漢佰 (HBI) 2013 Q1 法說會逐字稿

Good afternoon. My name is Laurel, and will be your conference operator today. At this time I would like to welcome everyone to the Hanesbrands first quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Charlie Stack, Chief Investor Relations Officer. Please go ahead, sir.

Good afternoon, everyone, and welcome to the Hanesbrands' 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 2013. 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 10K and 10-Q, and may be found in our website and in our news releases of the 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.

Please also note, in May 2012, Hanesbrands announced exiting certain international and domestic imagewear categories that are now classified as discontinued operations. Unless otherwise noted, today's speakers will be discussing our performance from our continuing operations. Additional information, including reconciliation to GAAP performance measures, can be found in today's press release and in the investor section of our hanesbrands.com website.

With me on the call today are Rich Noll, our Chief Executive Officer; Bill Nictakis, one of our two Co-Chief Operating Officers; and Rick Moss, our Chief Financial Officer. Also with us today is T.C. Robillard who will be assuming the Vice President of Investor Relations role beginning May 1. For today's call, Rich will highlight a few big picture themes, Bill will provide a sense of what is happening in a few of our businesses and Rick will emphasise some of the financial aspects of our results. I will now turn the call over to Rich.

Thank you, Charlie. At our recent investor day, we highlighted three aspects of our Company that should allow us to drive superior shareholder returns for many years to come. All three of these aspects are evident in our first quarter results. Let me recap them for you.

First, we have a strong consumer franchise, a hallmark of any good CPG company, and is reflected in the stability of our financial performance, even in very volatile times. For us, a short-term of volatility within a quarter or two tends to revert to the mean, delivering the annual consistency more typical of a CPG company. In Q1, while sales were somewhat soft due to macro issues that we discussed at our recent investor meeting, due to the consistent replenishment nature of our categories, sell-through at retail has already rebounded and is back on track. Second, our innovate to elevate strategy allows us to leverage our most precious assets, our strong brands, our approach to consumer-driven innovation and our great global supply chain, all of which combine to allow us to increase operating margins towards our 12% to 14% goal.

In Q1, our margins expanded considerably, allowing us to deliver excellent profit results with an operating margin of 9% and record first quarter EPS of $0.51, and we are just beginning. Many of our current new products are just being rolled out nationally this quarter, and with our robust pipeline, we should enjoy the benefits for many years to come. And third, our strong free cash flow, with a price to free cash flow ratio of approximately 10, our cash flow is substantial relative to our valuation, and that by itself creates many opportunities for materially increasing shareholder returns. This month's initiation of a regular quarterly dividend is a great example and as we said, we envision a dividend payout of around 20% to 25% of free cash flow. We are starting at the lower end of the range with the intent to increase our dividend over time. And we are not done; at some point we plan to also employ bolt-on acquisitions and share repurchases as part of our strategy to maximize the value of our strong cash flows.

As you can see from our first quarter results, our strategies are working and they give us great confidence in our guidance for 2013. So that is today's simple message. Leveraging our enduring consumer franchise, driving our margin-enhancing Innovate-to-Elevate strategy, and being good stewards of your cash should allow us to drive results for many years to come. And with that, I will turn the call over to Bill.

Thanks, Rich. As we've been doing for some time now, our organization executed really well in the first quarter, and we're pleased that our Innovate-to-Elevate strategy is working. This strategy is delivering improvement in our profitability, while at the same time driving performance at our retail partners. But before I talk about the results, let me share our perspective on the macro environment, since I know this is top of mind for many of you.

For the quarter, there were two headwinds that impacted both our business and from what we hear, the business of many retailers. First, the delay in the timing of federal income tax refunds, which had a measurable impact in the three to four weeks from late January until mid February and second, the unseasonably cool March which overlapped last year's unseasonably early warm weather. When we look at our point of sale trends, we estimate the delayed tax refunds dampened sales by about $20 million, while the cooler weather in March impacted sales by another $5 million to $10 million.

When we look at our point-of-sale trends over the past four weeks, including Easter, we see that business is rebounding and is now running ahead of last year. So, we believe the short-term impact of the first quarter are now behind us. Remember that consumers tend to purchase the same number of pairs of basic apparel over the course of any given year so eventually, we expect to see the sales come back. When you couple that fact with the shelf space we are gaining this quarter, our increase in media and current retailer inventory positions that are at or below last year's levels, we feel good about delivering our sales guidance for the full year.

Now, let me turn to our specific results for Q1, and let's start with Innerwear where we have been executing against our Innovate-to-Elevate strategy for some time. This strategy helped drive significant margin improvement during the quarter as our innerwear operating profit increased 69%. While Innerwear sales were down 2% for the quarter, men's underwear, socks and bras all grew as hosiery and panties declined. We're seeing great results in our three large innovation platforms, Tagless, ComfortBlend and Smart Sizes. During Q2, we will be setting significant incremental space for our ComfortBlend products, as this platform continues to exceed both our plans and the productivity goals of our retailers. We increased our media in Q1, and many of you probably saw our ComfortBlend and Tagless ads featuring Michael Jordan that ran during the NCAA basketball tournament. And as a reminder, we still plan to spend an incremental $30 million to $40 million on media this year, and that should only enhance the performance of these platforms.

Our sock category also posted strong results with sales up mid single-digits. As with underwear, the ComfortBlend platform continues to exceed expectations, and our overall Hanes sock innovation strategy that focuses on comfort and color is performing very well. We're using this same approach innovation on our C9 by Champion portfolio of socks which delivered strong double-digit sales growth during first quarter. The bra category was also up mid single-digits, logging the second consecutive quarter of growth. The Smart Size platform continues to resonate with consumers, with sales of Smart Size bras across all of our brands up over 30%. Another highlight was our Bali brand which posted double-digit growth in the quarter. Overall, we are pleased with our Innerwear profit results and how our Innovate-to-Elevate strategy is working to deliver products that delight consumers, grow our retailers' categories and improve our margins.

Let me now move to our next segment, Activewear. As a reminder, effective March 1, we renamed our outerwear segment to Activewear to better reflect how consumers use these products. This segment posted a strong improvement in operating profits in Q1, delivering and 8% operating margin as we recovered from last year's cotton inflation. While sales were down 2% in the quarter, when you exclude the branded printwear decline, the core business was up 4%. In fact, retail sales of Hanes, Champion and Just My Size posted a combined 6% increase in the quarter, led by strong growth in core Champion and Hanes branded products. Finally, international sales declined 5%, but were up 1% on a constant currency basis. We continue to execute against our regionalization strategy where we are aligning our international businesses into four key regions to leverage both our regional expertise and global supply chain. The results are unfolding as we expected.

To wrap up, I am happy with our profit performance in the first quarter, and we are on track to deliver our sales and profit guidance for the full year. The margin results indicate that our Innovate-to-Elevate strategy is working as we combine our market leading brands, consumer-driven innovation and low cost global supply chain to deliver strong results for both us and our retailers. I will now turn the call over to Rick Moss to discuss our financial performance.

Thank you, Bill. Before I discuss our first quarter results, I'd like to comment on how pleased we are to return cash to shareholders with the recent initiation of a regular quarterly dividend. The $0.20 per share dividend represents an annualized dividend yield of just under 2% and about 20% of our normalized annual free cash flow of $400 million, a great start.

Now let me talk about our first quarter results. Sales were $945 million, down about 3% versus prior year, but roughly flat when you adjust for the planned decline in branded printwear of $15 million, and the currency headwind of $7 million. Sales were still below our expectations, however, due to the macro factors Bill mentioned. Our gross profit margin for the quarter was 34.6%, slightly ahead of our expectations. This 840 basis point improvement was mainly due to a more stable cotton cost and product pricing environment, and we also benefited from our ongoing Innovate-to-Elevate strategy that is designed to increase price per unit and lower cost per unit, particularly on new products.

SG&A was down about $2 million in the quarter versus last year. Media was up approximately $3 million, or 50% higher than last year, as we continue to restore spending to support our product innovations. Our plan is to spend an additional $30 million to $40 million on media this year with more than two-thirds of the increase coming in the back half of the year. I also want to note that about $6 million of the SG&A spending, primarily marketing and selling related, that we'd planned for the first quarter will likely now occur in the second quarter, so I encourage you to adjust your models accordingly. As a result of the improved gross profit margin and the lower SG&A spending, operating profit increased by nearly $75 million versus last year with improvement in three of our four operating segments. This resulted in an operating profit margin of 9%, a 790 basis point improvement over last year's first quarter.

Interest expense for the quarter declined $11 million versus prior year, and our tax rate was 13%, including a one-time favorable impact of tax law changes signed into law on January 2 of this year. EPS for the first quarter came in at $0.51. Even adjusting for about $0.05 of SG&A expense timing, our results were still about $0.05 to $0.06 ahead of our expectations for the quarter, a great result, especially in a difficult macro environment.

Moving to the balance sheet, we remain focused on working capital improvement in generating strong cash flow as we move through the rest of the year. Our inventories are line with our expectations as we begin to build for our key selling periods later this year. Now, let me talk about the progress we're making towards achieving our guidance for 2013. Our sales guidance for the full year is approximately $4.6 billion. We remain confident that our strong consumer franchise and the replenishment nature of our categories will enable us to achieve our guidance. The recent POS data that Bill shared with you seems to bear this out. We are off to a very good start in reaching our operating profit guidance for the year of $500 million to $550 million. Our strong gross profit margin in the quarter and our continued commitment to cost management put us ahead of plan coming out of the first quarter, and pricing is largely in place and our input costs are basically set for the balance of the year. As we continue to drive our Innovate-to-Elevate strategy, we expect operating margin expansion to move us closer to our 12% of 14% long-term goal.

Interest and other related expense is expected to be $120 million. This includes approximately $15 million in prepayment expense anticipated in the fourth quarter to retire the remaining $250 million of 8% senior notes. The full year tax rate is expected to be in the teens with the second and fourth quarter rate at the higher end of the range and the third and fourth quarter rate at the lower end of the range due to the timing of anticipated discreet tax items. EPS for the full year is expected to range from $3.25 to $3.40 with more pronounced earnings in the first half of the year as we overlap cotton inflation from 2012. Free cash flow is expected to be $350 million to $450 million, including expected pension contributions of approximately $38 million and net capital expenditures of approximately $50 million.

In closing, I'm pleased with our performance of the first quarter; instituting a regular dividend represents another major milestone for us and highlights our commitment to increasing shareholder returns. The combination of our margin-enhancing strategy, our execution and our performance in the first quarter gives us confidence in achieving full year guidance we laid out for you at the beginning of the year. And with that, I'll turn the call back over to Charlie.

Thanks, Rick. That concludes the recap of our performance for the first quarter. Now, we'll 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 questions to one question plus a follow up and then reenter the queue to ask any additional questions. I will now turn the call back over to the operator to begin the question and answer session. Operator?

(Operator Instructions)

Matt McClintock, Barclays.

Good afternoon, everyone, and great quarter. I have a couple of questions. First, Bill, you mentioned that the current retailer inventory positions are at or below last year, and I was wondering if you could give more color on that. Is that on a dollar basis or unit basis? And then how should we think about replenishment building as we proceed throughout the year?

I think as we look at our weeks of supply across our categories, across our customer base, we feel real good. We are either parity or actually below where we were last year in terms of average weeks of supply. So, we get into the second quarter and getting towards back to school, we feel really good that inventories are clean and there is not going to be any impediment to the normal shipping flow.

Thank you, and then Rick, you talked about gross margin, and I'm sorry if I actually missed this, but I was wondering if you could break out the gross margin improvement this quarter into the two buckets that were provided in terms of, how would that cotton-driven and how much of that was driven by the Innovate-to-Elevate strategy?

The Innovate-to-Elevate was about 100 basis points and the rest was cotton.

Okay, and then lastly if I could shift gears to international real fast, I see the constant currency sales were down about roughly 1%. I was wondering if perhaps there were any things that you guys could share with us or opportunities that might drive near-term improvement in that business. And perhaps Canada, if you could focus on Canada and the opportunities that you see in that market in the short and near-term.

Short-term, the Canada business is real simple, it's Zellers coming out and Target not yet being in there. They just opened their 24th door three week ago. So, that is a big drain. Long-term it bodes real well for us. We have a great business relationship in the US with Target and are already on track to have that same type of relationship on basics as well as C9 by Champion up in Canada. So, long-term it's a real positive for us there, but certainly, it has a big impact in the first quarter and through the second quarter that will be a pretty hefty drain.

And Matt, can I just make one correction, on a constant currency basis, our international sales were actually up 1%.

Taposh Bari, Goldman Sachs.

I had a question on the macro color, last quarter you had mentioned that retailers, you were seeing a more cautious position out of retailers for the first time in quite some time, the first quarter a little bit weaker than you had hoped. Has that changed? Are retailers being a little bit more aggressive now with the sell-throughs snapping back into place, or what are you seeing in terms of the way retailers are acting?

I think -- this is Rich, let me put it in a broad perspective. When retailers were starting to see some of these tactical issues in the first quarter in terms of the declines because of the income tax delays and then weather, to be honest, nobody really overreacted. I think everybody understood that there is these tactical issues out there that will correct themselves. When you look at the weather, it was crystal-clear throughout the country, you could see where there was big swaths of bad weather and snowstorms, especially on weekends, comp there was really down. In other places where there wasn't bad weather, comp sales were fine. I don't think anybody really overreacted. It was more like, look, we're having this set of issues, this too shall pass. Every single spring eventually comes and it gets warm. I don't think there was a real overreaction and therefore, nobody is really saying, okay, great, things are better, let's go ahead and change our tactics. I really think that it was as expected. Us too.

That's helpful, and then going back to original comment of sell-throughs returning, I guess two parts to that. Did that happen at a point in time in April and did it happen on a national level? So, are you seeing the Northeast revert back to -- the Northeast and the Midwest revert back to more normal sell-through patterns?

The answer is, it really is a switch being flipped. In terms of the income tax refund, you can see exactly when that started. You can see the cooler weather in March and as the weather has warmed up, you can see a real clear delineation, all of a sudden the trend line is moving up. It is night and day and yes, we see the Midwest and North doing better, snowstorm now, it'll have a couple soft days probably, but we're, clearly it is very clear to see what is going on with that.

Thanks, Bill for that. And the last question I have is the innerwear business adjusted for the $15 million branded printwear shift. 4% is pretty good, especially considering that that category or that part of your business is probably more weather sensitive than innerwear. If you an talk about that business, the health of that business, perhaps in some more color. Have you seen evidence of that category improve as well over the past four weeks? Thank you.

The answer is yes, we are seeing the same exact weather related trends happen. Our Innerwear business has spiked over the last four weeks and our Activewear business has spiked in the exact same manner. It is a macro phenomenon there. I think if you look at the solid branded results in the first quarter in Activewear, it is back to, our brands resonate. The Hanes programs are working well, the combination of brand and innovation, and Champion has -- continues to do well across all classes of trade for us.

Susan Anderson, Citi.

Good job on a tough quarter. I thought that intimates sales were pretty good, I was wondering if maybe you could give us some color on what is driving that, is it the Smart Sizes, and do you expect that to continue throughout the rest of the year? Because it seems like other players are struggling in that category. And also maybe if you could touch on the inventory at the retailers in the intimates specifically, because I thought I'd heard that it was starting to build up a little bit.

If you look at our intimate business, as we said, the bra business is growing nicely. I think that really is innovation-driven. Smart sizes across Hanes Barely there and Bali is doing exceptionally well for us and really lifting our whole portfolio there. So, innovation is working on that. Our panty business was down, that is a lot of promotional overlap more than anything because we didn't overlap some of last year's promotions. We've been growing that business, we feel good about our panty business and innovation that we have coming in place that will start showing up Q2 and Q3. And our hosiery business lagged, and it has been lagging as the category declines, and we are following suit the overall category softness there. Your second question, in terms of inventory levels, it really is going to vary by account when you look at intimates. Overall, again, we are at or below. If I look at it on a macro basis, we're in good shape. And of course, some retailers may be heavy, some others lighter, but overall, we are in good position.

Okay, good, and then one more question on the Hanes outerwear, it seemed like that performed really well also in the quarter. Was that driven by space gains, or are those coming later in the year?

The majority of the growth on Hanes activewear businesses were just productivity -- new programs that were outperforming prior year's programs. It really wasn't a big space gains in the first quarter, it was just productivity.

Eric Tracy, Janney Capital Markets.

I will add my congrats to the quarter and also congrats to Charlie for a great run and moving in the business. Rich, for you just first in terms of the top line, again, you went through the macro issues. I know we have got some programs that are coming up starting here in May and June and selling in terms of Macy's, as well as the men's underwear at Walmart. Could you just remind us again the timing, magnitude of those? And then are there any other sort of -- you're obviously having success with these innovation platforms, any other type program wins or shelf space gains that we can be thinking about in the back half?

Yes, Eric, in terms of program and space gains -- most of those are going to come Q2 as we speak, and the biggest gains are going to be on our basics businesses. So, ComfortBlend has delivered extremely strong results across all customers, we're be rewarded and recognized by significant incremental space on that. That will start setting next month and should continue to drive our business. We're seeing the same kind of opportunity on socks, that ComfortBlend socks has done very well, some of our basic color innovations have done well, and we're being recognized with incremental space there. Macy's sets in June, and we are very proud that Macy's wants to put the Hanes brand in their shops, have America's leading brand be an opportunity to buy that at Macy's now.

And Eric, in terms of additional space gains the we may get later in the year, the fall, there is opportunities for a little bit, but really, that's not the big reset time. It is usually in the January through May timeframe, especially a lot of retailers have been moving those later and later. So, the opportunity for additional space gains that we don't already have line of sight to, which we do for some of the rest of the year, really comes in 2014. And as these news programs continue to work, Bill, wouldn't you agree that that opens up more opportunities for further expansion, so they are --

We deliver the kind of productivity we deliver, we get recognized and rewarded with more space and they make more money with our product.

Absolutely.

Okay, and then Rick, maybe switching gears, I know there's a big move on the Activewear business to continue to enhance and drive profitability there, maybe give us an update in the quarter. And then maybe the timing of, I know there is -- the intent is to internalize some of the source product, maybe just the timing in how should think that the cadence of that improving profitability.

Sure, I'll speak to that and Bill can add in as well, but we are very pleased with the progress that that group has made. Their goal is to increase their operating profit margin double-digits, and I think the margin in the first quarter of 8% is a good step in the right direction. So, it's significantly better than it was last year. I think owes to two things, number one, the switch -- the decline of the -- the shrinking of the branded printwear business and the fact that that group is very focused on improving profitability.

In terms of internalization, I would say that is a continuous process, it is not an event or an episodic activity here. We are always looking at opportunities to internalize things and frankly, what we do is we tend to take things, test them and once they become big and scalable, then we put them into our supply chain and leverage our low cost, leverage our scale.

Okay, and if I could just one more, Rich, for you, strategic question on uses of cash. You have obviously initiated a dividend, laid out the potential for acquisitions and a potential buyback. How does the international piece work into that? And I mean specifically, really Asia, in leveraging supply chain that is set up there and being able to sell into the region. I know it's a longer-term sort of -- but maybe just give us an update on thoughts there, what level of investments need to be made relative to the opportunity, because it certainly does seem a sizable and could be that next layer of organic growth.

In terms of acquisition strategy, I think -- let me start by just putting, once again, the entire uses of cash strategy in a framework. Obviously, debt paydown is done this year, dividends clearly are priority. We started at the lower end of our range; over time, you will see that increase into the higher end of our range of that 25% of free cash flow. After that, share repurchases and bolt-on acquisitions, there is no one priority. It's really going to be more opportunistic on exactly what is available on any particular time.

Both domestic and international acquisitions within the Americas and Asia would be part of that strategy. And we clearly have had a demonstrated track record where we could make an acquisition to get us, build a little bit of critical mass internationally and build upon that platform over time. And that strategy has worked in the past, it can work in the future. A great example of that is, we are number one in men's underwear in Brazil,. We made a small acquisition there about a decade or so ago and we have been able to grow the brand that we acquired with that company and also use them as a way to leverage the Hanes brand into Brazil. Making the acquisition in intimate apparel space in some of our countries or further expanding like we have done recently in Australia are all part of that strategy. In terms of priority of international versus domestic, we don't really prioritize one over the other. We are actually keeping abreast of everything that is going on at those marketplaces, and we'll take advantage of any opportunity that comes our way when the time is right.

Jim Duffy, Stifel.

Rick, question for you with respect to the gross margins, we should see some further improvement in cotton costs falling through the P&L, higher-volume quarters are still ahead. Looking forward, is a gross margins better than 35% achievable this year?

Well, Jim, I really don't want to give guidance on -- per se on the gross profit margin. I will say that you are right, that we should continue to see improvement in cotton cost year-over-year as the year progresses, though that gap -- year-over-year gap will narrow as the year goes on and will become less of an issue as we get into the back half of the year.

Okay, great, and then the Innerwear operating margin was certainly a stand out in the first quarter. Looking forward, maybe on a full year rate as you work towards that corporate objective for 12% to 14%, how would we think about the blend of margin by segment?

I think from a longer-term perspective, the Activewear group probably has, relatively speaking, the most opportunity for operating profit margin growth because they have historically been below double-digits and can get -- we believe we can get into double-digits. It doesn't mean that the Innerwear group doesn't have opportunities for margin growth as well, it is just a little more pronounced in the Activewear group.

At the end of the day, as you just said, Jim, when look at the operating margins for Innerwear, they are already pretty sizable. Our goal there is to grow units and grow topline, not trying to further expand margins. Make sure we are investing in our brands so that we have a healthy business not only today, but next year, the year after and many years to come.

David Glick, Buckingham Group.

Just a follow-up, Rick, on the P&L, just so that, given that you don't have quarterly guidance, that directionally we're modeling it correctly, though it's helpful to comment on gross margin. It sounds like, you had said the first half earnings would be up obviously higher than the second half. Are the second half earnings, can they be flattish or are you assuming they are going to be down? And then as far as sales growth should -- given the shelf space gains in Q2, should that be the highest growth rate quarter of the year so that we are thinking about the model correctly as the year unfolds?

I just really don't want to get into quarterly guidance like that. I think, like I said, it's -- the first half of the year we will see much greater improvement in terms of year-over-year comparisons than in the back half of the year.

Okay, and as far as one of your larger customers was a -- Penneys was 100 basis point headwind or so for you on the top line. They're certainly making noises about focusing on basics, which I would like to think, while it may not be material overall, it certainly could be another small tailwind. Is it your sense that you are going to see them more aggressively pursue brand like yours? Would that tend to be more inventory in size intensive or basic oriented, and are you feeling more optimistic on that front?

Clearly, there has been a big change at Penneys. If you remember, it used to be 2% of our business, it is now a little bit over 1.25% about is what it is. There's no question that as they've now overlapped their promotional changes of last year, we've started to see their sell-through go up and down, looking more in line of what the rest of the retail world does, so it has been improving. They -- since the change at the top, they really haven't communicated exactly what changes in direction that they are going to undertake as a company. The good thing is, there's a lot of stability of management, believe it or not, in terms of the head merchant. We know a number of those people, one of the women that runs it, she was a strong player when Mr. Ullman was there before. Under their -- same thing, she was there under Mr. Johnson and will be going forward, as far as we know. I think there's going to be a lot of stability, their focusing on national brands basics will probably be a part of it. So, there could be some upside, yet at this point, they have got a lot to figure out, and we need to wait to hear from them before we make our own conclusions about how it will impact our businesses.

Omar Saad, ISI Group.

Rich, you talked a little bit at the beginning about capital allocation, dividends, M&A repurchase. And it seemed to me, and please correct me if I am wrong, it seemed to me were emphasizing probably dividend growth from the lower part of that 20% to 25%, maybe up towards the higher end over time, then M&A, then share repurchase. Is that the right order of priority, or am I misinterpreting?

You are misinterpreting a little bit. I would say there is probably a slight preference on the dividend payout, getting it towards the higher end of the range. Yet, from a dollars perspective, that is a relatively small dollar amount. So, you don't really need to think of it as eating up a lot of overall free cash flow. In terms of M&A and share repurchases, you shouldn't think about it that as a priority, one as a priority over the other. I really think about it as over time you're going to see us use a mixture of dividends, share repurchases and bolt-on acquisitions to maximize value. In any given year you may favor one over the other, just because of the tactical timing of what is going on. But when you look at it over a number of years, you're going to see a mixture of all three of those things. So, we don't necessarily think of it as it is in this order, A, B, and C; rather than as they're all things that we'll employ to create value.

Got you, that's very helpful, thanks. And then you talked a lot about the timing of tax refunds and some of the impacts you saw there, have you been able to discern from some of the trends and the sell-throughs and especially in your replenishing business -- replenishing business? And there's obviously been at the beginning of the year there's a lot of talk about the tax increases that the American consumer was going to be facing for the first time in a long time Have you seen that at all have an impact or discussions with retailers, or has it really been more weather and timing of tax refunds?

It is really more the timing of tax refunds and the weather. The data is crystal clear when we look at it. The tax refunds, when they were delayed a couple of weeks, the sell-through implications on those couple of weeks I think, Bill, wasn't it down almost double digits for like two weeks. And then as soon as the tax refunds started to flow again and matched last year's numbers, you see that correct. And then on weather, you could see it area by area across the country. Whether or not there is a broader macro issue on the payroll tax increase and those things, that data isn't quite that clear yet.

And then, Rich, I wanted to circle back again to one of your initial comments. You talked about CPG companies and the consistency of those businesses. I think what jumps out probably most substantially in terms of, and I agree, there's a lot of similarities, but maybe some of the differentials there between Hanesbrands at least from a cursory review versus some of the CPG guys, one might be the global exposure, I know that is an area you are focused on. But another is probably the margin level. You looked at some of these CPG companies, they have been able to sustain pretty robust margins over very long periods of time. I know your margins are moving in the right direction and keep expanding.

Yes, in terms of the global footprint, clearly in the Americas and Asia, that is one of our priorities for growth long-term. I think from a margin perspective, though, if I focus on operating margin, not growth versus SG&A, because it is very business model dependent, but when you look at operating margins and you look at the operating margins of Innerwear, I think that they --you could stack those up to virtually any CPG company and feel good about that. Clearly, we have got a little bit of corporate unallocated that is always going to reduce that a little bit, and Activewear is one of the areas where we have got margin opportunities. We you look at the categories that are most like CPG companies, measured on an operating margin basis, I think you see even a lot of similarities there.

Scott Krasik, BB&T Capital Markets.

Hi, this is Kelly for Scott. Thanks for taking my question. Just building off of Jim's question about gross margins, when you look back on a historical basis, gross margin tend to be higher in Q2 than Q1, barring any significant changes in cotton costs. Is there anything that I'm not considering that would make it, this pattern not be the same in this year?

I think what we've seen historically is that while that's -- what you are saying is true, more often than not, it also -- there also are a lot of years where it isn't. Last year, for example, granted, there were a lot of cotton movements -- or actually two years ago, the highest margin of the year was in our first quarter. So, it is not universally true that that is the case.

Okay, but there's nothing that I am missing here that would be a major impact in how I've viewing that on a sequential basis?

Our history is our history, so no, you're not missing anything.

Okay, and just my second question just was general corporate expenses. How should we be viewing that? I know that your media spend is obviously growing, but in terms of any major buckets there that we should be modeling out that I'm not considering?

Well, obviously from a SG&A standpoint, the biggest mover this year is the increase in media spending with a $30 million to $40 million increase in media spending, which will come primarily in the back half the of the year, I think some two-thirds of it in the back half of the year.

Steven Marotta, CL King and Associates.

Can you speak to the proportion of revenue dedicated to pre-books versus replenishment in the first quarter and the second quarter?

We're -- I can tell you broadly, we're not going to get into it on a quarterly basis. But if you look at our Innerwear business, it is replenishment other than promotional order, which we booked -- we have back to school and holiday. The rest of that is just replenishment and about 70% of our Activewear business is prebook.

Okay, that's very helpful. And as it relates to --just as more or less a reiteration, as it relates to the $15 million prepayment, can we think of interest expense as in that $25 million to $27 million in each quarter, with that incremental $15 million in fourth quarter bucket?

The incremental $15 million is in the fourth quarter bucket, the rest of it should be fairly even through the year.

And that equates to roughly $0.12 a share, which is included in your current EPS guidance range, correct?

That is correct, Steve.

Though it is a one-time item.

It is a one time item that we are including in our guidance.

Andrew Burns, DA Davidson.

Thanks for the details on growth by category. I wanted to follow up on the C9 program, it was low single digits in the quarter, likely impacted by external factors. Could you talk about the growth opportunity going forward, and is it primarily a function of improving sell-through at this point, or are there some categories you see for that C9 program that could extend into accelerate the growth? Thanks.

I think there is three ways we're going to continue to partner with Target to grow C9. You have their Internet opportunity where we're working with them, you have Canada and then you have continuing to drive within North America stores. And as we look at North America, there's opportunities both to improve productivity of the existing programs, and then we're working with them as other categories that are brand-right for C9 and where their own brands maybe aren't delivering the kind of productivity that they would expect to have or would like to see. There is a lot of opportunity for us across multiple geographies, channels and categories still with C9.

Great, thanks, and at the analyst day, we heard about the X-temp product and getting into stores, getting into Kohls. It seems to really grab some great shelf space. Can you talk about the success of that product and the climate control product category ability to expand that beyond Kohl's? Thanks.

Yes, we have been into Kohl's for a couple of months, they are very pleased with the results. We are pleased with the results, they are ahead of plan. We haven't set the product in any other account yet, it will start getting set in another six to eight weeks, permanent. We did a promotion with one account. It is way too early to make a call, but all signs are positive for X-temp. And we think it is just another example of us being able to Innovate-to-Elevate in terms of, it's a higher ring for our customers. They make more money, and we do as well.

Eric Beder, Brean Capital.

When you look at this innovation, this very aggressive rollout of innovation product, what kind of is the shelf life for these products in terms of how long before you have to come up with the next innovation? I know these will be diffused pretty much throughout the chain -- the offerings eventually, but how do you look at the rollout and the shelf life of these products?

You really need to step back and think about our categories as, really what we are doing is driving innovation in the core. And while some of these products will start out relatively small, our goal is to actually build them into a substantial portion of the overall market. Think of Tagless as an innovation, right? That wasn't some niche product that had a short shelf life that then had to be replaced. Basically, it is over the last 10 years we have been able to drive that from T-shirts to bottoms to panties to a whole host of product categories, and it is become the new innovative core. ComfortBlend may be another product that becomes -- that is similar. I think over the next 5 or 10 years, you are going to see that kind of performance oriented fabric being a much larger portion of the core market. So, you shouldn't think about these as niche products that have to come in and out. It is really about driving innovation with consumers for the products that they want to solve their needs that are going to have a lot of staying power.

William Reuter, Bank of America.

I apologize if I missed this, but in terms of the decrease in inventory, did you break out what was priced versus units?

No, we did not do that, but I can give that to you now. The -- versus first quarter of last year, inventory is down $272 million; $81 million is due to lower units, $121 million due to lower input costs, and $70 million is the discontinued operations.

Okay, and then on the other one from me, you mentioned bolt-on acquisitions; last quarter, you guys had said you were targeting leverage of 1.5 to 2.5. Are there any companies that would be larger that would be on a wish list basis that if you guys -- if they became up for sale, that you would be interested in, that are much larger than bolt-ons?

We have talked about what our acquisition criteria is. What we are really trying to communicate is, we have strong free cash flows and we want to deploy those free cash flows to maximize value. So, when you think of acquisitions, think of it in the context of how to maximize the value you get out of free cash flow. Don't think of it is an acquisition strategy by itself.

Carla Casella, JPMorgan.

This is Paul Simenauer on for Carla Casella. Just one quick question, did you guys say what percent of your sales growth target is from space gains? Thank you.

I'm sorry, could you repeat your question? ( multiple speakers). Can you repeat the question.

Did you guys say what percent of your sales growth targets were from space gains? I may have missed that?

No, we don't actually break that level of detail out.

With no further questions, I will turn the call back over to Mr. Stack.

We would like to thank everyone for attending our quarterly call today. We look forward to speaking with many of you soon.

And this concludes today's conference call, you may now disconnect.