漢佰 (HBI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hanesbrands third-quarter 2013 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce our first speaker for today, Mr. TC Robillard, Vice President of Investor Relations. Sir, please go ahead.

Thank you. Good afternoon, everyone, 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 third 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 Investors section of our Hanes.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 or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC such as our most recent Forms 10-K and 10-Q, and may be found on our website as well as in our news releases and other communications. The Company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Please also note that our full-year guidance for 2013 and our preliminary EPS estimates for 2014 include expected Maidenform performance contributions and exclude certain one-time charges associated with the Maidenform acquisition. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release, which is available in the Investors section of our Hanes.com website.

With me on the call today are Rich Noll, our Chief Executive Officer; Gerald Evans, our Chief Operating Officer; and Rick Moss, our Chief Financial Officer. For today's call, Rich will highlight a few big-picture themes; Gerald will provide a sense of what is happening in our businesses; and Rick will emphasize some of the financial aspects of our results. I will now turn the call over to Rich.

Thank you, TC. Let me start by saying we had another great quarter. We saw margins expand 200 basis points. We achieved record earnings for the second quarter in a row, and we gained share during the back-to-school selling period.

Our strong performance is driven by our ability to execute on the things we can control, as well as the success of our Innovate-to-Elevate strategy, which is delivering results better and faster than we anticipated. Even though we gained share, the overall retail environment during back-to-school was weak, ultimately impacting our Q3 sales. This retail weakness is causing many retailers to feel cautious about the upcoming holiday season; therefore, we're going to be prudent and take a very conservative sales view in the fourth quarter.

But even in spite of this prudent macro view, we are raising our operating profit and earnings guidance for the second consecutive quarter, based on the improved profitability and the continued momentum in our business. The success of our Innovate-to-Elevate strategy gives us the confidence to take the high end of our EPS range up by $0.20, with about half of the increase coming from an improved profit outlook in the fourth quarter.

When you add Maidenform to this momentum, we feel very good about the remainder of 2013 and for 2014. In fact, we are also increasing 2014's target EPS range to $4.25 to $4.50.

I'm going to focus the remainder of my comments on the Maidenform acquisition, and let Gerald and Rick talk about the near-term performance of our business. We closed the acquisition on October 7 and, just as we expected, their business continued to deteriorate all year long, with a current projection for this year's revenue of approximately $550 million and operating profit in the low $30 million range, which is very much in line with our assumptions and was already incorporated into the guidance we gave you last July.

But don't focus on these current trends. It's what we can do with the business that counts. And the closer I get to their business the more confident I feel about achieving our long-term profit goal.

We knew exactly what needs to be done to cut costs and to drive profitable sales. We have made tremendous progress on the integration in the 90 days since signing the deal and in the past three weeks since closing.

By the end of the first week, we were already selling Maidenform's products on our e-commerce sites and in over 100 of our own outlet stores. By the second week, we finalized the vast majority of the organizational decisions and communicated them to all of the Maidenform employees.

The simplest way to conceptualize this integration is that we brought the brand and the business, but we are going to close the company. We will keep the things they do well, particularly intimate sales, design, and merchandising; but we will rationalize where we have a competitive advantage.

Therefore, the majority of the synergies will come from the elimination of their corporate overhead and the absorption of their distribution supply chain functions into our existing low-cost global network. We have tremendous experience managing large-scale cost reduction and supply chain integration projects, experience that we developed during the many transformation projects we have undertaken over the past few years. We are leveraging these capabilities to complete this integration quickly, with much of it being done by mid-2014 and all of it being complete by the end of 2014, at which time both the headquarters and their distribution center will both be closed.

Looking to the front end, we heard directly from our retail partners that they are overwhelmingly supportive of this acquisition. To that point, within 10 days of closing we completed combining our respective sales organizations, communicating to each individual internally and, as importantly, communicating it to our retail partners. This fast combination ensures that everyone is settled, allowing both our sales teams and our retail partners to focus on driving this new combined business.

As we have continued to investigate the brand positioning, Maidenform's brands remain highly complementary, fitting right in the heart of our contemporary younger brands. They also form a nice balance against our classic brands of Bali and Playtex.

Looking at the overall intimates business, we now have a stronger number-two position in bras and a number-one position and shapewear.

Most importantly, we are beginning to see the opportunities to drive our Innovate-to-Elevate strategy through the entire Maidenform portfolio. The major driving themes will be focusing their innovation on fewer but bigger platform initiatives, beginning to advertise these platforms to build brand power, and lastly, as these platforms gain scale, internalizing them into our supply chain to substantially improve margins.

This strategy is working well for us. It will work equally well for Maidenform.

As you can see, our integration plans are in place, we are developing great ideas, and we are executing aggressively. We remain very confident Maidenform can add $0.60 of share to our earnings within three years.

In terms of seeing the benefit on the P&L, you should first see the corporate SG&A savings beginning in mid-2014, the supply chain and distribution savings in 2015 and 2016, and the complementary revenue growth from Innovate-to-Elevate in late 2015 and fully in 2016.

So to wrap up, our business performed extremely well in the quarter in spite of a challenging retail environment during back-to-school. But even with being prudently cautious with our sales outlook for the upcoming holiday season, the momentum from our Innovate-to-Elevate strategy gives us confidence to once again raise our earnings guidance for the fourth quarter and for 2014.

Add Maidenform on top of the strength in our core business, and we feel optimistic about the remainder of this year and throughout 2014. With that, I will turn the call over to Gerald.

Thanks, Rich. As we have done all year, we are successfully executing our Innovate-to-Elevate strategy by controlling the things we can control and by making the necessary investments to keep our brands strong for the future. And this is showing through in our performance.

In the quarter, we gained share during back-to-school. We expanded our margins, with all four segments reaching double-digit levels. And we raised our outlook for the remainder of the year.

Our Innovate-to-Elevate strategy is not just about new platforms. It is about leveraging our strong brands, our global supply chain, and our innovation platforms to drive margins across our entire product portfolio.

Having strong brands allows us to gain share even in a tough environment. The supply chain allows us to leverage our scale to lower costs and improve margins, like what you are seeing in Activewear.

And of course, leveraging our innovation platforms has led to some great results for both us and our retail partners. X-Temp underwear and socks, for example, exceeded plan at both mass and mid-tier, while Smart Sizes bras continued their strong performance with sales at retail up double digits through the third quarter.

Next, I would like to provide some color on our revenue trends. As you have heard, retailers saw negative sell-through in August during the key back-to-school selling period. Our point-of-sale saw a similar trend before rebounding in September.

Unfortunately, the rebound was not enough to offset the critical month of August and resulted in a sales decline of roughly 70 basis points on a constant-currency basis. We are encouraged to see that September's positive point-of-sales trends continued through October and that our inventory at retail, in terms of weeks of supply, is in line with last year's level.

Listening to retailers, back-to-school is clearly making them cautious about the upcoming holiday season. Couple this with the fact that retailers are much quicker to adjust inventory since the recession, and we believe it makes sense to be prudent with our own sales expectations for the fourth quarter.

Therefore, the midpoint of our guidance assumes flat sales for the fourth quarter. However, our Innovate-to-Elevate strategy is clearly continuing to work, and is increasing our operating margin, and is one of the major factors for raising our guidance in the fourth quarter.

Turning to our segments, I would like to start with Innerwear, where operating margins improved over the prior year, driven by strong profit improvement in our basics group. Men's underwear and socks were the key drivers with double-digit operating profit growth.

For intimates, we continue to see strength in our classic bra business, with sales up double digits driven by Bali, Playtex, and Just My Size. Our Bali brand was up double digits in both bras and panties, while our Hanes bras grew low single digits in the quarter.

At the beginning of the year, we communicated our plan to invest incremental media to support our brands. Year-to-date, we have spent $16 million of this amount, with $8 million coming in the third quarter to support campaigns for Hanes underwear and panties as well as Playtex bras. In the fourth quarter, we plan to invest an incremental $18 million on media.

Now turning to Activewear, our quality of revenue continues to improve, and it drove another quarter of significant margin improvement. Our operating margins increased 500 basis points over last year to 16.9%, bringing its year-to-date operating margin to over 13%.

The strong results in the quarter were driven by profit improvement in our retail Activewear group, which includes Champion and Hanes, as well as the de-emphasis of the less profitable elements of our branded printwear business. Gear for Sports also had a good quarter, with sales up low single digits and operating profit up double digits.

Now switching to International, on a constant-currency basis sales were up 10% and operating margin was over 12%, as we continue to make progress on our regionalization strategy. Currency, however, remains a strong headwind.

Currency took 10 points of growth off of this segment and a full percentage point of growth off total Company sales for the third quarter. We expect a similar impact in the fourth quarter.

So to wrap up, I am very pleased with our performance in the third quarter, our momentum for the fourth quarter, and our opportunities for 2014. Our Innovate-to-Elevate strategy continues to work well and you are clearly seeing the benefits in our bottom-line results.

We feel very good about 2014, including our brand power and continued ability to take price to offset inflation, the continued momentum of our successful innovation platforms, and the savings we can achieve through our global supply chain. I will now turn the call over to Rick.

Thanks, Gerald. Our strong third-quarter results were driven by a familiar theme -- the success of Innovate-to-Elevate and our ability to execute our plans. Earnings per share of $1.23 was a new record, while our 14.8% operating margin and $230 million in free cash flow were both at near-record levels.

With cotton volatility behind us, you are seeing a higher level of base earnings in our business. It is being driven by higher quality revenue and our Innovate-to-Elevate strategy.

Sales in the quarter were $1.2 billion, down 1.8% versus the prior year. Adjusting for currency headwinds of approximately $13 million, sales were down 70 basis points.

Operating profit increased 13% from last year to $177 million, driven by a 240 basis point improvement in our gross margin, with the majority coming from our Innovate-to-Elevate strategy, which drove a higher price per unit and a lower cost per unit in both our Innerwear and our Activewear segments.

We continued to deliver SG&A leverage in the quarter, as SG&A in dollar terms was essentially flat from last year despite an incremental $8 million in planned media spend. Interest expense in the quarter declined roughly $8 million due to lower debt balances and a lower average interest rate.

Moving to the balance sheet, we continue to drive improvements in our inventory turns. During the quarter, our inventory decreased by $27 million from last year, with the majority of the decline coming from lower units.

I would now like to spend some time on our updated guidance for 2013. The momentum from our Innovate-to-Elevate strategy is driving a better profitability outlook for the fourth quarter and gives us confidence to raise our operating profit and earnings guidance once again.

We now expect our 2013 full-year sales to be slightly more than $4.6 billion, including about $120 million in the fourth quarter from Maidenform. Operating profit is now expected to be $580 million to $590 million, up from our prior range of $550 million to $575 million, and includes $6 million to $8 million from Maidenform and the planned increase in media spend that Gerald mentioned.

Interest and other related expense is expected to be $118 million, which includes $15 million in prepayment expense to retire the remaining $250 million of 8% senior notes, and $3 million for the amount borrowed on our revolver for the purchase of Maidenform. We expect our full-year tax rate to be approximately 17%, which implies a rate in the low double digits for the fourth quarter.

We raised our EPS range to $3.75 to $3.85, from our previous range of $3.50 to $3.65. Of the $0.20 to $0.25 increase, about $0.10 is from the upside in the third quarter; about $0.02 to $0.03 is from Maidenform, with the remainder coming from an improved outlook for the fourth quarter.

Next, I would like to touch on the acquisition and integration expenses related to Maidenform, which were excluded from the guidance I just provided. By the end of 2014, we expect total acquisition-related expenses of $120 million to $140 million, with $50 million to $60 million expected this year and the remainder spread through 2014. Of the total acquisition-related expenses, we estimate that approximately half will be non-cash.

Turning to our cash flow guidance, we narrowed our guidance range to $475 million to $525 million, but we retained the same midpoint of guidance despite $30 million to $40 million in acquisition-related cash expenses that were not in our original plan. Our free cash flow guidance continues to include approximately $38 million in pension contributions and approximately $50 million in net capital expenditures.

With respect to debt, adjusting for the paydown of the $250 million in 8% senior notes and the increased borrowings on our revolver from the acquisition of Maidenform, we should end the year with long-term debt of approximately $1.4 billion to $1.5 billion. This implies a long-term debt-to-EBITDA ratio of about 2.1 times, well within our target range of 1.5 to 2.5 times.

In closing, we are thrilled that our year-to-date operating margin is just over 13%, right at the midpoint of our margin goal. This is a testament to our Innovate-to-Elevate strategy and our ability to execute on the things we can control.

It feels great to be able to raise our guidance for the second time this year. You are now seeing what we believe is a sustainably higher level of earnings for our business; and with the addition of Maidenform and the continued reinvestment of our significant levels of free cash flow, we believe that we are very well positioned to deliver growth for many years to come.

With that, I will turn the call back over to TC.

Thanks, Rick. That concludes the recap of our performance for the third quarter. We will now begin taking your questions, and we will continue as time allows. Since there may be a number of you who would like to ask a question, I will ask that you limit yourself to one question at most two, 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, guys. First off, congratulations. Great quarter.

My first question is on the guidance for 2014, the $4.25 to $4.50, the update, the increase there. How much of that -- can you just actually help us understand where the increased expectations are? Is that from the revenue, the top line? Is that from operating margin?

And if it is from operating margin, can you help us localize what division? Is it Activewear, Innerwear, etc., where you have a better outlook?

So let me just give you the broad overview, because it is a little too early to get into some of that level of detail. We are feeling really great about our Innovate-to-Elevate strategy. It is working; it is driving our results.

You have been seeing it all year. You saw it last quarter. You are seeing it in the results this quarter, and it is what is encouraging us to raise our full-year guidance with an improved profit outlook for Q4.

And that momentum in our current business is going to continue into 2014, and so we felt that it was important to call that momentum out in our business and make sure that you understand that it's elevating our target EPS ranges for next year.

In terms of the overall specifics, how much is coming from operating margin and sales and Maidenform and this, that, and the other thing, we are right in the midst of our detailed planning process so we don't have those kind of answers for you yet. But I think what it's safe to say is our strategies are working, it is driving our near-term business, and we see that cascading into 2014 and beyond.

Great. If I could follow up on that, Activewear this quarter, you called out that it was a record level. In fact it was an outstanding record level. It seems to be 300 basis points -- the operating margin 300 basis points better than any operating margin as a public company -- as you are a public company.

Can you talk about what is driving the improvement there? Is that the Innovate-to-Elevate strategy in its infancy too, now as you start translating that strategy over to Activewear?

And then, now that it is at this level, which you could consider to be a best-in-breed level across all of activewear companies, how should we think about that structurally, being able to stay in the high teens? Thank you.

Let me just give the broad overview. I will turn it over to Gerald to talk about some of the specifics.

Look, we are thrilled with the progress that Activewear is making in terms of hitting the double-digit operating margins. You have always heard me talk about -- be cautious about one quarter, and whether it is good or bad news, it is -- I think the trend is the right direction. When you look at their overall increases year-to-date they are doing extremely well, and we expect those kind of trends to continue.

And, Gerald, you can talk a little bit about the specifics of what is driving Activewear.

Well, Matt, it is just a great example of Innovate-to-Elevate at work. We focused on the core Activewear business and our strong brands in both Champion and Haines, paired it up with great innovation in the product line and so forth. And it is driving much better margin within this segment.

In addition, as we continue to deemphasize the unprofitable commodity segments of the imagewear business we have refocused that business back on a more profitable mix of business. And it's performing very well in a category, as you know, that is a very, very successful and fast-growing category right now. So we are pleased.

Eric Tracy, Janney Capital Markets.

Hello, guys. Good afternoon. Add my congrats on a really nice profitability in the quarter.

So, Rich, I guess for you, if I could start off maybe just talking about the tough retail environment, what you are seeing as it relates to pricing. This Innovate-to-Elevate, you are clearly able to get the pricing; yet it appears it is just a traffic issue.

With the things that are in your control, be it trade spend, you are obviously increasing marketing a few million here and in 4Q, but what are in your control to try to continue to drive share gains? Is it just simply a macro traffic issue?

Yes, let me give you a little bit more color on the macro environment, and I will turn it over then to Gerald to talk a little bit about some of the tactics and pricing and the advertising spend. When you look back at the third quarter, our sales were down 1.8%; 1.1 points of that was actually currency, which has been a big headwind for us all year. But the core business was down 70 basis points.

However, in our Innerwear categories we gained share during back-to-school. So it is indicative of the macro trend.

August is the second-biggest month behind December, and all retailers talked about how it was a soft back-to-school, and we saw the same types of results. Saw slightly negative sell-through because of it.

Now, fortunately September and October has actually been coming back fairly nicely. But they are smaller months, so you can't make up the gap with -- when the peak is a little bit soft and the trough is strong, you would rather it the other way.

So as we looked into the fourth quarter, we said -- all right, well, which do you want to use for the trend? Do you want to use the near-term stronger trend? Or do you want to be a little bit more conservative given what happened to back-to-school?

And given the strength of our margins and how well with Innovate-to-Elevate is doing we thought it would be more prudent to be a little bit more conservative, and even with that taking up our guidance because of how well Innovate-to-Elevate is working. Gerald, do you want to talk about some of the specifics?

Yes. As we look to the fourth quarter, clearly we enter the fourth quarter with retail inventories in line and from the standpoint of executing our plan we are absolutely executing our plan. We have got an excellent promotion plan in place for the holiday period.

And we are investing more behind our brands -- certainly by far, $18 million more than we did the prior year, heavily behind our -- both our Hanes and men's and women's programs to keep driving our brands. Our innovations are working; we want to keep driving what we know works, and that is our brands and our innovation.

Okay, that's fair. Then I guess if I could switch gears, Rich, to the Maidenform. Appreciate all the color in terms of timing and cadence of how this should play out. Maybe just a bit more.

You spoke to trying to overlay the Innovate-to-Elevate on Maidenform, maybe rationalizing some of the SKUs and focusing on bigger key platforms. Maybe touch on what those are, the timing of how that plays out.

And then again, maybe a little bit more just in terms of the cost savings. It seems to me the opportunity would be a little bit sooner than back-half 2014, as would the insourcing of some of the production in 2015. But maybe just walk us through those elements.

Sure. We've talked about over the years we've got a lot of demonstrated competence in managing large transformation and integration projects. We did it here when we spun off, bringing eight divisions into one operating Company and moving our supply chain around the world. We have been successful with Gear, and now we are applying the same skills to Maidenform.

One of the best ways to try and mitigate any risk with integration is do it fast as you can in a very methodical and -- from a very methodical process. And that is what our focus is, and that is why we came out of the blocks running and made sure that we were communicating to people up at Maidenform on what was going to happen and the time frame that it's going to happen.

In terms of the speed, while we want to do it fast I really want you to think about three separate components, because the time frames are different for each one. SG&A savings will start to show up by mid 2014. We have actually communicated that a lot of the duplicative corporate functions we intend to close and exit those by mid 2014 out of New Jersey and absorb them in here; and you will start to see the benefits on the P&L after that.

While the supply chain sounds as easy as that, it is really not. You have got to ramp up some production. You have got to remember they have got POs that are out there for four to six months. So you really won't start to see that internalization happen until late 2014; and it doesn't really start to show up on your P&L until 2015 and 2016.

The longest lead time, unfortunately, is the driving the Innovate-to-Elevate. The product development cycles, the shelf space that is already sold in has about a year, year and a half lead time. So it will really be a 2015 to 2016 perspective from that.

So don't think this is we are being slow. It is just we are being realistic that you can do cost reduction and SG&A fast, supply chain medium, and some of the Innovate-to-Elevate a little bit more slowly. That said, you know we love to have a plan and beat the speed of that plan.

So we want to get to that $0.60 as soon as we can and right now we think three years makes a lot of sense.

Omar Saad, ISI Group.

Thanks. Hello, guys. Good afternoon. So, just wanted to touch quickly on the top line again. The skeptic might say you guys are going through this premiumization process. It is working; consumers are responding to the products. But given the macro environment or for whatever other reason, it is having an impact on the volumes.

Are you -- how do you identify the sales drivers here? What is macro? What is the retailer ordering less and managing their inventories? How much of it is that versus maybe there is some price sensitivity for some of the consumers in those channels?

When -- I think there's two pieces of data that you want to look at to try to figure out is this systemic and macro, or is it specific to us. And one is share and the other is our -- what is the retail's experience?

I think all of the data suggest that it was a tough back-to-school. I haven't heard one retailer say that it wasn't, and they are all talking about traffic issues. There is no ifs, ands, or buts about it.

So at the end of the day that is going to impact you in the short term. We feel really good about our overall share position, but these things ebb and flow.

I think -- you talk about the skeptics, let me flip to the optimists. Think about the operating margin and the profit that we are driving in this lackluster macro environment. Things always come back. We are going to have a lot of opportunity as that headwind goes to a tailwind, continue to drive this into the future.

Thanks, that's helpful, Rich. Then just switching to the Maidenform again, you talked about applying this same sort of premiumization, Innovate and Elevate strategy to their brands.

Can you talk about, based on the work that you have done and the analysis you did leading up to the deal and since the deal, that gives you comfort that those brands have that kind of power behind them and they have the ability to reach up a little bit and insert some more innovation into their products and see the consumer respond?

Yes, Omar, this is Gerald. Certainly we feel even better as we have gotten into the business and looked at the brands and so forth. We see how the Maidenform brand really complements where we are weaker and so forth.

We have a very strong classic position with our brands Bali and Playtex and so forth in the bra business. The Maidenform brand is younger; it is a little more contemporary. That really gives us a better portfolio to work with.

We see our innovations working very well, and we are very excited about applying those across this additional brand group and levering our strengths and then investing in those innovations to drive the brand, ultimately driving the scale, and levering our global supply chain to have the full effect of the Innovate-to-Elevate strategy. So we are really excited about what we can do with this going forward.

Susan Anderson, FBR.

Good evening, guys. Congrats on a great quarter.

So just looking at the EBIT margins, you are already running about 13% year to date, so barring any catastrophes in fourth quarter it seems like you are going to be getting to the high end of your 12% to 14% goal. So just curious; does this push the goal up after this year, or how are you guys thinking about that?

I think our operating margins today are a testament to how well Innovate-to-Elevate is working. It is working better and faster than we expected.

We have had that 12% to 14% operating margin goal out there for a little while, and we have gotten there sooner than we had hoped. And that is great.

I think that we are now in there on a sustainable basis. In terms of how high up is up, let's get through this year, let's do it one year fully. Let's get into next year, and as we start to bring in Maidenform and start to see those things, we can talk about where else it can go.

But I am thrilled and I want to celebrate the fact that we have gotten here as quickly as we did.

Okay, great. Yes, I agree. Good job. Then on the gross margin front I think you said half was driven by Innovate-to-Elevate. So maybe if you could just touch on what the other half was driven by.

And then last question just on replenishments, I think you said they were shut off in the third quarter. Are you guys still seeing that or expecting that for the fourth quarter?

Yes, Susan, this is Rick. Let me address the gross margin question for you. I think the best way to think about it is to actually go back to the pre-cotton bubble, where for several years we averaged about 33.6% gross profit margins. That was in an environment with cotton prices generally averaging about $0.55 to $0.65 a pound.

Then you fast-forward to post cotton bubble, really beginning the fourth quarter of last year when our P&L really started to normalize from that. You have been seeing gross profit margins slightly above 35% on average. And that in an environment where you had cotton prices averaging about $0.80 to $0.90 a pound.

So, the Innovate-to-Elevate strategy has really been driving pretty consistently about 150 basis points of improvement in our gross profit margin, which we believe is sustainable and is a great base for us to build on going forward.

And as far as your question about inventories at retail, going through the quarter what we have really noticed, Susan, frankly since the recession is retailers can react now, and do react very quickly when they see a downturn in their POS sales to adjust their inventories. And they did that in the quarter. So when they saw the softness in that August period they adjusted within the quarter.

So we came out of the quarter with inventories in line with prior year, which makes us feel like we are well positioned going into the fourth quarter to satisfy demand. And orders are flowing as we see sales.

Evren Kopelman, Wells Fargo.

Hi, thanks and congratulations. I have a few questions on the incremental media spend.

Firstly, in the third quarter, I don't know if you quantified how much the incremental was year-over-year. But it looks like excluding whatever then amount would be your SG&A would have been down in dollars, if I am looking at this correctly. So could you talk about maybe the drivers of the disciplined SG&A in the quarter?

Then secondly looking at the fourth quarter now, the media spend, as we are modeling, where should we see -- which segment should we see more of the pressure from the incremental media? Is it more Innerwear or Activewear?

And lastly, when should we expect to see maybe the benefit from the incremental spend? Is it the kind of spend that should immediately impact sales in Q4? Or it is more of brand building longer-term? Thanks.

Sure, let me start off with the bridge for the SG&A. You're right, it was actually up $1 million year-over-year, but we did incrementally spent $8 million in media. We saw reductions in both our distribution costs and our general and administrative overhead costs.

In regards to the spending itself and what it was invested in, the third quarter we invested behind our Hanes men's business and the innovations in that line, as well as we launched a Hanes women's panties campaign and we invested in the Playtex brand. In the fourth quarter, we will continue to invest predominantly behind the Hanes men's and women's campaigns, so you would expect the majority of that spending to be in the Innerwear portion of our business.

This is Rich. I will just take the benefits question. You want to think about media as not giving you an immediate impact on sales. It is a cumulative effect about building brand power and talking to consumers about the platform innovations that you have.

So you want to think about it more as a longer-term or midterm investment rather than something that is going to impact sales in the short term. But it is one of the major reasons that our Innovate-to-Elevate is working.

Great, thank you.

Scott Krasik, BB&T Capital Markets.

Thanks. Hello, everybody. Congratulations. A couple questions on Maidenform and then one on cotton.

First on cotton, Rick, any reason not to think that the next three quarters, just based on where you buy and use cotton, should still be a tailwind year-over-year? I have it through Q2 of next year.

Then on Maidenform, the sale that you projected, about $550 million is a little lower than where they thought it was going to come out for this year. So are you already starting to rationalize that business? If so, where?

Then, Rich, you talked about selling Maidenform products in your outlet stores. So that again begs the question -- why keep their stores open? Because I don't think that is part of your accretion guidance.

Well, Scott, this is Rick. I will start off with the cotton question. The answer is yes, we do for the next -- at least for the next couple of quarters we should see favorability. Though I would caution you that the favorability won't be nearly what was seen in the past. We have been in a much more stable cotton environment for the last really several months, and so it won't be nearly as big an impact as we have seen in recent quarters.

Then, Scott, this is Rich. In terms of the Maidenform, basically their year is unfolding pretty much how we had assumed it and was built into our assumptions actually when we announced the acquisition in July. They were I think about $600 million in sales last year; their earlier projections for the full year were in that $560 million, $570 million range. We're now calling it about $550 million for the year.

And that was driven by a number of competitive pressures they had already called out, we were already mindful of and building into our overall assumptions.

We talked about it continuing to go down from there. That is why we have talked about it adding in slightly over $500 million of good, core, quality profitable sales. Because at the end of the day they were driving the top line at the expense of the bottom line.

So their quality of revenue wasn't that superb, and one of our goals will be to continually remix that quality so that we are able to make sustainable profits and great returns over time. We have talked about exiting some of the private labels that they have, which hasn't happened yet but will, upcoming.

And we intend to get all of those types of things done pretty quickly so it is not a drag on our top line. So just in line with how we expected.

In terms of the outlet stores, do you want to talk about that, Gerald?

In terms of the outlet stores, they have just around 66 outlet stores, I believe it is, that will add to our group. And they operate their outlet stores in very much the same manner we do. They manage them for four-wall profitability, so in effect they're profitable sales generators that we will add to our portfolio.

In the malls where we don't both have a store we will actually cross-sell their products in our stores and get incremental sales as well. So it is a profitable sales generator for us.

David Glick, Buckingham Research.

Yes, thank you. Rick, just a clarification on the revenue guidance. I am just having trouble understanding exactly what slightly more than the $4.6 billion and slightly more than the $1.2 billion means.

If you take your year-to-date sales and add $1.2 billion you certainly don't get over $4.6 billion. So is the Q4 revenue guidance closer to like $1.26 billion to $1.27 billion?

And is another way to think about it you are planning the business flat, ex-Maidenform? Is that how we should approach it?

Yes, David, exactly. I apologize for the confusion on that. Yes, the way we are looking at revenue for the fourth quarter and then for the full year is the midpoint of our guidance assumes revenues flat.

Last year our revenues in the quarter were $1.153 billion. Then you add $120 million on for Maidenform, which gets you into the range that you were talking about, somewhere north of $1.250 billion.

When you add that to the $3.342 billion year-to-date sales you come up with a number slightly above $4.6 billion.

So it sounds like the adjustment to your original guidance, ex-Maidenform, it is -- a Q3 shortfall is the majority of it and then a slight adjustment to Q4 in the core Hanes business based on -- I guess what you're forecasting more an average trend similar to Q3 as opposed to your run rate of the last eight or nine weeks.

You are spot on, David.

Okay, great. Thank you very much and good luck.

Taposh Bari, Goldman Sachs.

Hey, guys. Congrats. I wanted to ask a question just about your -- just to follow up on the fourth-quarter guidance, just trying to back into the margin assumptions. I know that there are some marketing shifts and there is some negative mix from Maidenform. Rick, if you could provide some more clarity around either vis-a-vis legacy or consolidated, how to think about gross margin versus SG&A.

Well, you know, we try not to give you a gross margin on a quarterly basis, but let me give you some things to think about. We walked you through the sales guidance for Q4. I would point out a couple of other things.

You are right, the Maidenform in the fourth quarter will have the effect of averaging us down on an operating profit margin basis by about 50 basis points. If you look then at that at the $16 million of incremental media -- pardon me, $18 million of incremental media that Gerald talked about in the fourth quarter, that is going to be about 1.5 points of margin.

So you want to factor those into get to the operating profit, the implied operating profit range in the quarter of about 137 to 147. And we will have about $6 million to $8 million of operating profit from Maidenform, is our guess right now.

Okay. That's helpful. Then, Rich, just again on Maidenform, at the time of the announcement you described some competitive issues, particularly within the shapewear business. I know you are planning pretty conservatively on the top line.

But I guess the question is -- how confident are you you can stabilize those issues longer-term? I think Hanes has historically spent 4% of sales on marketing. Maidenform I think has spent half of that.

I know they're different categories. You have a lot of Michael Jordan and Charlie Sheen expenses, so to speak. Do you feel like they were underspending when it comes to marketing?

Let me hit some of the tactical things but then talk about it more broadly. When you look at what we define as media and marketing and what they define as media and marketing, are two totally different things. It was much more of a retail push type of business rather than a consumer-driven pull business, which is what we run.

So from our perspective they really didn't spend any money on media or platform innovation to communicate to consumers in a big way. And that will be part of what we change in Innovate-to-Elevate. There is no question about it.

You need brand power; big, meaningful innovation to consumers; and you need to be able to take those big meaningful innovations and internalize them into a supply chain. And all three of those things can work synergistically to drive your margins up, and part of that will be an investment in media which will be self-funding.

In terms of -- I think the other part of your question was the competitive environment in shapewear and things like that. This was pretty crystal clear where you actually had a couple of competitors where there wasn't a lot of cross-selling within different retail accounts; and when you would have -- Maidenform might have a high share in an account and another competitor would come in, over time you would see exactly how those shares would shake out.

It is very predictable. We know exactly what was happening. And it is unfolding just as we had thought, as they had thought, and we can see where it is going to settle out in the next year or so.

So we feel very good about their strong position in shapewear. Combined with the Hanes business and the Maidenform business we will have the leading share in shapewear, and I am confident in our ability to drive Innovate-to-Elevate through that and continue to improve the overall business.

Carla Casella, JPMorgan.

Hello, one quick one on Maidenform. You mentioned there's a couple facilities you will be exiting. Are there any expected proceeds from asset sales?

We are still working through a lot of that, Carla, at this point. I think as we give our further guidance for 2014 I think we will be able to give you a better sense of how some of that sort of thing will shake out.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back over to TC Robillard for any concluding remarks.

Thank you. We would like to thank everyone for attending our call today. We look forward to speaking with you soon. Have a great night.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.