漢佰 (HBI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HanesBrands first-quarter 2014 earnings conference call. (Operator Instructions) Please note that today's conference is being recorded.

I would now like to hand the conference over to T.C. Robillard, Vice President of Investor Relations. Sir, please go ahead.

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 2014.

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 10Q, 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.

Unless otherwise noted, today's references to our consolidated financial results as well as our 2014 guidance exclude all one-time charges and expenses. 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 an update on the Maidenform integration; and Rick will emphasize some of the financial aspects of our results.

I will now turn the call over to Rich.

Thank you, T.C. The first quarter was another great quarter for HanesBrands. Our business continues to do extremely well. Our Innovative-to-Elevate strategy is driving higher levels of profitability, and we are beginning to see the benefits from bolt-on acquisitions.

For the quarter we grew revenue 12%, operating profit 34%, and EPS 49%, once again demonstrating our ability to magnify our sales growth into faster operating profit growth and even faster earnings-per-share growth. The fact we are delivering strong results in a challenging consumer environment is a testament to our strong consumer franchise, the success of our Innovate-to-Elevate strategy, and our ability to effectively deploy our cash flow.

And we are not done. You have heard me say this before, but it's worth highlighting again. With the strength of our cash flow and the ability to cascade Innovate-to-Elevate throughout our entire organization, we believe you are only beginning to see the earnings potential of our business.

As we look to the remainder of 2014, we are confident the momentum in Innovate-to-Elevate can continue and the profit contribution from Maidenform will continue to grow. We are reflecting this confidence by raising our full-year EPS guidance $0.20 to a range of $4.80 to $5.00 per share.

The integration of Maidenform is going extremely well, and I couldn't be happier with our progress. Gerald will focus his entire remarks on the integration. But before he does, let me take a minute to update you on the trends within our core business.

For the quarter, revenue excluding Maidenform was roughly flat on a constant-currency basis, a very solid achievement given the current consumer environment. Innovate-to-Elevate continued to drive our Activewear business, where sales were up 10% over last year, driven by our Champion brand, and operating profit was up 50%.

Within Innerwear, the significant weather in the quarter along with the Easter shift clearly impacted results. Excluding Maidenform, retail sellthrough declined approximately 2% for the quarter.

As retailers adjusted their inventories, our shipments declined 6%. However given the replenishment nature of the Innerwear business, we expect much of this decline to reverse over the year. In fact April's point-of-sale trends have already rebounded, running at mid single-digit increases.

Turning to International, we had a very solid quarter. On a constant-currency basis and excluding Maidenform, sales increased approximately 8%. We continue to make good progress with our regionalization strategy, where we are leveraging the tremendous scale and capabilities of our domestic business.

Lastly, our profit margins are at record first-quarter levels and are exceeding our expectations due to the great success of our Innovate-to-Elevate strategy in Champion, superb performance from our supply chain, and a slight beat in Maidenform.

So in closing, our business is doing extremely well and we are confident this momentum can continue. We believe the combination of our strong consumer franchise, our margin-enhancing Innovate-to-Elevate strategy, and the potential leverage from additional bolt-on acquisitions position us to deliver solid double-digit earnings growth for the next several years.

With that, I will turn the call over to Gerald.

Thanks, Rich. I will devote my comments today to the Maidenform integration, where we are on track and we have reached several key milestones. I am pleased to announce that as of March 2, all of Maidenform's domestic business is being run by our people on our systems using our processes. And with the exception of closing their distribution center, we expect the integration to be complete by the end of the second quarter.

While we hit a few bumps along the way, which is to be expected, the process has gone extremely well. To have effectively completed an integration of this magnitude in only nine months is a remarkable achievement and one that emphasizes our core competency in executing large, complex integration projects.

We now have a proven, repeatable process of project integration. We have honed this process over the years through our experiences, including our spinoff, the relocation of our global supply chain, and the acquisitions of Gear for Sports and now Maidenform.

While an integration project is very complex, our overall process is rather straightforward: detailed preparation paired with consistent execution. We start with an organizational roadmap; we pull together our experienced project management team; and from there we create a sophisticated project plan.

In the case of Maidenform, our integration plan had over 4,700 individual project tasks and over 650 project milestones, while our integration team involved roughly 300 people, with 10 of them dedicated solely to managing the integration.

Looking at the Maidenform integration, the design, merchandising, and sales functions were integrated within weeks of the closing, while the supply chain, HR, and legal functions were absorbed by the end of December. And by March the domestic Maidenform business was fully operational on our IT system. All of their financial reporting, forecasting, ordering, and purchasing as well as their retail operations are now being done on our system.

And all personnel decisions have been communicated. Of the total headcount reductions, 60% should be completed by the end of June, with the majority done by the end of this month. The balance of the reductions, primarily from the closing of the Fayetteville distribution center, should be completed in the fourth quarter.

With the big hurdles now behind us, we expect the P&L benefits to flow through as we previously communicated, with SG&A beginning this year. As we internalize manufacturing, you should see those benefits in 2015 and 2016.

We are now turning our attention to cascading Innovate-to-Elevate throughout Maidenform. Our marketing team is focused on enhancing the Maidenform brand position to maximize its complementary nature with our strong portfolio of intimate apparel brands.

In addition, we are beginning to apply our platform innovations to bring meaningful innovation to the Maidenform product line. And of course we are rapidly internalizing Maidenform production into our global supply chain to reduce costs and leverage scale.

So what exactly does this mean to the investment community? Well, it means three things.

First, the integration risk is substantially behind us. Second, we are developing a distinct competency in acquisition integration. And third, over the course of the year the integration constraint to doing another transaction should be meaningfully reduced.

So to wrap up, I am very pleased with the accomplishments of the entire team on executing this very complex integration. We are excited about the opportunities ahead of us as we bring our full suite of intimates offerings to our customers.

I will now turn the call over to Rick.

Thanks, Gerald. We had another quarter of strong operating and financial results. Our operating profit grew 34%, driven by three factors.

The first is that Innovate-to-Elevate continued to drive increased profitability in our core businesses, particularly within our Activewear segment. The second was better-than-expected supply chain efficiencies and SG&A leverage. And finally, was the addition of Maidenform.

As a result of this strong performance, we are confident that the momentum in our business can continue, and we have reflected that confidence by increasing our full-year guidance for operating profit, EPS, and cash flow from operations.

For the quarter, revenue grew 12% to approximately $1.1 billion, driven by the addition of $125 million in sales from Maidenform. The remainder of our business was roughly flat on a constant-currency basis, a solid result given the weather-challenged quarter and the continued uneven consumer spending environment.

Let me take a moment to touch on the performance of some of our businesses for the quarter. As a result of adding new distribution in mid-tier and shelf space gains within our existing accounts, our Champion business delivered high teens revenue growth, one of the key drivers of the performance of our Activewear segment.

Turning to Innerwear, Maidenform drove growth in the segment for the quarter. Excluding Maidenform, our basics business was flat, while our intimates business was down from last year.

Currency was once again a headwind in the quarter, representing a drag of roughly $11 million or 100 basis points of growth on total Company sales. Gross profit margin was 35.1%, up 50 basis points over last year as the benefits from Innovate-to-Elevate in our core business overcame the dilutive effect of generally lower Maidenform margins.

SG&A spending increased $15 million over last year due to the addition of Maidenform and $2 million of incremental media spend. Excluding these two items, SG&A in dollar terms would have experienced a mid single-digit decline from last year.

Operating profit of $114 million was up 34% from last year while our operating margin increased 180 basis points to 10.8%, a record for the first quarter. Interest and other expense as well as our tax expense were in line with our previously stated guidance, resulting in EPS for the quarter of $0.76, a 49% increase over last year.

Now turning to our guidance, we continue to expect full-year sales to be slightly less than $5.1 billion with approximately $500 million coming from Maidenform.

We have increased our operating profit guidance to $665 million to $685 million, which includes approximately $30 million from Maidenform. This compares to our prior range of $640 million to $660 million, with $25 million from Maidenform. Inherent in this guidance is an expectation of roughly $85 million in interest and other expense and a full-year tax rate in the low teens.

Given the strong profitability in the first quarter and our confidence that the momentum in our business can continue through the year, we have raised our EPS range $0.20 to $4.80 to $5.00 per share. The midpoint represents an increase of 25% on top of last year's 49% increase.

We have also increased our cash flow from operations guidance by $25 million to a range of $475 million to $575 million.

So in closing, we had another strong quarter despite the challenging consumer environment. Our Innovate-to-Elevate strategy continues to deliver strong results with the margin expansion across the organization, particularly within our Activewear segment. And Maidenform's profitability is coming in slightly ahead of expectations.

All of this gives us confidence to raise our full-year operating profit and EPS guidance. And as we continue to execute on the things we can control and effectively deploy our cash flow, we believe we are very well positioned to deliver solid double-digit EPS growth for the next several years.

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

Thanks, Rick. That concludes the recap of our performance for the first quarter. We will now 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 will ask that you limit yourself to one question and a single 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.

Yes, good afternoon; and may I offer my congratulations on not only the quarter but also the successful integration of Maidenform?

Thanks, Matt. Appreciate it.

My question, Rich, in the press release you talk about branded printwear, and I was just wondering if you could elaborate on some of the things that you're doing in that specific market. When we talk about Innovate-to-Elevate, is there a specific strategy to branded printwear that we should think about, that you can do with that specific market?

And what are some of the opportunities there? Maybe just some elaboration there.

Sure. I think it was about two years ago where we said, look, we need to look at our entire portfolio and exit private-label or very commodity-like pieces of business; and the major piece of business that we had was in that branded printwear area both in Europe as well as the United States. We exited that piece of that business in Europe, and we actually retrenched in the United States.

But we did maintain about $150 million, maybe $165 million worth of business there that is in fact branded. Consumers buy it because they want the brands. Or actually the screen printers buy it either because consumers have requested it or the wholesaler or the screen printer wants to make sure that they have got great quality product to provide to their end-users.

So we see product such as Champion. We see some of the Hanes products, Tagless for example, which do very well in those markets and are a little bit less price-sensitive.

So we have maintained that business. We feel pretty good about it. It's actually doing -- I think it's actually exceeding our expectations both a little bit last year as well as this year.

And it's just a testament to -- if you focus on brands and drive great product with innovation, it works in a lot of different marketplaces. That said, the Innovate-to-Elevate is working extremely well at retail, and it's what's really driving our results.

Thank you. If I may ask one follow-up, Rick, there has been a lot of discussion about your successful track record of integrating acquisitions, etc., on the call today. I was just wondering.

As we look forward could you remind us about the capital structure, your thoughts on that in terms of ability to take on leverage, etc., where your updated thoughts are on that? Thanks.

Sure, as you know we have a solid BB credit rating, which gives us tremendous flexibility in terms of being able to execute against our business plan, including any potential acquisition that would meet our criteria that Rich has talked about in the past. So feel very confident on that front.

Perfect, I appreciate the color. Thanks again.

Eric Tracy, Janney Capital Markets.

Good afternoon. I will add my congrats. So, Rich, maybe if we could talk about the trends going on in the core business. Clearly weather was an issue and the calendar shift.

But just sort of talk through -- I think you said shipments down in the quarter 6% or looking like they're up mid-single digits here in April. Could you just maybe talk through what's your views on inventory in the channel?

I am assuming no real destocking going on. But maybe just a broader picture on the core.

Yes, let me just give a high-level picture and then I will turn it over to Gerald to talk a little bit more specifically on some of the Innerwear trend. For the quarter, with the Easter shift we didn't expect it to be an extremely strong quarter. In fact, our sales levels were right about exactly on plan.

Now, with the weather and things, that's sort of a plus and a minus. It actually negatively impacted Innerwear a little bit. On the flipside, it positively impacted Champion, where we had some stronger fleece sales; so that was all good.

So things were at the highest level played out a little bit like we thought, but when you get under the covers not exactly as we thought. Let me turn it over to Gerald to talk about some of those trends underneath.

Yes, Eric, as we look at our Innerwear business, our POS excluding Maidenform was down about 2% in the quarter while our shipments were down 6%. The interesting thing is as soon as we flipped around to that April period of time and we got a little better weather and we got back into the Easter period where it was, it quickly flipped around to the mid single-digits rate that Rich mentioned in his comments.

It really leveled out our POS to be flat for the year in the Innerwear segment. I think it clearly reinforces the point that there may be interruptions or shifts in timing on these core categories, but over time their consumption is consistent.

And no real incremental pressure on pricing? Obviously Innovate-to-Elevates in that the innovation is supportive of, but any resistance to do some of the pricing out there?

Not at all. And I think even retailers' reactions to the soft Q1 is there was a clear recognition that Easter shifted and they all knew that that was going to impact their results.

And when you have these Polar Vortex and nor'easters hitting, they were seeing the trends there. But a lot of them were seeing business being fine in Southern states like in Florida and so on. So nobody was overly concerned about the short-term softness.

This is just a reflection of how the consumer environment has been for the last couple of years. There's good selling periods followed by weak ones; but overall it tends to be okay.

And that's a great thing about our categories. They tend to be pretty stable, and we are feeling good about things.

If I could, just switching to Maidenform, one follow-up here. So that integration, it seems to be completed by 2Q. Is there anything -- because I believe at the Analyst Day it was really just a function of management capacity that was constraining doing another deal.

So as we think about the back half, is there anything that would prevent you all from looking at doing something else? And if so is it -- should we think about it being a little bit smaller tuck-in?

Or, to the last question, is there an appetite for actually leveraging up and doing something more transformational?

Let me make a couple of points about our thoughts concerning acquisition. You're going to find that pretty much nothing has changed.

Our four criteria, which are very strict, are still strongly in place. We are still talking about acquisitions being bolt-on, not huge transformational that would carry a lot of risk.

That said, I did say at the Investor Meeting in late February that our constraint to do the next acquisition was making sure that we got Maidenform fully integrated. And an acquisition such as that, you would expect that integration to take about a year or so.

The great thing is we've just got a fabulous team, nearly 300 people working on this integration. They have just done a phenomenal job. I can't brag about them enough. I am really, really proud of all the great things that they have accomplished.

And what that is allowing us to do is substantially reduce the constraints of Maidenform, and it can allow us to turn our attention to another acquisition as the year moves on. We are constantly talking to people. I have said that over and over again.

Some deals take a long time. Like Gear for Sports from when we initially talked to them to doing a deal took three years. Some happen very quickly, like Maidenform three months from initial contact to actually signing the deal.

So we are out there. We are constantly talking to people that meet our four criteria. And when it culminates in a definitive agreement, obviously we will let you know.

The great thing is our core business is just doing extremely well. That's really what's driving our results.

I feel great about how the Maidenform synergies will play out over time. I think we've got a lot of long-term prospects that are very bright in front of us.

Susan Anderson, FBR Capital Markets.

Congratulations, you guys, on a really amazing quarter. I was wondering maybe if you could talk a little about the improvement. It looks like it improved quite a bit at Maidenform from fourth quarter to first quarter, both in terms of like sales and profitability. What drove that?

Then also I think maybe you increased the profit for the year by $5 million. So maybe talk a little bit about where that is coming from, too.

Sure, let me talk for just a minute about the profitability on Maidenform. We did -- the operating profit was about $6 million in the quarter. It was slightly higher than what we were expecting.

That really came primarily from a little better gross profit margin than we expected, as we were able to exit some of their underperforming or less profitable businesses a little faster than we thought. You will see the improvement from an SG&A standpoint later in the year as the integration fully kicks in and those costs are eliminated.

As we said we had originally given guidance at $25 million for operating profit for the full year. Based on where we are now we see -- with $5 million to $7 million of upside, so we have incorporated $5 million of that upside.

And there can still be more there. It would be a function of us getting some of those costs out a little faster than what we had originally thought.

Okay, that makes sense. Then one follow-up. On Innovate-to-Elevate, so it sounds like your Champion business is really driving that. Maybe if you could talk about the products that -- contributing into that.

Then also if you can maybe talk about your longer-term vision for the brand, it seems like it really has a lot of legroom for growth, given activewear trends out there in the US; and then if there's any plans international, too.

Hi, Susan, this is Gerald. The Champion business did have a great quarter and the Innovate-to-Elevate strategy is really taking hold within Champion. And you're right; the activewear trend is a great trend to ride with, and we are riding it with a great brand right now.

From the standpoint of our Innovate-to-Elevate initiatives, it's driving expanded distribution within our current accounts, as well as we are gaining a number of new doors. A lot of these -- a lot of this new distribution went into place in the first quarter, in combination with -- frankly, the cold weather helped this business some. It helped them in the fleece business and so forth.

So the combination of that, the extra fleece sales, and all these placements gave us an extraordinarily strong first quarter. But you are also right; this brand has a lot of legs and we do expect it to continue to grow throughout the year, more at a full-year rate around 10%.

Certainly on an international scale, there is room there as well. We have the brand established in certain markets, but not as well established as we'd like to see it, whether that would be Canada or even some of our markets in Asia where we operate as well.

Okay, great. Thanks, guys, and congrats again.

Omar Saad, ISI Group.

Thanks, guys. Fantastic quarter.

Innovate-to-Elevate, clearly you guys have been talking about it for a while. It's clearly working.

How do you think about the upper limitations or if there are upper limitations on how far you can push the envelope in pricing, and innovation, and bringing the consumer up the curve? Some of the channels you are in, some of the consumers are a little bit more price-sensitive.

That doesn't seem to be having an impact at this point. But is this something we are going to be talking about two, three, five, 10 years from now, that you're still pushing the envelope on innovation and pricing elevation? Because the power of it is really evident right now. Thanks.

Absolutely. This is something that's there for the long-term.

And let me remind you there's three components that are critical for Innovate-to-Elevate. It's really taking advantage of your brand power; it's driving platform innovations; and then leveraging that global supply chain. And all three of them work synergistically.

So with brands, you need strong brands so that when you do innovation, consumers are willing to actually try the new products. Also it allows you to have the power as inflation comes at you, which is where clearly apparel's in a situation of dealing with moderate inflation as costs push inflation over time. And you've got to have brand power to increase prices to offset that cost push inflation and maintain margin.

Innovation is a critical piece of it. Looking for consumer segments where people are willing to pay more for products that are better, and we are in very early innings of that.

You look at something like X-Temp or ComfortBlend. I think of our men's underwear business; they are probably less than 12% of the total business right now. We've got a long way to go until those things are fully penetrated throughout just even the United States, let alone internationally.

And then there is our secret sauce, which is that supply chain. Every time we build scale in particular product categories, we are able to reduce our cost and that allows us to increase our margins.

So we are in very early innings of this. You are seeing it be the greatest results where we started the earliest, in men's underwear. You are now cascading it to intimate apparel, ultimately to Maidenform, where we won't even see benefits until 2016. And we are now starting to see it really drive results in that Activewear category.

So yes, we will be talking about this for two, five, 10 years from now.

Rich, so to be clear, you're not getting resistance from the retail customers, your retail partners? You're not really seeing any meaningful resistance in terms of the consumers or any research you are doing around the consumers?

You know: oh, is this really something I want to pay more for? It doesn't seem like you're getting any sort of pushback.

Remember, this isn't about driving price up substantially. While in some categories from an inflation perspective we did actually raise price anywhere from 3% to 5% on some of our categories, and that's all working fine, so you're talking about small dollar increases to offset inflation.

But when you look at ComfortBlend or X-Temp, I will use those as example, where you're pricing 40% to 50% to 70% higher than the core products, not every consumer wants those products. But there's clearly a market where people are willing to pay more for those kind of very special products that deliver higher benefits. And those businesses are doing really well, continue to grow.

And as I said, they are low percentages of the current business. So there's a lot of room for growth and continuing to drive our margins.

Thank you, Rich. Helpful.

Bob Drbul, Nomura Securities.

Good evening. I guess the two questions that I have is, Rich, when you look at the results and the increase in the guidance, I think at the Analyst Meeting in late February you had talked about a 2015 number of right around that $5.25 level. And with the change in the guidance from this year, can you just give us any updated thoughts around a little bit further out where you are with the business right now?

And then the second question that I have is, can you comment a little bit about -- the Champion business seems to be doing very, very well. But any comments around Champion in Canada?

Let me take the first one and then I'll turn it over to Gerald to talk about Champion in Canada. First, what's driving our increase in guidance is the fact that we just had a great Q1 and we feel really good about those results, and we've got a lot of visibility for the rest of 2014.

Our prices and space gains are set. Back-to-school is in place with our key retailers. Our holiday plans are very fully developed and almost complete with most of our key retailers.

And on the cost side virtually all of our commodity costs are locked in for I think 97%, 98% of the year. So we feel really good about where we are with visibility for the rest of 2014.

In terms of what is it looking like for 2015, I did make the comment, as you were talking about, in low $5s at the investor day. I think I was really talking about it in terms of what it might be reasonable to expect, how quickly we can double results and using numbers historically.

And I think we will wait to any more specific guidance to 2015 until we get a little bit closer to 2015 starting. That said, we feel really good about the momentum we've got in our business, in our core business, in Maidenform, and we've got a very bright future indeed.

Gerald, do you want to talk about Champion?

Let me talk about Champion in Canada. In fact let me just talk a little bit about our international strategies first.

We've had a focus on leveraging our scale of the US business more effectively across the borders of both Canada and Mexico to really leverage our regional scale. We focused first on Canada, and it really is a good example of the power of what we can do, is now bring the power of what we are doing in Champion through our Innovate-to-Elevate and grow that brand even faster in Canada.

We are seeing the results now both with the movement of Target up into Canada, we've got our Champion at Target now in Canada developing very well. The brand, the Champion brand is also developing in other channels. But there's a lot of upside there, and that's certainly one of the things we are focused on as we leverage the scale of the US business across the borders.

David Glick, Buckingham Research.

Thank you. A quick question for Rick. I'm just looking at the Q1 results, the gross margin was obviously much better than we expected and SG&A certainly lower. I'm just wondering. Relative to your original expectations, obviously you commented on the gross margin being driven by Innovate-to-Elevate.

I'm just wondering what other factors are driving that, and whether those you think can be sustained potentially to drive upside for the rest of the year. One of the reasons I ask the questions is I am looking at the Maidenform gross margins last year and looking at the SG&A dollars particularly in the first half, and wondering how you guys are getting -- recognizing those benefits sooner.

And -- because I had thought that the Maidenform gross margins would be more of a negative mix factor for you guys this year. Any color on that would be appreciated.

Sure. Let me start with gross margin. The improvement really came both in the core business and in Maidenform being a little better than we thought. The core business was driven by Innovate-to-Elevate. It was our ability to get price to cover inflation and to maintain margins.

It was innovation mixed us up -- resulted in positive mix, I guess maybe to be clear about that. Then our supply chain efficiencies were actually better than what we expected. So those things all contributed to really a very nice margin improvement for the quarter there.

In terms of SG&A, let me kind of break that down for you. It was up in dollar terms about $15 million; Maidenform accounted for $26 million of that. We also added $2 million of additional media spend over last year.

But that $26 million for Maidenform was about we expected it to be. You'll really start to see that number come down as we go through the year and the integration, the financial impact of the integration, the benefits that Gerald talked, about really kick in.

So that's where you will start to see that. As we get into the second quarter and then beyond you will see the improvements in SG&A for Maidenform.

But the base business was actually down $13 million on an SG&A. A really nice cost control for the quarter.

So when you look at all those dynamics, David, and it causes us to feel very good about where we will be for the full year. If you take the midpoint of our operating profit margin guidance, and you divide it by $5.1 billion of sales, then you come up with about a 13.2% operating profit margin, which is 30 basis points higher than what we were last year and was actually higher than what we had originally guided to. So we believe we can keep moving the margin up.

On the gross margin side, I thought it would be unlikely to get an increase based on the Maidenform benefits not coming till next year and having a negative mix effect. Based on the Q1 performance, can you guys maintain the gross margin or increase it this year? Is that baked into your plan?

Well, we don't give guidance on gross profit margin. But we feel good about what we accomplished. We think Innovate-to-Elevate is going to continue to drive margin improvement throughout our P&L.

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

Steve Marotta, CL King & Associates.

Good evening, everybody. Rick, you just mentioned the operating margin at 13% for the year, midpoint, versus guidance as well. Could you talk a little bit about what the ultimate earnings power is, assuming a steady-state? In other words, assuming no additional acquisitions.

You know, we have historically talked about an operating profit margin goal of 12% to 14%. We continue to move steadily towards the top end of that. I think as we continue to integrate Maidenform, we will have a clear picture on what we think the longer-term operating profit goals are.

But I think what you are seeing is that Innovate-to-Elevate and our focus on strong cost containment, these are things that we can continue to execute for the foreseeable future.

All right, that's great. Can you comment also on the upward drift to raw cotton prices over the past six to eight months or so, and how that's affecting your cost structure, and what you think pricing will be as a result of that?

Sure. In the cotton market there's always a certain amount of volatility that's normal. Honestly what we've seen in the last few months really is within that normal range of volatility.

We plan for that in our P&L, and obviously we generally stay six to nine months ahead on our hedges for that. So we have good visibility to it.

As Rich said, we have almost all of our cotton hedged for this year. So we really know what that cotton cost is going to be.

Yes, and I would just add to that, Steve -- this is Gerald -- that as we've said before we have anticipated a level of inflation working its way into the manufacturing supply chain now. We priced early in the year in anticipation of raw material movements but also wage movements, and put those prices in place in February.

Jim Duffy, Stifel.

Thank you, hello, everyone. Great quarter from the Activewear side. My compliments to the Champion team.

The increased confidence in the operating profit for the year, can you talk about how you're thinking about that by segment? Is it the acceleration that you're seeing in the Activewear segment that was the principal contributor to your increased confidence?

Jim, in terms of talking about operating profit expectations by segment, we don't give guidance at that level. Suffice it to say I think we feel really good about all facets of our business.

I think Innovate-to-Elevate as we cascade it through is driving all of our operating margins up. We feel really good about Champion there, or the entire Activewear segment. Innerwear is doing well.

But in terms of by specific segment guidance, we don't want to really go there.

Fair enough. Rick, follow-up question on the SG&A. A large part of the year-to-year reduction in the SG&A looks to be in the corporate overhead line. Can you explain where some of those savings are coming from and speak to the additional opportunities in corporate overhead?

Sure. The savings are coming basically in personnel and related types of costs around that and the corporate overhead section. That's where most of it is.

In terms of our future ability, we are always looking for opportunities to reduce our overhead spending and to leverage the resources that we have to accommodate growth on the top line.

Danielle McCoy, Brean Capital.

Good afternoon, guys. Congrats on the nice quarter.

Quick question. How is Hanes doing in Macy's? How many doors is it currently in? And can we expect any door expansion in that midtier channel?

Hanes Platinum is doing quite well at Macy's. In fact you'll see a further expansion of doors in the second half of this year.

You will also see the introduction of Hanes Platinum panties in retail as well. So that business is growing nicely and I think again always speaks to the power of the Hanes brand that it spans channels from the department stores right down to dollar stores.

All right, great. Then just on Maidenform, how far have you guys gotten with the SKU reduction? Have you witnessed any floor expansion in any of the stores? And I guess just a little update on the shapewear and Maidenform with Spanx?

You know, we've made a great deal of progress on our SKU reductions. There was quite a bit of low-quality revenue that we said going in that we would shed, and with that comes SKUs. We said it would fall sort of a $500 million base, which we are still very comfortable with, and that's the base from which we will begin to grow.

Our focus is on making fewer, bigger statements on the floor across all of our businesses, including intimate apparel. We have begun the work on that process with our retailers and we are in the early stages of that. They love the idea and we think it will be very effective in offering better assortments of styles and colors.

I'm sorry, I forgot the third part of your question.

The Spanx.

Oh, the shapewear. Yes, as we said since we bought Maidenform, that it would play out over time. There were some competitive space gains that would play out over time, and that's playing out exactly like we thought it would.

There's a little more time to go before we overlap where those competitive entries began, but we think that we're in good shape and over time we will grow that business as we bring our Innovate-to-Elevate strategies to that business as well.

Carla Casella, JPMorgan.

Hi, just a couple quick ones. One, I'm wondering if you are changing the assortment and all at JCPenney as we move through the year.

And then also just a follow-up on your cash flow, your priorities for cash for as you look at the business. You have talked a bit about M&A. Is there anything else we should be watching for?

Starting with JCPenney, we have continued to rebuild the assortment there as they returned to their past strategies, and we are having a lot of success across both basics and also Champion entered on the men's side in JCPenney and is performing very well.

In terms of priorities for cash flow, obviously our first priority is always to invest in our own business; and we've talked about gross capital expenditures this year being in that $60 million to $75 million range. And you should expect that to migrate up towards depreciation and amortization close to $90 million to $100 million per year over time.

The second priority is to -- we've instituted a dividend and obviously we need to support that dividend. We've talked about having a target payout ratio between 25% and 30%. So as earnings-per-share would continue to grow you may see the dividend increase.

After that, the other priorities are to think about bolt-on acquisitions that can create value that are focused on our four criteria that we have talked about historically. Then lastly we would also think about share repurchases.

Debt paydown used to be a priority, but since we got that to where we wanted it to be obviously it's fallen off the list.

Thank you, and that concludes our question-and-answer session for today. I would like to turn the conference back to T.C. Robillard for any concluding comments.

I would like to thank everyone for attending our call today and 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 good day.