漢佰 (HBI) 2011 Q2 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 second quarter 2011 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 will now turn the call over to Mr. Charles Stack, Executive Director of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to the Hanesbrands quarterly investor call and webcast. We are pleased to be here today to provide an update on our progress after the second 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 results 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 in which they were made.

With me on the call today are Rich Noll, our Chairman and Chief Executive Officer and Dale Boyles, our Interim Chief Financial Officer and Chief Accounting Officer. Before I turn the call over to Rich we want to reiterate that in this inflationary environment there are some aspects of our business that we intend to refrain from discussing in great detail for competitive reasons. Specifically, we will refrain from discussing details regarding cotton pack 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, Charlie. We continued our strong start to 2011, as Q2 was another great quarter. Our combination of domestic and international performance drove both top and bottom line results. Sales grew 14%, marking our sixth consecutive quarter of accelerating sales growth. And operating margins grew 70 basis points, highlighting the leveraged generated from our supply chain and overhead.

Domestically, we grew top line organically and through our Gear For Sports acquisition. Our Champion brand grew double digits, as we experienced strong sales across our active wear channels. We continued our strong support of our brands and strong media and we saw male underwear, panties and socks all have double digit sales increases. Gear For Sports had a good quarter and we remain optimistic about their future potential. They continue to expand their door count in the low single digits and are aggressively rolling out concept shops to increase brand presence and drive space to Hanes They're also now leveraging our supply chain for product and remain on track for the cost synergies that we have projected.

Now, let me make a comment or two about the general economic trends we are seeing in the US. Consumer spending continues to yield mixed results as evidenced by retailer comp store sales reports. Strong months follow lackluster months, repeating the trend we have witnessed since the recession and we don't expect changes in this pattern anytime soon. Another trend we are seeing is that retailer's more liberal with inventory dollars and units appear to be seeing stronger sales and comp results. And lastly, consumers are migrating some of their purchases up scale resulting in mid-tier, specialty and department store retailers performing slightly better than the overall market.

Now, turning to our international businesses, we are growing across the Americas and Asia. Asia provided the largest dollar growth, with China and India both experiencing over 50% gains. We expect growth to continue as we have expanded our offerings, placing hosiery, socks and women's panties across many accounts. We also completed our acquisition of TNF, an Australia Champion licensee, which helps us further build our active wear base in Asia. And finally, Latin America was strong as well, with Brazil and Mexico driving sales gains in the quarter. All of these actions further strengthen our potential for our future growth, as we work towards our goal of $1 billion in international revenue by mid-decade.

Turning to pricing, we executed a price increase in late spring to offset higher cotton and other inflationary costs. Evidenced by our inner wear segment profits, that while down versus a year ago, did improve over the first quarter. In terms of elasticity, while still early, preliminary results support our assumption that units fall off less than the rate of price increases. Now, looking ahead we have instituted another price increase in the US retail business for the fourth quarter, which should cover the increases needed as we head into 2012. We are also going after the additional space gains for next year to mitigate unit fall off from pricing elasticity and will provide more updates on 2012 space and program gains during the third quarter call in October.

So, today we are reconfirming our full year guidance with sales expected to increase over 13% to between $4.9 billion and $5 billion and EPS increasing more than 25% to a range of $2.70, $2.90. So, to wrap up, we are steadily managing through this very volatile economic environment, leveraging our brands, our supply chain and our overhead to drive profitable growth. I'll now turn it over to Dale for our financial highlights.

Thanks, Rich. Our second quarter performance was again strong, as we continue to grow our top line and leverage our supply chain and overhead to drive EPS growth. Sales grew $149 million or 14%, with the highest growth in the outerwear and international segments, up 26% and 24% respectively. Gear For Sports contributed $61 million or 23 points of the 26% growth in the outerwear segment. Our international segment saw strong growth in its key markets in the Americas and Asia, including the acquisition of TNF in Australia during the second quarter. Our inner wear segment sales increased 8%, while hosiery grew 6% and DTC 4%. Our operating profit grew more than $25 million or 21% compared to a year ago, with operating margin increasing 70 basis points to 12.1%, our highest ever, while operating margin for the first six months was 11.1% versus 10.4% last year.

For the quarter our operating margin was 15.3% for the inner wear segment, 10.8% for outerwear and 11.2% for international. Now let me give you some details around the operating profit improvement for the quarter. Gross margins were up 10 basis points in the second quarter or $52 million. Gear For Sports added $22 million and we benefited from a net $18 million of sales growth and price increases, offset by higher cotton and commodity costs. In addition we realized $12 million of our supply chain savings in the quarter.

Turning to SG&A, our second quarter SG&A rate was 22.8% of sales versus 23.4% last year, which continued to reflect good leverage. Our SG&A dollars increased by $27 million over the prior year, driven by $13 million related to Gear For Sports, higher net distribution costs of $6 million and $5 million of higher media. The higher net distribution costs were due to $8 million of higher sales volumes and incremental cost to implement our price increases, partially offset by elimination of $2 million of our excess service cost we incurred last year.

Interest expense was $3 million higher than last year due to higher working capital needs. Our second quarter tax rate was 20%. The resulting EPS for the quarter was $0.87, the same as a year ago when EPS benefited by $0.20 from a lower income tax rate. Turning to the balance sheet. Inventory at the end of the second quarter was $1.64 billion, up $345 million versus last year, mostly due to higher inflation. The higher inventory level consists of $205 million of higher inflationary costs, $90 million of incremental units and $50 million relate to Gear For Sports. Between now and the end of the year, while we will see higher inflation in inventory, we will have overlapped the Gear For Sports inventory increase and our expectation is that units will be down.

Free cash flow, while normally negative in the second quarter, was positive and was higher versus last year. EBITDA grew 21% to $170 million in the second quarter. For the full year, we continue to project free cash flow between $100 million and $200 million. We expect our year ending net debt level to decrease by the amount of free cash flow and expect net debt to EBITDA at 3 to 3.5 times at year-end. In summary, we had a very strong quarter. Our leverage was again evidence in our results and remain confident in the remainder of the year. We are implementing our price increases, realizing our supply chain savings and eliminate the excess service cost from last year. As a result we are reconfirming our full year guidance of sales between $4.9 billion and $5 billion and EPS in the range of $2.70 to $2.90.

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

Thanks, Dale. That concludes the recap of our performance for the second quarter. 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 reenter the queue to ask additional questions. I will now turn the back call over to the operator to begin the question and answer session. Operator?

(Operator Instructions) Eric Tracy from FBR Capital Markets.

You're off to a nice quarter.

Thank you.

Dale, welcome.

Thank you.

So, Rich, if we could, I know you want to be a little bit higher level on this, but from a elasticity perspective if you could talk about the back half assumptions, the cadence, how we should think about it. Just maybe a little bit more color on that. If product turns out to be more inelastic could be at the high end of the range versus more elastic at the low end, just a little bit more color around that would be helpful.

We've got what we think are pretty good assumptions built into our guidance on negative price elasticity. That is really broken into a couple of categories. One would be overall consumer reaction. The other is retail is just managing their inventories and dealing with inflation, sort of cutting back on unit inventory levels. As well as also price gap issues that we expect to be there for some period of time. Since we are the number one brand we tend to lead on price and by definition, therefore, everybody else follows and so you might have some gaps that goes for a short period of time.

Eventually all those gaps have to close, because everybody is facing exactly the same kind of inflationary pressures. So we've got all that built into our guidance. You're probably really not going to see and our guidance assumes that really late third quarter or fourth quarter where those things can actually have a meaningful impact on unit volumes. So, from a 2011 perspective, the effect is somewhat muted because it's obviously not for a very long period of time. We did say that we've seen units fall off less than the rate of price increases, so that means dollars obviously will overall be up. And we feel good about our strong brands being able to support the prices that we need out there in the marketplace.

And then, I guess, again on the cotton issue. I know you don't want to get too detailed. But as we think about fiscal year '12, I know previously it kind of being pretty conservative for me where cotton could be, obviously it moderated pretty significantly here. Potentially sets up, I would imagine, at least for the back half of next year very nicely. If can just -- as we get through the year in the cotton perspective, would be helpful if you could give your thoughts, Rich.

Well, the first thing I know about cotton is it's highly volatile and we are probably going to have to deal with that situation for a long time to come. It has dropped to about $0.25 just in the last two and one-half weeks, yet it was up limit yesterday. So where it is all going to settle out for 2012 is sort of anybody's guess. But you have got it right. The 2011 cotton is working its way through the supply chain now and the industry in essence bought that between $1.70 and $2.00. And that is going to work its way through retail starting in the fourth quarter and into 2012, possibly as long up to mid-year.

When you look at the futures curve right now, 2012 cotton, so delivery for some time in '12, is actually lower and you can see it as actually as low as a buck. If it remains that low, we need to wait and see. However, obviously, I think there will be things that we will have to take into consideration for the back half of the year. In fact we are already starting to talk to retailers about how to make sure that lower cotton prices don't adversely affect them from a negative comp perspective and us as well and we are already developing programs to make sure we handle this volatility in a successful manner for both for us. So we have got a lot of runway between now and then to figure it out. We are actively working on it and I think that's the advantage we have with our supply chain and our strong brands is we can handle that kind of volatility, which I believe is going to be here to stay.

And then maybe just lastly if I could from some of the top line opportunities that are out there. Pretty vast, be it through acquisition, international, but maybe the graphic tees. I know there has been stuff in the press here lately. I know it has been an initiative you guys are focused on. But maybe provide a little bit more color there around the opportunity and how we should think about that as it is evolving.

We said a couple of years ago that our outerwear segment we wanted to focus and shift towards more branded and defendable segments and deemphasize more commodity like segments of the market. And graphic tees was a major part of that. We started our own initiative which is Hanes Inc. We have also made the Gear For Sports acquisition. When you add those things together, approaching 25% of our sales now in the outerwear segment is all graphic or attributed apparel. It has better overall operating margins than those commodity segments and we also believe there is a lot more long-term growth potential. So it is one of the things that is helping that segment start to margin up and continue with strong growth. So we feel really good about that long-term and we have got a very small share of a very large market, so we can expect some good growth for a long time to come.

Bob Drbul from Barclays Capital.

I guess the first question I have is when you look at the guidance and reaffirming the full year guidance for this year. Can you in terms of the range, the $0.20 range that is still out there, how much of that uncertainty is from the uncertainty around the tax rate versus the uncertainty to price elasticity on the increases for the remainder of the year.

No, the bulk of the range is really there not of having anything to do with the tax rate or even costs at this point, which are really well known. It really has to do with the overall consumer spending level and the negative impacts due to elasticity. And so we have our baseline assumptions, if they are a little bit better than those baseline assumptions gets us into the high end of the range and vice versa. And so really that's what's driving it.

And then on the gross margin for the remainder of the year. How much of the -- when you look at service costs or air freight from the third and fourth quarter, how much of that would you expect not to have to anniversary? And can you quantify sort of those numbers and remind us what they were from last year?

Yes, we incurred about $30 million to $35 million of excess service cost last year, mostly in the third and fourth quarters. We did eliminate a few million this quarter, but looking at the full year we are at $30 million to $35 million.

And I think, Dale, wasn't it $5 million in this quarter, what was it last year in this quarter?

About $5 million.

I'm sorry, the third quarter.

Oh, I'm sorry, it was probably about $10 million.

And then the remainder in the fourth quarter.

Then just my last question is on the space gains. (Inaudible - scratchy noises) In programs you talk about some new programs coming online in '11 and in '12. Can you talk about the cadence on when we should expect some of those and sort of exactly what they are, especially as you look into the remainder of this year?

I can't go into detail on exactly what they are because we don't really lock them in until late summer early fall, but I can talk about the cadence a little bit. And I think 2010 is a great model for space gains. We came out of the recession pretty strongly. A lot of retail resets in that February through April timeframe. So you lock the programs in usually by fall, because we obviously need time to make the product and then you have the fixture fills in that first or early second quarter and then you get those gains and wraparound all year.

There is a second set of space changes that happen later in the year, sort of tied right after back-to-school going into holiday. We have received some space gains there, but on a full year impact since it happened so late they don't really drive a lot of benefit. In 2010 they were a lot of programs across lots of retailers in all of our categories. We are attacking this in a very similar manner. This isn't about going to get one big new program, it is continue to drive the strength of our brands with new programs, new product offerings throughout a whole host of accounts. So it is a lot of small wins in a lot of different places.

Jim Duffy with Stifel Nicolaus.

Nice job on the quarter.

Thanks, Jim.

I have a few questions on the flow of business for the remainder of the year. Can you speak to the inventory levels in the channel and how retailers have postured their inventory positions, particularly in light of the price increases?

Yes, retail inventories are a mixed bag on balance. They are approximately about where they were last year at this time. But you have very different results by retailer. So we have got some retailers that actually, I think they are very focused on driving results and their units are actually up versus last year, even at higher prices. You have got other retailers that actually bought the units in dollars are down below last year. So you have got retailers that have very predispositions and focuses on working capital versus driving sales results and gains. The ones that we have seen so far that have been more liberal with inventory dollars are actually doing better than those that are actually been pulling way back.

At the end of the day it hinges on what you believe about consumer elasticity and we actually think from a long-term perspective that is not going to be a big impact. They may have some short-term sticker shock, but at the end of the day promoted prices this year, back to school for example, are just getting back to where they were in 2005. And we don't think it's going to, in the near term, have a big impact on consumer elasticity and that is why retailers with broader or deeper inventory seem to be winning in the marketplace.

Rich, it sounds like you feel, based in the context of your expectation for elasticity, that some of the retailers may even be a little bit under inventoried?

Yes, clearly from our categories I absolutely think that is the case. They are tending to manage their inventories at a very aggregate gross level and the place that they can make the, some of them that are very focused on that, the place they can make the biggest impact is in high turn categories, which tends to move more correlated to our categories. Overall retail inventories look good, but there are some accounts that are probably being overly conservative in managing their plans. I think as they see they start to lag from an overall share or comp store sales perspective, obviously they will change their approach to that.

And then a couple more questions around the guidance and the split between 3Q and 4Q. Can you help us with the seasonality of Gear For Sports and how that balances between the two quarters? And then lastly looking to the third quarter it looks like the year-to-year impact from cotton should be within the same ballpark as it was in Q2. You have got more price, which you have taken into the third quarter. I guess I'm just scratching my head why both the revenue growth and year-to-year margin profile would not be more favorable in the third quarter.

Well, let me talk to Gear For Sports and then I will let Dale talk about the overall cadence of the inflation and the answer there, because I think we will see more in the third quarter than you might expect. But overall with Gear, their business is more weighted towards Q3 and a little bit early in Q4, but it's actually more front loaded than our overall business. I think our overall business between first and second half is probably 48, 52. They are probably closer to 45, 55 and with a lot of it in the third quarter. But also still pretty strong in October through about half of November. Their December really, really starts to slow down. They will start to deliver even more benefit to us in the next two quarters. And in terms of the overall cadence of cost in the guidance, Dale?

Yes, if you look at the back half of our year, that's when our inflation really starts to hit our P&L, especially cotton in the third and fourth quarters. So you will see the high dollar cotton rollout pretty dramatically over the second half of this year.

Yes, the high cotton costs really starts to show up beginning in July.

And then thinking about what you said about seasonality for Gear and the price increases which have been in effect is it reasonable to expect that year-to-year growth in the third quarter will be stronger than the fourth quarter? Certainly as you anniversary some of the revenue from Gear that was already in the P&L last year, right?

No, actually we are talking -- I think we gave guidance on both sales quarters will be up somewhere between the low and mid-teens. There might be a little differences from a percentage or two, but I think of them more as up more equally than they are one being up dramatically more than another. I wouldn't say they are exactly equal, but I think of that more as appropriate than one being up a lot more than the other.

That's helpful. Thank you very much.

Omar Saad, ISI Group.

A few questions, thank you. Rich, would you mind talking about your inflation outlook a little bit more. It sounds like maybe you expect it with cotton coming down as much as it has, it seems like you've shifted a little bit more from kind of this structural steady inflation to maybe it's going to be a little bit more volatile over the next year or two. Has something changed there?

Well, clearly the futures curve has changed. I think when I was giving you that cotton was in the $1, the 2012 cotton was in that $1.25 to $1.35 range. I will be honest, I was surprised that it hit down -- went as low as $1.00. To tell you the truth, if it stays at this level, corn and other crops are going to be much more desirable for farmers to plant and you are going to see the shift back. Cotton needs to be at least above $1.25 or so for it to maintain acreage relative to other crops. We might be seeing a little bit if a dip down that may actually not last, but in this world we have got prepared for anything, so we are clearly open to the possibility cotton could stay this low for the foreseeable future in 2012 and we will need to put programs in place to deal with it. At the end of the day I can't predict it so we are -- we have got to figure out how to manage through a much more volatile environment and I think we are prepared to do it.

So, in the scenario where it stays low, do we start thinking about price decreases or how should we think about that?

No and that's where we are already talking to our retailers, because at the end of the date they want their average price per pack to not go down, because then they have got to deal with negative comps. And retailers are already talking about how do we make sure we prevent that if in fact cotton stays low at these levels in the back half of 2012. So we are working on different ways for them to work together to make sure we can prevent that. I don't want to talk more specifically about it, because at this point we want to work with retailers to develop the programs and I don't want to actually tip my hand to our competitors. But I think there are some clear ways that we can help get through that kind of environment pretty successfully with our retail partners.

And then on the shelf space side -- I'm sorry, on the demand elasticity side, have you seen a difference? I know it's still early for the big price increase, but have you seen a difference across channels? You made a couple comments about people trading up, the higher end doing a little bit better than the lower end retailers. Are you noticing any difference in consumer demand elasticity across your channels from an income demographic standpoint?

At this point it's a little too early to tell, to be honest, because we only have a few weeks of data. You have got different retailers having different levels of inventory and so on and so forth. It's a little too soon to try and discern if there are differences across channels.

And then on the shelf space gain side, is that market share coming from private label or other brands that you think where you're best opportunities are?

I think it's the same as 2010, it's all of the above. I think in a high price environment weak brands, those third, fourth and fifth level brands that really don't have a reason for being, are very, very vulnerable, because they can't support higher prices and they don't have the media spend to make their brands strong. We see opportunities there. And private label in some of our categories, like for example men's underwear, private label has lost share each and every year for the last four years and that trend is probably going to continue as well.

Last question. M&A environment, how do you balance -- what is it like and how do you balance that? It sounds like Gear For Sports has gone pretty well for you guys. How do you balance that with debt reduction in terms of uses of cash over the next couple of years?

Clearly we want to make sure that our leverage continues to improve. The best way to do that is by driving EBITDA up and then that gives us a lot of flexibility in what we want to do with our cash flow. While this year we are calling for $100 million to $200 million of cash flow because of the working capital needs due to inflation. Next year it should return to at least a normal level of cash flow or even slightly positive if we start to see some of these inflation and facts begin to moderate. So over the next 18 months we should have a lot of cash that we can use to drive value. As that cash gets generated, we will then make the determination whether it's in the best shareholder's interest to use it for further debt pay down or bolt-on acquisitions like a Gear For Sports. If another Gear For Sports is out there and our debt to EBITDA ratio is pretty low or below 3, I think obviously we'd have the opportunity to take advantage of it. But we don't need to speculate at this point, we'll just wait until we have the cash and then decide then.

Thanks, nice job, guys.

David Glick, Buckingham Research

Congratulations on the quarter. Rich, I just wanted to confirm what you said. I believe you said that you have secured all the additional Q4 price increases to cover that cotton in the $1.75 to $2.00 range that should carry you into 2012. I just want to make sure that I heard you correctly on that.

For all practical purposes that we are in that situation, yes.

And then -- I'm sorry, go ahead.

Have been presented and accepted at retail. Right now we are talking about the Innerwear categories. The same is true for the outerwear categories, which is actually done on a seasonal basis and had actually been done quite a while ago.

And then the soonest that this lower cost cotton can flow through your income statement is probably, what, mid-to late Q3 or is it really a Q4 opportunity?

The high cost cotton through our P&L in 2012 probably mid-year.

So the high cost lasts until mid-year and then lower cost potentially starts to hit.

Yes. No, I want to remind everybody cotton has come down a lot in the last couple of weeks. It's not clear exactly where it's going to end for 2012 and we have got other inflation impacts, such as double-digit wage increases in the entire developing world. In the DR, in Central America and Vietnam and China and that is all going to start working its way through the P&L, probably showing up in about mid-2012. So that is going to mitigate some of the declines due to cotton prices. Now, cotton obviously is going to be a big driver for the cotton intensive categories. But that will start to work its way through, but it all will show up about mid-year.

And then last question, just in terms of retailer pricing behavior. I know a lot of the retailers own a lot of the lower cost inventory. It seems like the pricing, at least that I have seen at some of your big customers in particular the mass channel, hasn't necessarily gone up from beyond the spring price increase. Is it your expectation that the more dramatic move up be kind of mid to late back-to-school or maybe I am just missing some of the pricing behavior. Those are my observations, I'm curious what you think is going to happen and how prices are going to go up as the year unfolds?

We are clearly seeing our prices go up. You do have some retailers as they are -- as we implemented this price increase and they are coming up on back-to-school and promoted prices, some of them did choose to maybe not take the full increase and then turn around four or five weeks later and actually implement a price decrease due to back-to-school. Those are more tactical things rather than sort of an industry trend. I think it is all retailers intent to fully price for the cost that they are absorbing.

Great. Thanks very much and good luck.

Ken Stumphauzer, Sterne Agee.

I actually just want to follow up on 3Q and make sure that I am not missing something. You guys had eluded to higher cotton costs [going through the] back half of the year, but when you were still disclosing what the cotton cost should be it was actually a pretty moderate year-over-year increase, at least in terms of sentence. So did maybe things flow through differently than you had previously anticipated or is there some kind of costs associated with the price increase that flows through in the quarter. Is there anything else that can explain why the year-over-year growth, at least percentage terms, shouldn't be more substantial?

Yes, two things and I think there is a couple of things from an overall cost perspective going on. And then we will -- also, I just want to highlight some of those service cost issues in terms of Q3. So, first of all when we were still giving that guidance I'm not sure we had fully locked in Q3. When we came into the year we had a certain level of expectations for cotton which would flow through our P&L for late Q3 and Q4, which we didn't have locked in at all. We ended up -- the cotton market ended up being much higher and our average price was a little bit higher.

That may explain some of it. The other thing is in the first half of this year our sales were a little bit better than we overall expected, especially in Q1. That's why we took our guidance up $0.10 and that means we got into higher cost cotton a little bit sooner and that also actually weighted averaged up Q3 probably from what we would have given a while ago. So those two affects probably are -- explain the difference that you are thinking about. The other thing is I will remind you last year the service cost laid out, as Dale just talked about, was about $10 million in Q3 but about $20 million in Q4 and I think people from a modeling perspective might have been thinking about that more evenly.

And then I wanted to touch on SG&A. It's been, at least in dollar terms, year-over-year it's been very volatile the past three quarters and was a little bit higher than what I anticipated heading into today. So I'm curious to know what precisely, is it the acquisitions that is causing the unusual amount of volatility and then how should that look the next couple of quarters in dollar terms?

Well, we were real pleased with the leverage that we are seeing this year and it continued to improve again in this quarter. I think what you have to keep in mind is you have got to look at us really over the year. Our cores can be volatile because of the media spend. That's a big spend in that $90 million to $100 million range for the year. So any one quarter can rise or fall dramatically just depending on the timing of those ads. Look at it from the full year perspective. Look at year adding about $50 million to last year and then the rest of the dollars floating up, but not nearly at the sales growth rate. So think of it that way. It is really volatile from quarter to quarter.

So I guess to follow-up on that then, it was plus $30 million in 4Q, plus $10 million in 1Q and then plus $20 million in 3Q. Is it somewhere in-between those three numbers?

Somewhere. Again, just thinking about it in a broad for the whole year. Again, you look at this quarter our SG&A was up, almost half of it was Gear. And again, higher sales volume from distribution costs. So that was another increase. Then the media with another $5 million.

And I want to be careful, Ken, I do not want to get into trying to give guidance by each of the components of the P&L for part of the year or whatever. I am really pleased with our overall leverage of SG&A in this quarter. The increase was due to Gear, $6 million of it was due to the higher volumes that we actually had to ship through our distribution center and $5 million was higher media. In essence the rest of all of that SG&A was dead flat and that is pretty darn good. And so I feel good about our overall leverage that we are seeing, both in the quarter and overall. I think from a mixed perspective between gross margin and SG&A, that is going to fluctuate from quarter to quarter. I wouldn't get too concerned about it.

And then just one last question for you, Rich. You kind of alluded to this, but as cotton prices come down in the back half of the year, I'm curious for your historical perspective on how inflation has played out. As it has in the past when you have had inflation followed by subsequent pretty severe deflation, has it proven to be a structural benefit to margins, i.e. does not all of the price go back to the retailers and the consumer?

It is a pretty competitive market out there and operating margins from my perspective can only range so much. And I think that one of the things we've talked about is by driving our top line mid to high single digits, we can magnify that advantages through our supply chain and our overhead and drive mid-teens EPS growth. Obviously that implies our operating margins should be closer to our competitors' levels of that 12% to 14%. We think that's achievable long-term, it's because we are structurally able to take advantage of our cost advantages with our supply chain and we fully expect to be able to keep those things in an environment of inflation or deflation.

Andrew Burns from DA Davidson.

Good morning, nice quarter, everyone. Two questions. Just on Gear For Sports, I heard you mention you're now leveraging the supply chain. I was hoping you could update us in terms of the amount of volume that is on your own supply chain versus still being sourced. I thought that transition continued in 2012. Just looking for an update there, thanks.

Yes, let me just talk about it. It's going extremely well. We are now just starting to take advantage of that. It took about six months to sort of get everything in place, so they are now beginning to reap those benefits. However, just because those benefits go into inventory they don't really start showing up until 2012. So we feel like we are right on track for the $0.20 this year and the additional $0.10 going to $0.30 next year. So we feel real good about Gear. The great thing is we are leveraging the supply chain, but they've also got upside revenue opportunities.

Because we've been able to give them a little extra capital, and that really means another $1 million or $2 million, they are able to expand their overall operations and go for growth. I talked about them rolling out concept shops where they actually use that to emphasize the brands in some of the bookstores. It allows them to gain space, helps their customers drive sales and us to drive sales. They weren't able to really to do. I think they did four of those over four years, even though they knew they worked, but they didn't have the capital to do it. We freed the capital up and they are going to do 12 of them over the next 12 months. So that gives you an idea of where there is also long-term revenue synergies. So we feel great about this deal.

And the second question, it seems to me that the intimate apparel category has been fairly promotional so far in 2011. Could you speak to the competitive dynamics for that space and the opportunities longer-term for growth in that category for Hanesbrands.

Overall that category has a lot of good growth characteristics in it and we have got a very strong share. One of our -- we really think of the share in terms of full figure where we have got a really good share with Playtex and Bally and so on. And then the average figure think of that more in that sort of Victoria's Secret segment where they actually have strong shares. What is interesting is the overall market's growing, however full figures held up a little bit better during a recession and it showed in our sales. It's actually sort of been a little bit softer over the last 12 months. And average figure has been doing much better, both in the marketplace and our overall sales. So there is some puts and takes. I don't think it's necessarily being a lot more promotional. Prices did actually increase there in February and those prices stuck throughout all retail. And I think the category is good, but I think we are seeing some dynamics in the short-term where average figure is actually doing a little bit better than full figure, but I think that will probably turn it around in the next couple of quarters.

Eric Beder with Brean Murray.

I am going to apologize if I ask a question that was said already, my phone had problems today. When you look at the space gains you picked up with Dollar General and some of the other ones here, how are those working out and how do you look upon them as growth drivers going forward?

I won't talk to any one particular account, but overall the space gains that we got in 2010, which also wrapped around into 2011, have performed very well. And it's actually allowed us to continue discussions with a lot of retailers on how to further capitalize on that growth and help them continue to drive their business.

Just kind of weird, in the hosiery category rose after five quarters of being down, is there something going on there or is that just finally people are wearing hose? How do you look at that?

There is a couple of things going on. First of all it was pretty strong in the quarter due to placing a new program with one or two major retail accounts. And you can see with the margins in that category that is a really good thing. The hosiery is starting to -- the decline, right, starting to moderate a little bit. We still think the business is long-term decline, but it is starting to show signs of life with across a whole range of product categories of newness and innovation. However, at this point we are still managing the business appropriately given its long-term decline trends.

Most of my other questions have been answered. Thank you and congratulations on the quarter.

Susan Anderson with Citi.

I guess really quick on the outerwear segment, it looks like Gear's pretty much on track, but if you back out those sales it looks like maybe they were a little bit weaker than last quarter. Can you maybe talk a little bit about the other categories in that segment and what is driving that?

Yes, Gear obviously accounted for the lion share of the increase, I think it was only up 3% excluding that. Obviously, with that kind of business you have got to be careful quarter to quarter, you are going to have some volatility, I think, long-term. We had a couple of quarters the business is still pretty strong and healthy and we feel good about it. Importantly to note is the operating margins in that segment continue to improve, not only with Gear weighting averaging it up, but the core segment itself was actually increased. So while sales are not up as much, profit actually is doing fairly well and that's all driven by our strategy of branded more defendable, things like graphics and things like that, as well as, I think, the overall core business being a little bit better.

And then in the Innerwear segment, I think you already talked about kind of categories, some of the performance there, but can you maybe talk about how much of the increase, it seems like it did much better versus the first quarter, was price increases and how much was just better performance maybe driven by the increase ad spend.

The Innerwear segment is clearly one where you saw the profits down actually Q4 last year Q1 this year and still they were down versus prior year in Q2, although just a little bit. And that is because it was starting to feel the effects of inflation that we actually had not been able yet to pass on, fully implement the price increases that we needed. And that's going to start now turning around as we've implemented the June price increase and then the fourth quarter price increase to offset the further inflation that it's going to see. In terms of sales it was up about 8%. Units were up and actually I mentioned that we had saw double-digit gains in a couple of the key categories and so clearly units were up there as well. Now, as we go into the higher price increases I want to emphasize that we do expect negative elasticity impacts and that units will actually decline, but revenues will still, dollar revenues will still be up in those cotton intensive categories in Innerwear.

And then just maybe really quick touch on the higher profits at retail, what drove that in that segment.

I'm sorry, I missed that. The higher what at retail?

Profits in the direct segment.

Oh, I think that was just good management by that organization. Sales were up, I think the comp store sales were pretty good. Tight inventory or tight management on cost led to their profit increase.

And then really quick on the price increases. I believe the more significant increases began in June? I know you guys said that dollars are still up even though units maybe declining, but have you seen a change since, say, the beginning of the year when there was only single digit price increases or is it too early to tell in terms of the consumer's buying behavior?

Yes, we didn't expect a lot of negative impacts of price elasticity for the first price increase in February at 5%. It's never been our experience that, that has a negative impact on units. We are seeing, obviously, an impact on units with this, the June price increase that would be in the teens level, probably mid to high teens in the cotton intensive categories. It is a little too early to tell exactly the types of things that are driving that. And if it's just short-term sticker shock, if it is short-term dislocation because of those price gaps that I talked about. Long-term, when you look at pairs purchased per year in a lot of our basic categories, those numbers have been extremely stable over the last decade or more. And whether prices were coming down or prices are going up, long-term prices purchased per person per year is pretty darn rock solid and that's why we don't think there's going to be major long-term impacts due to consumer negative elasticity.

Scott Krasik from BB&T Capital Markets.

Just a couple left here. Is there anything structural about your approach to media spend that would make it higher in the third quarter versus the fourth quarter?

Media does absolutely go -- bounce around a lot by quarter. Overall we are increasing media up to just under $100 million in total this year. I think it is just $2 million below that. I'm not exactly sure how it is skews by quarter, but it doesn't go up equally in all quarters. And it depends on the exact timing of our flights that we are running, the exact timing of different holidays when they show up, for example Easter shifts can actually be a big part of movement between quarters and so on.

And then in terms of the price increase, you sort of alluded to it, but just to confirm, you are set with another round of price increases for both Innerwear and outerwear that will over the first half of 2012, is that correct?

That is correct.

And are you changing your approach, I know you try to be pretty consistent, but to buying cotton with the futures as low as they have been in the last month or so.

One of the things that this volatility has taught us is that we should -- our strategy to not bet nor speculate on cotton is a good one. So we'll continue to dollar cost average and, therefore, we are going to end up having the same costs as the overall marketplace and be able to price accordingly.

And then have you taken any -- have you taken the opportunity to test the higher prices first in your direct to consumer segment?

Whenever we have run tests there in isolation, since if you try and take prices up there but the rest of the market is not going up, you don't necessarily going to get a good read, because people actually can see that the prices are higher than other places. So while we will play around with that, it's not necessarily a good way to actually test the overall elasticity. You actually need to see prices go up in the general marketplace to really get a good read.

William Reuter from Bank of America Merrill Lynch.

With regard to an earlier question about acquisitions, you guys talked about Gear For Sports as, it sounds like, a template for these. How about larger more transformative acquisitions. I am wondering if you would have any appetite for such an acquisition and whether if these targets, if there are certain targets that became available whether they would make sense.

Our acquisition criteria, we have laid it out, it is pretty clear. We want acquisitions that are only in our core basic apparel categories. They need to be justified based on leveraging our supply-chain or overhead. And cost synergies alone should justify any premium that you might need to pay. But they also need to have complementary long-term revenue synergies. Obviously, Gear fits that. We also stated that we like to do it out of free cash flow, not really necessarily lever up to do some big transformative transaction. And so that gives us a, I think, a wide range of opportunities to look at. Gear was a start and it has performed extremely well.

You can imagine using that type of strategy to help forward our international growth through the Americas and Asia to get some critical mass in certain categories that we may not have. For example in Brazil, we are number one in men's underwear, but we don't have any business to speak of in women's intimate apparel. So getting some critical mass in a place like that could make long-term and short-term sense. And that is what our criteria is. We feel really good about it and we can be successful without acquisitions, but if those kind of acquisitions present themselves we will take advantage of them, because that can actually help drive our results as well.

Carla Casella from JPMorgan.

A couple liquidity type questions. On the inventory and working capital, the peak to trough has changed given the costs in units, et cetera. Can you just say, and you gave us some guidance for the full year, for third quarter are you giving guidance for the magnitude of the working capital increase you could see for the seasonal peak in third quarter?

If you look at our normal unit volumes they are up in the first half and then the units will decline from here to the rest of the year, but what we are saying is that higher inflation from a dollar perspective is growing, so we could see a peek in the third quarter. But you will see that to go down as we wrap the Gear For Sports increase, that will go down to zero. And again, the units will be down the rest of the year and slightly below last year by the time we get there.

And then the accounts receivable facility are you still using that? Where do you stand on the availability and how much has been used for the quarter?

We feel real good about the receivables facility and I think we used about $250 millionths of that facility at the end of the quarter?

And then one more business related question? On the China facility, can you just talk about the capacity at that facility and if you still have opportunity to leverage the overhead cost there.

Right now it is right on track, we are doing extremely well. It is at around 75% of our current plans, which it should reach right on plan by the end of 2011. What is important to know, though, is we built that building to only be slightly over half full. And so our current plans are only to get machinery and equipment through end of 2011 and we still got a lot of -- fill up half of it -- still got a lot of expansion opportunity. The whole idea was to make sure we built that Asian cluster with textiles in Nanjing and sewing in Vietnam and Thailand to not only support growth for the US, but actually be the way that we can provide low-cost product to build our business in Asia. And those products are starting to flow through that supply chain now. It allows us to get really competitive on costs and that is going to continue to expand over time. So we have got a lot of opportunity to continue to leverage that entire cluster and lower its, continue to lower its costs throughout the years.

Emily Shanks from Barclays Capital.

I just have a few very quick questions around the acquisitions that a lot of people have been asking on. Can you comment on what the status is of the pipeline, i.e. are you seeing any compelling assets that are in play out there now, both domestically and internationally? If you could comment please?

I think as the credit markets loosened up, you clearly have a lot of people that are willing to look for opportunities or to sell their businesses and so I think there has been an actual increase in people trying to present their companies for sale. A lot of things that get presented to us don't fit our criteria and therefore we don't want to look at them. I don't think the market for the type of things that we are looking at has changed dramatically, to tell you the truth, over time. So there's businesses out there that are for sale, some of which we're not that interested in, others of which that could be right, but really from a long-term perspective we want to make sure that we can get our cost synergies from it. I think it's sort of -- the market is picking up a little bit, gives us more opportunity to look, but right now we are focused on getting through, driving our brands, driving our supply chain and managing through 2011 and into 2012.

And then my last question is just a housekeeping. In your guidance for free cash flow, what is the embedded CapEx spend for fiscal year '11? I just wanted to refresh that, please.

Yes, for the full year we expect to spend about $100 million net.

And will that change dramatically as we look into '12, can you comment on that yet?

We like to tell people to think about capital spending at around that level for the long-term perspective. Any given year it could be lumpy, as you saw as we are investing heavily in the supply chain. Earlier it was above that number. I think we might have hit a high watermark of about $125 million or so over the -- at some point in the last couple of years. If anything, in 2012 it might be below that number, but I wouldn't necessarily -- at this point we haven't put together plans for '12, so that is more conjecture than it is a fact.

Thanks, great quarter.

All right, thanks a lot.

There are no questions at this time. I will turn it back to Mr. Stack for closing remarks.

We'd like to thank everyone for attending our quarterly call today. Look forward to speaking with many of you soon. Thank you.

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