanks.

Just a little bit more color on the direct segment, what drove the sales decline there? Was it internet or retail or both, and how should I think about that for the rest of the year?

The direct segment was down about 2%. The stores actually did fine, they were actually -- I think the comp store sales were up about 2% for the quarter. It was actually the internet business that was a little soft. We did change -- part of that's a catalog business as well, the One Hanes Place. We did change our mailing strategy and our mailing timing during the quarter, and we think that's what impacted the business negatively. But I think that'll turn around later in the year, but overall, that business is doing fine and we're pleased with it.

Okay. Great. In terms of transportation and energy prices, have your assumptions changed at all as a result of the higher oil prices?

Yes. When we look at our guidance, built into that guidance right now is oil around $100 or so, maybe a little over $100.

Okay. And are you guys seeing pressure there at all yet or is it still pretty much in line with what you're expecting?

Yes. It's in line with what we expected. There's not a lot of negative impact in the first-quarter results. It'll get a little worse, but it's well within our guidance.

Okay. And then, you talked about the new marketing and advertising launches. I think some for women's intimate products -- was that in place during the first quarter or is that just now starting to roll out?

It's actually just hitting now. Most of that advertising kicks right around Easter; Easter's timing is a little bit later this year. Some of those just were literally breaking last week, and so really, it'll start to drive results in Q2 and Q3.

Okay. Great. Thanks a lot, you guys.

Thank you.

Andrew Burns with DA Davidson.

Hi, Andrew.

Good morning. One quick question for you. Congratulations on the great quarter.

Thank you.

Just in terms of International, phenomenal operating margin there in the first quarter. Wondering if you could help me better understand the dynamics there? Is that what we can expect with -- as you leverage your own manufacturing platform and bring some of those international programs in house, or were there other factors in play that made that particularly strong for the first quarter? Thank you.

Yes. The sales for international were up about 24%, including currency on a constant currency basis, 17%. We believe that, that's international over time on an annual basis should be able to deliver sales growth that's in the teens. So that 17% is clearly on the high end of that. But we're feeling really good about our momentum across all of our geographies with the sole exception right now of Japan. The business is doing well, but it's the macro environment in Japan due to the horrific things that have happened over there most recently. So, we think that International is an area that, with our product categories and our approach taking that we've done successfully in the US, taking it to those 6 key geographies, bodes well for strong growth for a long time to come.

Great. Thank you. Best of luck for the rest of the year.

All right. Thanks a lot.

Emily Shanks from Barclays Capital. Your line is open.

Good morning, thanks for taking the question. I just had a specific question around the Innerwear performance on an EBIT margin basis for the first quarter. Lee, I was hoping you could just walk me through the big pockets -- .

Emily, I'm sorry -- you're cutting out there again towards -- yes, thank you.

Sorry about that. My specific question is around the Innerwear EBIT margin deterioration for the first quarter of roughly 400 basis points. I was just hoping you could break out what the big drivers of that was.

The drivers of the Innerwear performance? Didn't quite get it, I'm sorry.

The drivers of the Innerwear EBIT margin deterioration of 400 basis points year-over-year.

Oh, the gross margin.

Yes. It's basically, when you look at it, we had the higher cost cotton and commodity cost all quarter, 3 months of the quarter, we didn't get pricing in place until mid-quarter, and that's the bulk of the difference, basically. And you'll see that reverse in the second quarter with the full quarter pricing. You'll see -- you would see expectations in our guidance that, that'll be a positive growth in the second quarter. It's that simple.

Okay. Great, thank you.

There are no further questions at this time. I'll turn it back to Brian Lantz for closing remarks.

Thank you. We'd like to thank everyone who attended the call today, and we look forward to speaking with most of you very soon.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.