漢佰 (HBI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hanesbrands first-quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to hand the conference over to T.C. Robillard, VP, Investor Relations. Please go ahead.

Good day, 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 2015. 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.

Unless otherwise noted, today's references to our consolidated financial results, as well as our 2015 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 on the Investor 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, T.C. Our business model continues to deliver significant returns for our shareholders as contributions from our acquisition strategy and margin improvements in our base business drove 16% growth in earnings per share in the first quarter. And that was on top of last year's 50% increase. Our acquisition strategy is working extremely well and this is a great quarter to see how all facets of this strategy are delivering significant growth. For example, Gear for Sports, which has been part of our core operations for several years, contributed double-digit revenue and operating profit growth in the quarter.

Maidenform, which was fully integrated only last year, delivered additional synergies and contributed nicely to the first quarter's profit growth. As we continue to internalize their production and launch our ComfortFlex Fit I2E platform under the Maidenform brand later this year, we are on track to more than double their operating profit to $80 million by the end of 2016.

DBApparel in just its second full quarter as part of Hanesbrands was also a strong contributor to results. We started the works council process last week and we expect to begin implementing many of the integration actions in the fourth quarter. This should lead to substantial synergy benefits in 2016 and continuing into 2017 and beyond, ultimately allowing us to reach our goal of EUR100 million of operating profit.

And only seven months after we added DBA, we closed our latest acquisition, Knights Apparel. This is a great acquisition, making us the leading supplier of licensed collegiate apparel in both the mass and college bookstore channels. As we leverage the scale of our supply chain, the graphic art capabilities of our Gear for Sports business and our expertise in the mass channel, we believe we can double their operating profit to more than $40 million within the next two to three years. Integration planning has already begun and we believe a large portion of the integration actions can be completed by the end of this year with synergies beginning to flow through our P&L in 2016.

Now that we have several acquisitions under our belt, investors are able to see how our acquisition strategy can deliver multiyear returns to our shareholders. And with just these expected synergy contributions, we believe we have great earnings momentum.

So in summary, we are off to a great start in 2015 with our first-quarter results coming right in line with our overall plan. We feel good about the trends in our business and we have great visibility for the remainder of the year. This, along with the addition of Knights Apparel, gives us confidence this early in the year to increase our earnings guidance, which now assumes mid to high teens growth.

Looking forward, we believe the ongoing margin drivers in our base business, combined with the current synergy roadmap for DBA and Knights Apparel, position us for continued double-digit earnings growth for the next several years. And with that, I'll turn the call over to Gerald.

Thanks, Rich. We were able to deliver another quarter of strong earnings growth by focusing on the things we can control and executing our long-term strategy. Our acquisitions are paying dividends. We are gaining share in our key categories. Our innovation platforms are driving additional space gains and our operating margin continued to expand, up another 90 basis points over last year, excluding DBA.

Looking at the quarter, our innovation platforms continued to perform well, helping drive sales growth in men's underwear and bras, while overall innerwear sales decreased over last year. The decrease was due to a short-term retail inventory reduction in basics by a major account, which dropped their retail inventory to its lowest level in five years. This short-term reduction has already begun to reverse in the first two weeks of April and the good thing about replenishment categories is that these types of inventory imbalances don't have a lasting impact on the business.

Bra revenue increased for the first time in several quarters as we began to anniversary the impact from our brand consolidation efforts and retail inventory normalized, particularly in the mid-tier channel. For the quarter, innerwear's operating margins increased 310 basis points driven by Maidenform synergies, benefits from Innovate-to-Elevate and efficiency gains from our supply chain.

Turning to activewear, sales in the quarter increased slightly over last year as double-digit growth in Gear for Sports and increases in Hanes activewear were somewhat offset by Champion. In the sporting goods, mid-tier and department store channels, Champion has a significant amount of space gains this year. With many new programs shipping in the second quarter, we believe Champion is positioned for strong full-year growth. We were also encouraged by Champion's sellthrough trends in the mass channel, which showed improvement in the quarter.

Switching to international, on a constant currency basis, we saw strong double-digit sales and operating profit growth in Japan and Latin America while results in our ongoing Canada operations improved sequentially through the quarter.

With respect to DBApparel, they performed well in the quarter, contributing approximately $184 million in sales and better-than-expected profits driven by favorable supply chain variances and strong expense controls. Sales in the key geographies of Spain, Italy, France, Germany and the United Kingdom were in line with plan and in France, sales growth was driven by the successful extension of the DIMmega brand beyond hosiery, underwear and intimates into socks.

Now let me take a step back and provide you with a broader sense of our business. The overall consumer environment remains choppy with good weeks followed by bad weeks. That said, the overall trends within our business remain strong. Sellthrough, especially within our innerwear basics business, continued to outpace shipments and helped drive marketshare gains in the quarter. Our innovation platforms are performing well. In fact, we are positioned to more than double our X-Temp space this year and we continue to drive efficiency gains in our supply chain.

Looking forward, we have great visibility into the remainder of the year as our space is set, our pricing is in place, the transaction impact from exchange rates is hedged and we have locked in most of our key input costs.

So to sum up, the trends in our business remain strong. We have great visibility into the remainder of the year and our acquisition strategy is delivering substantial benefits, giving us confidence in our ability to deliver double-digit earnings growth for the next several years. I will now turn the call over to Rick.

Thanks, Gerald. We had another quarter of strong operating and financial results. Contributions from our acquisition strategy, along with continued margin improvements in our base business, drove a 16% increase in earnings per share, once again highlighting the power of our business model to deliver strong returns for our shareholders.

Now let me give you some color on our record first-quarter results. Sales in the quarter increased 15% in constant currency with DBA contributing approximately 17 points of growth. Our acquisition strategy continues to be a major contributor to operating profit. Double-digit growth in Gear for Sports, synergies from Maidenform, as well as the addition of DBApparel helped drive a 16% increase in our operating profit for the quarter.

Looking at margins, our gross profit margin improved 300 basis points to 38.1% with DBA contributing approximately 190 basis points of the increase while the remainder was driven by efficiency gains in our supply chain and benefits from Innovate-to-Elevate.

SG&A costs in the quarter increased 280 basis points to 27.1% with DBA accounting for roughly 270 basis points of the increase. This resulted in a 20 basis point increase in our operating profit margin as the 90 basis point improvement in our base business more than offset the expected 70 basis points of dilution from the addition of DBA.

Interest and other expense of $27 million was roughly $5 million above last year due to the higher debt levels from our acquisition of DBA while the tax rate of 16% was the same compared to last year. This resulted in earnings per share of $0.22, a 16% increase over last year.

Turning to guidance, with our Knights Apparel acquisition being completed so quickly, we are now able to increase our 2015 outlook. We are increasing our full-year sales guidance to a range of $5.9 billion to $5.95 billion, which includes the addition of approximately $160 million from Knights Apparel, offset by a reduction of roughly $35 million from additional pressure in various exchange rates.

We are increasing our operating profit guidance to a range of $853 million to $873 million with the entire $18 million increase due to the addition of Knights Apparel. Remember, there is no impact to our operating profit guidance from our lower exchange rate assumptions as the FX transaction costs are mainly hedged and the FX translation impact is minimal.

Interest and other related expense is now expected to be a range of $95 million to $100 million, an increase of $5 million due to the additional debt associated with the Knights acquisition. Our full-year tax rate is expected to be approximately 13% and similar to last year, we expect the tax rate to be higher in the first half of the year. We believe the split between the first and second half of 2014 continues to be a good proxy for 2015.

We are increasing our EPS guidance by $0.03 to a range of $1.61 to $1.66, which represents strong mid to high teens growth for 2015. We expect cash flow from operations to be $550 million to $600 million. Capital expenditures are expected to be approximately $80 million to $85 million. Looking long term, we expect our CapEx should average around 1.75% of sales, which will allow our global supply chain to remain competitive while also handling the increased capacity needs from our acquisition strategy. And over time, as we spend at this level, our CapEx should roughly equal our depreciation.

With respect to DBA, our estimates of approximately EUR630 million in sales and approximately EUR30 million in operating profit are unchanged. This implies about 130 basis points of margin dilution from DBA for the year. We expect DBA to continue to have a significant impact on our reported gross margin and SG&A rate until we anniversary the acquisition in September.

So in closing, we are off to a great start in 2015. And with our visibility for the remainder of the year, we believe we are well-positioned to deliver mid to high teens EPS growth. Looking to 2016 and beyond, we believe our business model is designed to deliver continued strong shareholder returns as the combination of the benefits from current acquisitions, the momentum in our overall business and the returns from deploying future cash flows should drive solid double-digit EPS growth for many years to come. And with that, I'll 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 we 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 yourself to one question and a single follow-up and then reenter the queue to ask any additional questions. I will now turn to call back over to the operator to begin the question-and-answer session. Operator.

(Operator Instructions). Eric Tracy, Janney Capital Markets.

I guess, Rich, for you, if I could starting, maybe Gerald as well, just as it relates to the inventory reduction from a major partner here in the quarter, two weeks of supply, the lowest level in five years. Just kind of talk through the rationale of them doing that. It sounds like it is reversing in April, but speak to that specifically and then what you are seeing beyond that within the core business.

Sure, let me take that, Eric. When we look at the innerwear business, what we see is our overall fundamentals for the innerwear business are very sound. Our share positions grew in the quarter, our POS is stronger than shipments, space is sound and actually we are expanding space behind a number of our innovations as we look forward to the balance of the year.

So strong fundamentals. We do see fluctuations from time to time in our order patterns and in the quarter, we saw it in one of our major retailers and in fact, those inventories did fall by almost two weeks of supply, which is really the lowest level we have seen in five years. What I can say is the great thing about our category is ultimately over time orders and replenishment ultimately recovered to the level of POS trends and what we've already seen as we enter this April period is, in fact, those orders are recovering and flowing nicely. So I don't see any fundamental shift there. It's really just an aberration of fluctuation in the order pattern.

Okay. And then if I could switch gears a little bit, something that is emerging here as kind of a key topic is just transpacific partnership legislation that just got agreed to be fast tracked last week. Obviously, you guys have some decent cut and sew exposure in Vietnam, one of the TPP participants. So Rich or Gerald again, would love to get your thoughts on just the potential likelihood of something getting reached here and then how we should think about that playing out if, in fact, it does get resolved.

Yes, so let me talk about it from two dimensions, one is our overall strategic perspective and then I'll give you a little bit of color around what we think may be going on in Washington. At the end of the day, one of the reasons that we wanted to make sure our supply chain was balanced across hemispheres and we diversified both across countries was to be able to make sure we could take advantage of things that might emerge, for example, the transpacific partnership, when, in fact, if it is actually approved and passed by all the countries involved, it will give us a substantial advantage, vis-a-vis, those people that didn't pursue that strategy because we have been operating in places like Vietnam for close to eight years and by the time something like this would come to fruition, we would have a good decade or more advantage on other people then deciding to go into those countries.

So it is, I think, part of our strategy of balancing that supply chain globally and making sure we can take advantage of things like this.

Now that said, I do think that things in Washington and different governments around the world do move slowly. As you said, the Congress is moving forward the fast-track legislation, which would be what is called TPA, which gives the President the ability to go negotiate the deal with the other countries and then bring it back for an up or down vote to Congress. So that is the first part of the process. If that does get passed sometime between now and Memorial Day, then the Administration can go off and complete the negotiations with the 12 countries involved to try and put together the TPP or transpacific partnership. Once that is actually finalized that would then go to Congress for a vote.

There's people that are optimistic that think that that could happen as early as December of 2015. There's people that think that it could take until later 2016 to actually get passed. It's Washington. Things move slowly. We will just keep an eye on it and see how it unfolds. Once it is passed, once all the countries actually would approve it, it would then be a phase-in approach over time. But as I said, we wanted to make sure we are positioned globally to take advantage of these things and we will have a good leapfrog on everybody else because we will have been operating in those countries, such as Vietnam, for such a long period of time. It's a great country. It's doing very well for us even without TPP. It's low cost, high quality. We've got about 9,000 employees there and it's expanding to about 12,000 over time. It's a great base for us to supply places like Europe and we feel really good about it rolling our supply chain.

Susan Anderson, FBR.

I guess on the activewear, I was wondering if you could maybe give a little bit more color on the weakness there. I know you talked about the new space gains don't really hit till next quarter and then you said that the mass channel is improving, but I guess what is weighting that down given the better performance in Gear and stuff? Thanks.

Sure, activewear did grow in the quarter, as you noted, driven by Gear for Sports and Hanes and we expect it to continue to accelerate its growth overall for the full year and driving that growth will be acceleration of the Champion business to a mid-single digit rate overall for the full year.

Underneath that will be strong double-digit growth within the Champion business in department, specialty and mid-tier department stores and really what we have here is we have gained a lot of space this year just as we did last year. Those space gains happen to be more skewed to the second quarter whereas they were very strongly in the first quarter last year. In fact, last year, our sales were up in the Champion department stores, sports specialty business about 62% driven by a lot of placements in the first quarter. A lot of these are skewing as we get more space into the second quarter next year. I think you'll see in that Champion department and sports specialty store business double-digit growth in the second quarter and you'll see that continue throughout the year.

Got it. That is helpful. And then on Maidenform and the improved profitability in the innerwear, I guess, what percent of the 310 bps was due to Maidenform and then also did you guys have a full quarter of that kind of flowing through the P&L or should be expect the profitability to continue to improve throughout the year?

Well, I don't want to break out into too much detail for the profitability of a particular segment, but let's say it was a major contributor to the profitability in the quarter, along with Innovate-to-Elevate and manufacturing cost savings. The synergies from Maidenform are flowing in at or a little ahead of where we thought they would be, so we have been very pleased with how the integration plans have driven the synergy gains in Maidenform.

Omar Saad, Evercore ISI.

I guess my first question is organic growth, kind of peel back the acquisitions, what was it in the quarter, how does that compare to where it has kind of been trending the underlying revenue growth trends and what is embedded for your full-year guidance? And then I have a follow-up question as well.

For the first quarter, the organic growth was 1%, 2% on a constant currency basis as we had about $13 million of FX drag in the first quarter. As we said in our prepared remarks, the first quarter came in overall right about where we thought it would be. And so you are going to see those same sorts of trends through the year as we put in our original guidance.

And then I think on the second part of your questions, what is embedded for the full year for organic growth in a constant currency in

It's 2%.

About 2% for the full year. So I don't want anybody to overread the ups and downs and fluctuations in the first quarter. We don't see any trend change in our business whatsoever when you're looking at sellthrough. We've always talked about things are up and down as retailers move inventory. That's all this is and I don't want to overplay it. We feel good about the overall trends in our business.

Thanks, guys. That is really helpful, Rich and Rick. And then on the innerwear margins, is all that gain coming from the synergies in Maidenform, or are there other things going on in the business that we should have our arms around?

Well, I think yes and yes. So this was a good quarter for Maidenform synergies because remember last year in that first quarter we still had some of the SG&A, so we are overlapping some of that, but it's also just Innovate-to-Elevate and manufacturing synergies and how we are able to drive the overall business. But that was an anomaly if you remember. At Maidenform, we still had some of those SG&A costs that we're now sort of overlapping.

Michael Binetti, UBS.

Maybe a couple questions on Maidenform here. I think it's just a process because this is one of the bigger acquisitions. You obviously had Gear for a few years, but this is a bigger one that we will start seeing move through your P&L. And maybe something about the steps ahead. You mentioned that I think the middle of last year you were insourcing a lot of the product. When do those products start flowing to retail and through your cost of goods? And then I think you were going to start pushing out some of the Innovate-to-Elevate ideas to that business as well. Is that something that you think could start some organic revenue growth for that brand and some margin expansion after you've [rebased] it last year for some of the unproductive SKUs?

Yes, let me take this beginning with the internalization of production. We did begin that and we began to see the benefits of that roll through the P&L this year. We are about halfway through the internalization that we have undertaken. We will complete the rest of it in the second half of this year, which will allow some additional synergies to roll into next year from an internalization standpoint.

From the standpoint of Innovate-to-Elevate and applying it, our first product line that we designed is actually -- will come to market in the fall of this year with our fall line and we are excited about that because it allows us to bring into play, for example, our ComfortFlex Fit platform that is so important to our other bra brands and bring it with a line called [Fit to Flirt] that we will bring to department stores in the second half of the year and then (inaudible) Spring of the next year into the mass channel. So as we finish our brand consolidation strategy linked to our platforms and design, we think we have a real power now to unleash the full power of Innovate-to-Elevate and drive the brand forward.

Okay. And then I think you mentioned that X-Temp would double this year. Maybe just back up and talk about the Innovate-to-Elevate platform a little bit. I think you have commented in the past roughly where you are as a percent of the total portfolio that is on that platform and maybe how that mix will evolve this year. Thank you.

Well, from the standpoint of our Innovate-to-Elevate platforms, you are talking about ComfortBlend and X-Temp are the ones I think you are asking about, we pushed those across the basics business. As I mentioned in my prepared comments, we will double the space behind X-Temp this year, which gives us a lot of room to continue to grow those platforms. And I think it's just exciting to us as we continue to see the upside and we have pushed it not only across underwear, but across our basic category with panties and into women's panties and so forth, so tremendous success with those platforms and tremendous growth potential.

Jay Sole, Morgan Stanley.

Just curious about -- can we just talk about the marketing strategy for a little bit? Can you talk about the level of spend as a percent of sales you expect to do this year and how that might be different from last year? And then just in terms of what kind of vehicles you want to use to market. Is it TV, is it Internet, is it mobile and then what are maybe some opportunities to flex that up or down within the year if you see different opportunities to do things?

Yes, let me just talk about that. Overall, our spending is right in line with where it's been historically. We feel really good about it. In terms of total Company spend, you've got to remember there are segments like some of the activewear or actually like a Knights Apparel, which actually doesn't have media, so that might dilute it on a total basis, but we really think of it as a percentage of the branded innerwear sales. So when you look at that from a US perspective, we are right in line with where we've been historically. Feel good about it; focusing a lot of our efforts on these technology platforms such as X-Temp that will see expanded space beginning this quarter. So we feel really good about where we are.

In terms of mix, it has been changing over time. If you went back five years ago, predominately, it was all on TV and you are seeing that mix in digital become a larger and larger percentage each and every year and that will continue. We actually haven't talked about the specific trends, but it is definitely -- it is not yet a majority, but it is more than a quarter.

Interesting. Could you touch on just the ability to flex it up or down, if you see an opportunity to maybe drive sales with something or maybe to pull back if it's unnecessary to drive more profit?

We have done that historically and in fact, one of the things that we are apt to do is if we are feeling really good about our overall momentum in the total business, and we see an opportunity to continue to drive a platform, we will increase media spend. You can do it actually in the spot market with fairly little notice if you want to use things like TV; online is also relatively easy. And then historically we have pulled back when we saw big things like the recession show up and we said, look, at the end of the day, we need to pull back because people weren't in the stores. And so you've got the ability to flex it up and down with relatively little notice.

Ike Boruchow, Sterne Agee.

Thanks for taking my question. Congrats on a great quarter. I guess I wanted to just take a quick step back and ask about your view of the European market. I assume that view continues to evolve as you are now there in a bigger way. I guess what key learnings are coming up as you learn that innerwear market and get a little bit deeper there? And then how does that impact your potential decisions to enter new countries and new markets potentially through M&A or just organic growth?

Sure. When we look at Europe, I think certainly we understood going in and we still know that they are struggling with some headwinds overall in the economy. We also know that Europe is a collection of countries rather than one place and certainly we see improvement in certain countries faster than others. In the South, for example, we are seeing nice positive trends in a Spain or an Italy as we look at these economies.

The great thing is DBA's business is very much like our innerwear business here. It is a branded business. They have strong category or share positions within their categories and over time, the consumer tends to buy a consistent number of units and it has been that way through the good and bad periods of the economy and so we think we've got a great platform on which to build the business and as we execute our integration strategy, we've got a great platform to build on.

Jim Duffy, Stifel.

Rick, a couple questions for you on the cash flow. What are the cash charges presumed in the $550 million to $600 million net cash from operations guidance? And then the change in the GAAP guidance, is that entirely related to the addition of Knights Apparel, or do you have higher expectations for charges related to Maidenform or DBA?

You are talking about cash flow from operations, Jim?

Correct.

Yes, actually the cash flow from operations guidance stayed flat. We didn't increase it. The Knights Apparel, we believe, is within the range of what we had originally put out there. And I kind of missed the first part of your question.

So I was looking at the charges, $150 million to $170 million was the guide last quarter, goes to $200 million or more. What of that is cash versus non-cash? And then with respect to that change, is that entirely related to Knights Apparel, or are there more charges presumed for Maidenform and DBA?

It is about two-thirds cash, one-third non-cash on that and the bulk of the increase was Knights Apparel.

Okay. And then just to be clear, that cash is contemplated in the cash flow from operations guidance, correct?

Yes, absolutely. Okay, got it. I got it. Sorry. (multiple speakers)

And that's one of the reasons that as we added in Knights Apparel, which obviously would give you cash flow from operations, there's some cash charges included in that that also helped to offset it.

That's right.

Great. Thanks for that.

Bob Drbul, Nomura.

I guess the two questions that I have, the first one is, Rick -- Rich, on the inventory by one of your large retailers, I guess the thing that I struggle with is, end of March versus end of April from an inventory flex perspective, could you just maybe elaborate a little bit more what you think was going on? Was it just inventory or was it like quarter-end for somebody? I'm just trying to get a better handle on why it was drawn down so much at that point in time.

So historically, you generally see inventories at retail even from a weeks of supply basis come down within their first quarter, so generally it is going to be a February, March, April timeframe. So they generally come down. This year, they tended to come down lower than we have seen in a number of years, as actually Gerald talked about explicitly. And I wouldn't chalk it up to more than just sort of the normal trend down and either they decided they were a little bit tighter overall in inventory and so they were managing things. Sometimes you've got different groups starting to manage things that are new and actually we've had some systems changes, a whole host of tactical reasons. There is nothing that says this was some big systemic push by this retailer to dramatically change their turns on an ongoing basis. I'd just chalk it up to the normal fluctuation and the normal downtrend in this quarter that tended to overshoot what we have seen historically. And now as Gerald said, we've already started to see it reverse in April with the first couple of weeks. So it's nothing that gives us pause for concern. It's just the normal ebbs and flow of the business.

Got it. And just a question on product. Can you talk a little bit about the Tagless line? How has that been performing? What categories has that touched so far?

Tagless has been with us for a decade now and it really started in the T-shirt business and we've pushed it across not only our innerwear T-shirts, but now certainly it is across all of our activewear and outerwear T-shirts, if you will, and across printwear and Champion and the entire businesses we look at it.

From the standpoint of bottoms, we recently, a couple years ago I guess now, put Tagless into our bottoms, so it's a great example of Innovate-to-Elevate continuing to run for a long period of time starting over a decade ago and still running strong.

Now we will have some of the chances to do that in Europe as well.

Exactly.

(Operator Instructions). Carla Casella, JPMorgan.

I had one clarification question on Knights, or I guess a seasonality question. If you are looking for $160 million of revenue contribution this year, what is the seasonality on Knights? I am assuming it is very different than your existing business because of the college year?

Well, it has a strong back-to-school focus to it, as you might imagine, so it is a fall-driven business, so it is not inconsistent with some of the seasonalities of our other businesses, actually. It's actually consistent with the seasonality.

Okay. So with the biggest being then the third quarter, or would it be the second in prep for the fall season?

It's a similar pattern. You start to see the business build towards the end of the second quarter and then peak in the early part of the third quarter. Then it drops as you get to the (multiple speakers).

Similar to what you would see with back-to-school kind of businesses.

Okay. And then when you include both DBA and Knights into full year, do you have an estimate of what your Walmart exposure declines to or how much that would decline?

Haven't done the calculation.

Okay. But I am assuming there is none of that that goes through Walmart, DBA or Knights?

Well, Knights actually sells through Walmart -- a sizable piece of that goes through Walmart, yes.

That was one of the attractions is Knights has a good strong position in collegiate apparel in the mass channel and so that now allows us to cover all channels from college bookstores, mid-tier, as well as the mass channel.

Matt McClintock, Barclays.

Sorry if I missed this because I got on a little late, but I was just wondering if you could discuss your pricing strategies in Europe, opportunities to maybe optimize price over in that region, what your efforts are doing right now in the region and then longer term, is that optimizing price on existing product, or should we think about that more as an Innovate-to-Elevate opportunity? Thank you.

Sure, Matt. Let me answer a couple elements of that question. First of all, certainly when the euro declined in value, it had a transaction impact on all companies in Europe that were sourcing offshore as they sourced in US dollars and had that transaction impact. As we noted in the last call, the euro fell off very quickly at the end of the year and most of the pricing was set for 2015, but certainly as we look toward 2016, the best way to recover that transaction impact was through pricing and certainly we are in the early stages of developing those plans and we will be executing price increases in Europe for 2016. Certainly as we complete our integration and we work with the design teams together in Europe, we also intend to implement our Innovate-to-Elevate strategy as well and certainly that would help us optimize pricing as well.

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 closing comments.

I'd like to thank everyone for attending our call today and we look forward to speaking with you soon. Have a great night.

Thank you. 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.