漢佰 (HBI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HanesBrands' fourth-quarter 2015 earnings 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 TC Robillard, Chief Investor Relations Officer. Please go ahead, sir.

Good day, everyone, and welcome to the HanesBrands' quarterly investor conference call webcast. We are pleased to be here today to provide an update on our progress after the fourth quarter of 2015. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the replay of the call can be found in the investor section of our Hanes.com website.

On the call today, we may make forward-looking statements 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 and may be found on our website as well as in our news releases. 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 2016 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.

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 focus on a few big-picture themes, Gerald will focus on key highlights within our business operations and Rick will focus on certain financial aspects of our results.

I will now turn the call over to Rich.

Thank you, TC. 2015 was another record year for HanesBrands. We grew revenue 8%, operating profit 13% and earnings per share 17%. Once again, magnifying our great growth rates as you walk down the P&L, and we intend to do it again in 2016.

While these are great results, make no mistake, they are not up to the high standards to which we hold ourselves at HanesBrands. We did not fully deliver on our Q4 commitments. While Q4 was impacted by the well-publicized retail traffic declines, frankly, we struggled a bit on the sales line all last year. So it is time to refine our approach and regain our sales momentum. We have a variety of focused initiatives designed to reenergize sales. These initiatives, which Gerald will highlight, give us confidence in our ability to firmly deliver our 2016 revenue target.

We also expect another year of double-digit earnings growth, growing EPS 11% to 15%. Importantly, we can achieve the low end of this range just with our expected acquisition synergies, our historical level of SG&A leverage and the projected contribution from share repurchases.

In terms of cash flow, we have several action plans in place that put us on track to generate up to $850 million this year, which would be the highest level in our history. To put this in perspective, this is the amount of cumulative cash flow we generated in the first three years as a public Company.

Turning to acquisitions, both DBA, now renamed Hanes Europe, and Knights Apparel continue to perform extremely well. Operating results were above plan, the integrations are progressing on schedule and we are on target to deliver $40 million in synergies this year. And, as I mentioned last quarter, we have turned our attention to 2016 acquisitions.

A number of variables obviously need to fall into place, but with the integration of Knights Apparel and Hanes Europe now in full swing, we have the bandwidth to take on additional acquisitions.

So in closing, we are refocusing on driving our top line, and we are well-positioned for another year of double-digit EPS growth, with upside provided by potential future acquisitions.

And, with that, I will turn the call over to Gerald.

Thanks, Rich. We have a lot of things working very well in our business such as our innovations, our supply chain efficiencies, our margin enhancement strategies and our acquisitions. This is evidenced by three consecutive years of double-digit growth in both operating profit and earnings per share.

However, the fourth quarter did not turn out as we had expected. Retail traffic declined at high single-digit rates in November and the first three weeks of December, driven by one of the warmest holidays on record. The prolonged traffic decline weighed on point-of-sale trends, even in our innerwear products, as there were fewer people in the stores. This caused retailers to pull back on their orders, which, in turn, impacted our shipments for the quarter. The impact was across all channels, and, relative to our expectations, it was split between our innerwear and activewear segments. Relative to last year, the lion's share of the decline was in activewear, as innerwear sales were down only 2% in the quarter.

As retail traffic improved in the last two weeks of December and into January, so did our point-of-sale trends. Looking at January, our basics POS is up low single digits month to date, while Champion in the sporting goods, mid-tier and department store channels is up low double digits.

While weather affected Q4 and our POS is rebounding from that, our core business in 2015 was essentially flat for the year, and I am not at all satisfied with that level of performance. So we are being proactive by putting in place several focused initiatives to drive improved revenue growth in 2016 and beyond. And this is something I am committed to deliver. Let me take you through why I am so confident that we can achieve our sales guidance for 2016, which calls for growth of 1% on the low end of the range and 3% on the high end.

To reach the low end of our range, we only need about $70 million of incremental sales, which we should be able to hit with the $50 million from acquisition contributions and the absence of last year's $50 million to $60 million of innerwear headwinds from the retail inventory destocking and our intimates brand transition, partially offset by approximately $40 million in currency headwinds.

From there, the execution of our various sales initiatives, as well as a more normalized Q4, represents another $100 million to $150 million in revenue opportunity that could put us at or above the high end of our range.

There are 4 specific sales initiatives that I have the organization focused on delivering. One, continue to drive Innovate-to-Elevate by expanding space of our successful innovation platforms such as X-Temp. Two, apply Innovate-to-Elevate to our core products by driving innovation and making the right investments to deliver better volume growth. Three, continue to accelerate growth online and build upon our leading market share positions across all of our brands. And, four, deliver product enhancements in Champion across all channels.

With my focus on reenergizing sales growth, I want to emphasize that these efforts and investments will still come with the same focus on profitability and cash flow generation. And you can see that in our guidance, which calls for roughly 100 basis points of operating margin expansion, driven by our acquisition synergies as well as our continued focus on effectively managing our SG&A.

We also intend to deliver a record level of cash flow this year. Rick will walk you through the various drivers of our cash flow, but let me talk to the largest contributor, inventory. To bring our inventory level down in a cost-efficient manner, we will need to make small adjustments to our manufacturing production schedule, which we will do by taking a little time out, internalizing additional production, and by drawing down our raw materials and work in process.

So in closing, our brand is strong, our innovation is working, we are expanding our margins and we are generating significant synergies from acquisitions. Add to this the heavy focus I have on executing our sales initiatives, and I feel really good about our ability to deliver another year of double-digit earnings growth in 2016.

I will now turn the call over to Rick.

Thanks, Gerald. Last quarter, I spoke about how we create strong shareholder returns through the combination of our core business strategies, our acquisition strategies and our cash deployment strategies. This is the underlying formula that drives the magnification of our growth rate from sales to operating profit and, again, to earnings per share. 2015 was the third year in a row we have delivered on magnifying our growth rate down the P&L, and we believe we are able to -- we believe we are well-positioned to do it again in 2016.

Before I turn to the results, I would like to point everyone to our FAQ document, which provides additional details on our 2015 results as well as our 2016 guidance. For 2015, the 8% increase in revenue was driven by acquisitions, as our core business ended flat with the sales decline in Q4. Operating profit increased 13%, or nearly $100 million, due to the addition of roughly $50 million from acquisitions and a 150-basis-point increase in our core operating margin as we benefited from efficiency gains in our supply chain, synergies from acquisitions and ongoing cost controls.

Earnings per share grew 17%, driven by the growth in operating profit, a slightly lower tax rate and the contribution from share repurchases. And cash flow from operations was $227 million. The weaker-than-expected cash flow was the result of an inventory buildup due to the sales shortfall coming very late in the year. With no markdown risk and specific action plans to reduce inventory, we believe the impact is temporary.

Turning to our 2016 guidance, we expect full-year sales to be $5.8 billion to $5.9 billion, which represents a 1% to 3% increase over last year. As Gerald highlighted, we have a variety of focused initiatives that give us confidence in our ability to deliver on our revenue target.

We expect operating profit to be $920 million to $950 million, which implies a 90- to 110-basis-point increase in our operating profit margin and includes roughly $40 million of acquisition synergies.

Our EPS guidance of $1.85 to $1.91 represents 11% to 15% growth over last year and includes the following assumptions. Interest and other expense is expected to be $115 million to $120 million. Our tax rate is expected to be 10% to 11%. And in terms of share repurchases, we expect to spend a similar amount to last year.

Finally, we expect cash flow from operations to be approximately $750 million to $850 million. Using the midpoint of our guidance ranges, this represents an increase of roughly $575 million from last year, which is being driven by four main factors.

First, more than $300 million from improved working capital driven by reduced inventory. Second, roughly $140 million from the lower expected cash XA charges, absent any new acquisitions. Third, roughly $60 million from expected growth in adjusted net income. And, fourth, a $60 million reduction in our pension contribution.

With over $300 million of cash on our balance sheet at year-end, a net debt to EBITDA ratio of about 2.3 times, as well as our expected cash generation of 2016, we are extremely well-positioned to continue to execute on our capital allocation strategy. And our strategy is simple -- use our cash flow to fund capital investments in our dividend, use debt for acquisitions and use excess free cash flow to buy back stock.

So in summary, we have generated significant shareholder value over the past several years. And, with our focus on driving sales growth, along with our continued execution on expanding our margins, we are well-positioned to deliver another year of double-digit EPS growth. Add to that about $800 million in expected cash flow as well as upside from potential acquisitions, and we feel really good about 2016.

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

Thanks, Rick. That concludes our prepared remarks. 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) Eric Tracy, Brean Capital.

Rich -- and, I guess, Gerald, for you -- if we could just dig a little bit deeper on the 4Q revs, both from an environment and consumer perspective, walk us through a little bit more -- how you discern between weather versus just outright weaker traffic or something more structural going on that gives you comfort that we should expect that acceleration into 2016.

Yes. Let me talk a little bit about Q4, and then I will also let Gerald talk about the initiatives going into 2016. You go back to October, it was cold; things were looking really good. November, December came; it was the third warmest November and December since 1895, and December was actually the warmest. And you could actually see the correlation as temperature got above normal, retail traffic was dropped, and then we saw it impact our POS. So I think a lot of it was clearly impacted by that.

How much is overall consumer spending? You can't really tell. But, clearly, I think it was a very unusual holiday period.

That said, you expect it to be in our cold-weather activewear areas. It was. That was down about 12% in the quarter. But it was so strong, it actually impacted innerwear, which, when you take out the 53rd week, was actually down 2% in the quarter.

The good thing is, we started to see it rebound in December going into January, and I will turn it over to Gerald to talk a little bit more about initiative to drive results in 2016.

As we look forward, we really have a focused set of initiatives that we have built on proven tactics to better drive consistent top line over time. And really, it focuses in two areas. First, we are going to keep doing what is working, and that clearly is Innovate-Two-Elevate is working. Our innovation platforms like X-Temp and our elevated product in Champion are all driving sales increases, and we are gaining additional space that we'll have going in place for 2016.

There are two areas where we will refine our strategies a bit. One is in the area of accelerating our growth online. The online channel continues to grow very rapidly. And apparel, now 18% of apparel sales are all online. We are well-positioned there. Our brands hold leading shares already. And our sales, while they are -- 7% of our sales are done online today, they are also growing at a double-digit rate. So we -- and, actually, one of our largest customers now -- our eighth largest customer is a large pure player that sells online, is growing at approximately 70% rate.

So we are going to invest more resources to drive this business faster, both people -- we are dedicating more people resources -- as well as marketing investment to maximize our position in this channel.

Secondly, we are rebalancing our focus a bit on driving our core volume, and that really is in two areas. If we look at our core business, we have stayed behind our core innovations such as tagless for a number of years in our underwear business, for example. And it is time to drive new innovation there, so you will see innovation coming across our core basics business late in 2016 and into 2017.

And, secondly, you will see us rebalancing our media to focus more balance across both the core and our innovation platforms over time.

We think these are good strategies that take the best of what we are doing to moderately refine our strategy against basics and gives us confidence that we are well-positioned to deliver on our guidance for 2016.

And I guess my follow-up would be just in terms of the cash flow, you have got working cap expected to go down pretty significantly. Just walk through the inventory drawdown, the potential for downtime within manufacturing, how should that impact. And then, ultimately, on the stepped-up cash flow for next year, Rich, maybe just, again, highlight the acquisition environment and the pipeline of things that you guys are potentially looking at. Thanks.

Let me start with the inventory drawdown portion of it. Let me just say, first of all, that our inventory levels are high, but the quality is good, as Rick noted. And so we have good quality, but we would like to see those levels lower, and we will take actions to draw that down through the year.

And we will do that through a few ways. First, we always look at where we can as first cutting off outsource production. And second is we will take a week or so of timeout in our internal production. And, finally, we will draw down our work in process and raw materials. And Rick referred to some of that last year. We had built up some of that for the internalization of DB apparel, and we will continue to draw that down over the years as we pull our inventories back in line.

Yes, Eric, let me just say this. We have been through the inventory with a fine-tooth comb, so we can say with a high degree of confidence there is no markdown risk here. Very confident of that. There will be some costs early in the year associated with these actions that Gerald has talked about. We have built that into our guidance.

I think there was a third question in there, Eric, that I will ask because you went from inventory all the way to acquisitions. But I will go ahead and discuss that. Acquisitions is working great for us. There is no ifs, ands or buts. We are doing well with Maidenform. We are still seeing a little bit of the last synergies in 2016. Knights Apparel and Hanes Europe are working extremely well; both beat their plans in 2015. We are in full swing to reap acquisition synergy benefits, and so we feel really good about it.

And we now have the bandwidth to start looking for our next set of acquisitions, and it is part of our strategy and will be part of our strategy. And we feel really good about where we are.

Omar Saad, Evercore ISI.

Tough quarter. Can you talk about -- did you guys see anything at the retail level in terms of the sell-through in the innerwear category? It is one of the lower numbers you posted even when you back out all the non-comparable items and FX and acquisitions. Between the intimate category versus the basics, men's versus women's, is there anything you can glean there to help understand what is going on? Or is it really just such a broad-based, kind of across-the-board slowdown in the revenue line?

Well, I think when you back out a 53rd week, the innerwear category in general was down about 2% year on year and, clearly, was tied to the falloff in traffic. And we saw it fall off late in December as traffic caught up with those replenishment trends.

I think from the standpoint of looking forward, we saw the POS begin to rebuild as traffic built late in the holiday and into January. We have seen our basics POS, for example, rise into low single digits.

I would say that, as you look through the data, you can see that in the bra business, for example, we came off a strong third quarter. Our fourth quarter, when you back out the 53rd week, that business was actually flat in the quarter in spite of the traffic. So it gives us strong confidence in our brand consolidation strategy, and certainly optimistic it will drive that forward.

And, Omar, let me talk about channel a little bit. Because this was really broad-based. We saw it across all channels of trade. I will say, however, it was probably a little bit more concentrated in mid-tier and department stores, which, if you just think of what they are offering, is probably going to be a little bit more weather-driven than some of the mass. But it was pretty darn strong across the board, the impact of traffic to clients.

Does Gerald's comment around intimates -- is that saying something about the basics on the men's side of it? And maybe the Innovate-to-Elevate there is a little bit long in the tooth and ready for some new stuff to come in? Or are you comfortable where you are at?

No. I think it is just the opposite. If you remember in the first half of the year, we were struggling a little bit in intimates because we were going through the brand transition. We said a lot of that was behind us at the sort of late summer. You saw really good, strong third-quarter results. And then, bras in particular, when you back out the 53rd week, we actually had good, strong momentum. And, Gerald, I actually think it was up slightly in the quarter when I back out the 53rd week.

Right.

So I think just tactically, we were just better set up there because of some of the things that had happened earlier in the year. I wouldn't read into it negatively about basics.

Susan Anderson, FBR.

Good job in a tough environment. (technical difficulty) follow up on the DBA acquisition. It sounds like the integration pretty much is done now. How should we think about the flow-through of synergies this year? Is it going to be more back-end loaded, pretty equal throughout the year or how should we think about that?

Yes. We actually said the integration is really now just in full swing, so it is not done. I think we are well on our way. And so you will start to see synergies build this year going into 2017 and even into 2018. So there is a lot of tailwinds to come from that.

Specifically about this year, Rick, do you want to talk about the overall synergies?

Sure. We expect about $40 million in synergies for the year. The bulk of it will be coming from Knights Apparel -- or from DBA and Knights Apparel. And it will be a little bit back-end loaded or even towards SG&A, as is often the case. The initial flow of synergies comes more in SG&A than the cost of sales. Synergies come later.

Got it. Okay. And then just one follow-up on the activewear category, maybe just digging a little bit deeper. It sounds like you guys feel like it is pretty much weather issues out there. I guess investors have been trying to figure out is this category slowing, just given a lot of excess that we have seen out there across a number of brands. Maybe if you could talk about how you feel about the category in general going forward this year.

Yes. We still feel bullish about the category. Certainly, the Champion brand ended up mid-single digits in the sports specialty and the mid-tier department store channels. For the year, it was running well above that through Q3, and then it fell off as the weather-related pressures hit our replenishment in that business.

But as we look forward in our bookings and so forth into spring, we are very optimistic about where that business is going. Expect it to be in the 10%-plus growth range. And there is early sounds of recovery in the POS and the mass channel as well. So we are very optimistic about the category going forward.

Christian Buss, Credit Suisse.

I was wondering if you could talk a little bit about how you're thinking about acquisitions. What types of acquisitions are you looking at? What regions and what categories would you want to enter?

Yes. I know you are pretty familiar with our four criteria, but, for those that might not be, I will just quickly restate them. Obviously, in our core categories, complementary revenue growth opportunities; justifiable on the synergies, mainly supply chain, but also SG&A, and quickly accretive.

After that, we don't have necessarily a prioritization. Anything that falls through that screen would be a viable candidate. So it would either be innerwear or activewear, both domestic and international. And I think, over time, you will see us have opportunities along all of those dimensions -- both innerwear, activewear, domestic and international. In terms of the near term, we are always talking to people and working on things. And as soon as we get a deal signed, we will let you all know.

Thank you very much. As a follow-up, could you talk a little bit about e-commerce and how you're thinking about the e-commerce part of your business as it develops, given the challenges we are seeing at retail, and from a traffic standpoint, from an underlying sell-through standpoint?

Yes. Let me give you a couple of big picture of things, and I will turn it over to Gerald to talk about some more of the specifics and reiterate some of his comments from earlier.

When you talk about Q4 and you talk about online, I think a lot of people have also asked, are some of the retail traffic declines driven by a channel shift from bricks and mortar, retailers to online. Holiday was tough for everyone. And, in fact, some of our large Internet pure-play businesses -- the growth rates, while they were still strong, were cut by two-thirds in the fourth quarter. So everybody was feeling the impacts of the soft holiday. So while that shift may be going on, I think we just need to keep that in perspective.

But online here, it is growing. It is growing with our traditional retailers. It is growing through our own efforts, and we are also working with pure plays. And so it clearly needs to be a big area of focus. And, Gerald, do you want to highlight a couple of specific things that you are doing?

Yes. I think, first of all, we are really well-positioned. Our brands are well-positioned in the channel itself. And we are working very carefully with -- across bricks and mortar as well as pure plays in our own sites to drive the business across all those channels, leveraging our position, our brands and our marketing investments. And, as I referenced, certainly with the major pure player, we have seen significant growth. And we expect our overall growth as we work across all these players to grow at a double-digit rate going forward to really drive our business.

Jay Sole, Morgan Stanley.

Question on the operating margin guidance for 2016. I think in the FAQ document it says the midpoint of the 2016 guidance implies a 100-basis-point increase in operating profit margin, with more coming from SG&A than gross margin. Can you talk about, within gross margin, obviously, cotton, oil should be benefits. Maybe FX in some Asian currencies should be a help. It sounds like one offset is the inventory reduction. But is there any other offset there? It sounds like the inventory is relatively clean, so you are not anticipating big markdowns. Could you just talk about some more of the levers and drivers of gross margin in 2016?

Sure. I think you're going to see a lot of the same sorts of things that you have seen in the past. You have got manufacturing cost savings that will flow through. And, again, some of that will be offset somewhat by the costs associated with the inventory reduction.

And so we think that the operating -- the gross profit margin improvement this year will be a little more modest than what we have seen in recent years. But, remember, the recent years have been distorted a little bit by things like DBA's P&L structure, which has much higher gross profit margins and much higher SG&A. That is now kind of -- we have now seen that flow through our P&L, and it is now part of who we are. So that's, we think, basically the same drivers; just a little more modest growth than what we have seen.

Yes. And I just want to say that -- and thank you for focusing on the operating margin improvement first. Because I just think that is just a fabulous result. And while it may come a little differently spread in 2016 than it has historically, our business model continues to perform extremely well. And we are thrilled with that kind of margin improvement.

500 basis points of operating profit margin improvements since 2012 is not bad.

You can tell we're proud. (laughter)

Definitely. A 100-basis-point improvement in this environment is terrific. Maybe just to follow up on that, can you talk about the Company's ability to react quickly to changes, say, in the R&D and different aspects of the cost structure that could allow you to maybe go back and find some savings there?

Well, in terms of our exposure to R&D, we -- one of the benefits of making the vast majority of what we sell is that we are not nearly as dependent on the R&D as a lot of apparel companies who source heavily from that part of the world. And so, to be honest with you, it is really not that big of a driver. Plus what we do source from China, we do in US dollars. So it has less of an impact on us than on a lot of other apparel companies.

Taposh Bari, Goldman Sachs.

This is Chad Sutherland on for Taposh. First question, just hoping to dig a little deeper on the quarter-to-date commentary. When you talk about basics and Champion both being up, is that relatively broad-based? Just any detail you would care to provide on that.

I think your question is about the POS trends. We have seen come in -- as the traffic lifted, come in through the holiday week into January, we did see a positive lift in POS. And that is what we are seeing today. It is early days, but it is certainly favorable and follows the traffic.

Okay. That makes sense. And then any additional detail -- I saw on the FAQ document the acquisition in Japan related to the Champion brand. Can you talk maybe a little bit about that? And then is it impossible to get a breakdown of what other markets maybe there are opportunities around Champion, either where -- I guess what markets you are present in in Asia?

Yes. In Japan, we had a licensee for a long period of time. We actually did some of the Champion sales ourselves, but it was with a licensee. And we started working with them to actually reacquire the rights, and it was -- actually, the deal was done last year. And it actually starts to flow into 2016.

It is relatively small. It is a good size for that market. We feel really good about it. I think in total, that business, Gerald, won't it be close to $100 million, I think, in 2016? So we feel good about them continuing to drive Hanes and Champion in that market. We have rights for Champion throughout the Americas and Asia and we can start to use that, plugging into the design in the products that we do for the US and continue to expand it in Japan. We have got a business down in Australia that is also leveraging that same product line.

And so that is our plan, is to continue to drive growth in Champion, not only domestically but internationally as well.

Michael Binetti, UBS.

Given the amount of volatility we are dealing with in our earnings models across the sector right now, can I just ask you to get a little better sense of the cadence of the year on the top line and the operating margins in the guidance you gave, maybe just a little bit of help on what we should be thinking about in the first quarter to get us off on the right foot to start the year here?

Sure. A couple of things, if you recall from our comments that you probably picked up, Knights Apparel will be incremental to us in the first quarter. That is about $20 million of sales. And then we acquired them in April, so that will -- they will be anniversaried at that point.

We mentioned the $30 million in Japan. That is -- that will come a little later in the year in terms of top line.

The synergies, as we mentioned, are about $40 million; will be mostly in the back half of the year. And then the $40 million of FX headwinds, I would expect to be heavily weighted in the first half and a lot in the first quarter, actually. And then we talked about some costs associated with inventory management. And that is going to be, again, heavily weighted in the first half of the year and a lot in the first quarter.

Okay. And then if I could just ask a follow-up. As I look at different revenue scenarios for all the companies in the group here, it is pretty easy to figure out, for you guys in particular, the incremental margins as revenues come in above plan since you guys are really good at controlling the costs and even a strong macro. But if the revenues do come in closer to flat, how should we think about the point of fixed versus floating costs in your ability to deliver on the EPS line if the macro works against us? Any kind of quantitative support you could offer there?

Let me just talk about that conceptually. In the very short term, it is obviously a little harder overreact. Actually, I was -- given where sales ended up, I was thrilled with the fact that actually our operating margin didn't de-lever in Q4. So I think our ability to manage it quickly was pretty darn good in that quarter.

If it is over a longer period of time, and I am inferring the way you are asking it, if you started to see a much broader-based, soft consumer environment that is going to last, our ability to (multiple speakers) is substantially greater.

I would also remind you that, in any given quarter, we have a lot of volatility, as you have now seen. But in places like innerwear, over the period of a year or so, those types of things will start to work themselves out. In fact, in both 2008 and 2009, men's underwear had a lot of volatile quarters, ended up slightly up in both of those years.

But over a period of a year or more, our ability to react is pretty high. The great thing about our business is we have got a lot of things that drive profitability. We have got acquisition synergies. We are independent of that -- the consumer environment. We have strong cash flow that we can use, so we have talked about the pay dividends and buy back stock. We have got other acquisitions to do.

And I am very comfortable, as Gerald took you through the sales, what we need to just get to to the low end of our sales range, a lot of it is just the acquisition wrap that we've got, plus the absence of one-time things from 2015. And so we feel really good about our 2016 numbers to be able to deliver them.

David Glick, Buckingham Research.

Just a follow-up question on those POS trends, and then I have a follow-up on e-commerce. I am assuming that retailers are in a position to order -- to re-order from you from a replenishment perspective based on the POS trends that they are seeing, as opposed to tightening their receipt plans. Also, you are up against some big destocking in the first quarter, if I recall. So I just want to make sure we can make that logical conclusion that shipment trends are correlating with the POS trends you are seeing at retail.

Certainly from the standpoint of our replenishment innerwear goods, they will pick up with replenishment. As replenishment -- as POS goes, our replenishment will follow.

In the case of cold-weather goods, if they haven't been taken at this point, those sales are not going to occur now until next year when we go to the cold-weather period of next year. But on the replenishable piece of the business in innerwear, in particular, you do see the POS picks up the replenishment.

So you are not -- you are obviously not counting on those cold-weather goods in your plan to be shipped.

No. No.

Okay.

In fact, let me actually restate -- and Gerald talked about it. When you look at the low end of our guidance, he explicitly said that we are not assuming in that end any lift from fourth quarter next year. It is basically the same kind of results that you would have seen in 2015. It is not until you start to go to the high end of our range that we start to actually expect that we would begin to see Q4 next year start to normalize. That is an important point. Thanks for highlighting it.

Okay. Thanks. And then, just a follow-up on e-commerce. How do you think about investing in your own e-commerce site as a transactional site versus more an informational site, as opposed to really partnering up with your omni-channel wholesale customers as well? Obviously, there is the big e-tailer, which you have had a lot of success with Amazon. How do you look at investing in your resources across the various alternatives you have, particularly when it pertains to Amazon and it pertains to your own site?

Well, first of all, on our own site, what we really believe is it is a true convergence now of where the consumer learns and where the consumer shops. And they may come to your site and learn, and they may go to retail and buy. They may come to your site and learn, and go to another site and buy. So we view our site as a very important informational source as well as a selling source, just as we view our presentation at retailers is another way to provide information. Or representing our brands on Amazon is also another way that consumers go and learn, and then they may also go to stores. So it truly is a convergence of the consumer across channels from a communication and a purchasing.

Yes, David, I will share with you an anecdotal piece of data that Gerald and his group put together. And they were tracking where people where doing were searches for different products. And actually, when they took this snapshot, 15% of the searches that were being done for some of our products, people were actually doing while they were in a store. And it shows that everything is now totally interconnected. You could be in a Kohl's or a Walmart or whatever and searching the Internet to find out more information to make a purchase decision. So I think it is going to all blend and merge, and we need to be good at all of those things.

John Kernan, Cowen and Company.

I just wanted to go back to the inventory. Obviously, up pretty significantly here. You talked about minimum markdown risk, but there is also a lot of inventory in the channel from other brands across apparel. Can you just walk us through why you are so confident there is minimal markdown risk and what the timing looks like in terms of this inventory drawing down?

Yes. Let me break the inventory down in two buckets for you, and I think it will clearly answer your question. In the case of innerwear, the same inventory is used all year long. So as POS comes back up, then the orders come behind it and it just continues to ship.

In the case of cold-weather goods, ours are fairly basic cold-weather goods. So those that didn't sell yesterday, are actually goods that we -- or didn't sell in the current season, we can actually carry over and sell again next year. So we don't have any risk in those as well. It is basic fleece and things like that that will carry over and sell next year.

Okay. And if I can just shift back to the revenue question. The guidance, I think, assumes $50 million in revenue from acquisition. Can you talk to what you are looking at in terms of acquisitions for 2016 geographically, category-wise, and the confidence you have in consummating a deal this year?

Yes. The $50 million that you refer to are acquisitions that are already completed. So it is simply $20 million of wrap of Knights Apparel, plus the $30 million additional from reacquiring the rights to Champion Europe. Nothing in our guidance says anything about a future acquisition, and I think that is important. We are now turning our attention to begin looking at acquisitions in 2016 and beyond, but we don't have anything like that built into our guidance.

Actually, just to correct, that was Champion Japan, the $30 million.

Oh, thank you. I'm sorry. Did I -- I was thinking of Hanes Europe and Champion Japan. Thank you.

And then, just on valuations, it seems like there has been a lots of valuation contracting out there, certainly in the public market. So are valuations looking more appealing at this point than they were maybe 12 months ago?

I think it is fair to say that, over time, if you go back and look at our Gear for Sports acquisition and Knights Apparel, fairly similar businesses. And we have probably paid about a turn and a half higher for Knights Apparel than we would have back when we bought Gear for Sports in 2010. How that may change over time remains to be seen.

What we really focus on is what we can do with the acquisition and how much value we can create. And we have been thrilled. All of these acquisitions that we have had, the after-tax cash returns are easily in the teens. And we are convinced there is deals out there that we can do over time to continue to drive great value creation for our shareholders.

Ike Boruchow, Wells Fargo.

Just a quick one. I guess, Rich, just real quick. You are talking about the acquisition of Japan. Is there anything that inhibits you from reacquiring the rights to Champion Europe, and is that something that does intrigue you? I think it is a small business.

And then, Gerald, just to go back to that eighth largest customer that you referenced, I am just curious how that business works relative to your other brick-and-mortar partners, meaning how big do you ultimately think that could grow to. Is the profitability different, better or worse? And how does the pricing work there? I am assuming there is no real difference that would create any disparities, but just curious some color on that whole dynamic.

I am not going to talk about any one specific acquisition, and nobody should infer that we are focused on any one thing in particular. Obviously, people do know that Champion Europe was a business that was spun out of Sara Lee or sold out of Sara Lee, many, many years ago. And it is obviously a candidate that could one day make sense. Yet, you need a lot of things to fall in place for two people to be able to come together and decide to have a marriage.

And so, while it is something that is out there, as you said, it is a relatively small business and it will continue to be on our list. What we are focused on is, there is a lot of ways for us to create value with acquisitions. There is a lot of different types of companies that fit our four criteria. And as we continue to work with people and we get a deal done, we make sure we will announce it.

And as to the second part of the question on the online business, as I said a minute ago, we go out to business online really three ways -- through our brick-and-mortar retailers; we have online strategy to our own sites; as well as through pure plays. And generally, we work with all of them. We bring ideas and business and sell similar brands and similar structures to all of them in a wholesale model, whether they are bricks and mortar, online or pure plays. And we drive those businesses accordingly. And our goal is to be well-represented in all of them and grow across those businesses.

Anna Andreeva, Oppenheimer.

I guess a follow-up on the gross margin guidance for 2016 of being a little more moderate than historically. Should we expect the opportunity more back-half-driven, given the sales initiative and the near-term, I guess, inventory overhang?

And then, secondly, looking at profitability in direct channel, it came down pretty significantly in the quarter and for the year. And we know outlet traffic has been difficult. Are you guys reevaluating your commitment to this channel at all? Is there an opportunity to perhaps close some stores as leases come due? Thanks.

Yes. Anna, with respect to your first question, yes, I think you can infer from what we have said that gross margins will be stronger in the second half of the year than in the first as a result of the various pieces that we have talked about.

In terms of DTC, you have got to remember, the 53rd week actually impacts that business disproportionately to some of the other segments. Right?

Right. There was about $8 million in the fourth quarter (multiple speakers).

On sales. On sales alone. So when you look at that, you have got to factor that in.

In terms of more, though, to your strategic question, which is the piece of that is the outlet store business, how do we think of it because of the other piece was in there is our direct-to-consumer online business, which is obviously one that will continue to build and grow that piece. The outlet business for us has always been there. We are in it -- most of the malls around the country. It is a business that on the margin is a good business for us to be in. It is never going to be a growth driver. In some cases, as rents in some places have gone up, it doesn't make sense for us to be there. And if the lease comes up, we will go ahead and exit from that particular mall. We look at everything on a four-wall profitability basis. And, as long as the thing is making money, we will continue to keep the store. And if it is not, we will let it wind down. But on the flip side, I want to reinforce the online piece of that is clearly a growth vehicle.

Joan Payson, Barclays.

You have talked a good amount about the online growth going forward. But as we think about 2016 and even beyond that and some of the other channels, whether it is mass or department stores or sporting goods stores, where do you see the most opportunity or what are the growth profiles for each of those channels?

Well, we see opportunity, actually, in all the channels. We don't view online as the only opportunity. Certainly, as we look at sporting goods and so forth, there is still quite a bit of distribution to get with our Champion brand. We have expanded quite a bit, and we still see a number of doors and a number of segments within those doors that we don't have distribution. So we see substantial opportunity there as well as in the mid-tier channel for the Champion brand.

We look across innerwear, as I mentioned in my prepared comments, we continue to expand our innovation platforms like X-Temp. We feel good that, with our intimates brand transition behind us, we have got growth potential there as well. So we are not giving up on any channel. We see significant opportunity for us in all the channels.

Thanks. And then, just in 2015, what did X-Temp and Comfort Blend ultimately represent as a percentage of men's basics and activewear, even? And what could that mix reach in 2016, and are you doing anything differently to get there?

It was roughly 15% and -- in 2015, the combined of all those together. And we expect it to grow as we continue to expand space, and that will be balanced some as we dial up our innovation in the core. You may see that balance out. But there is still ample growth there. And we are taking some of those technologies and then pushing them across other elements, including Champion now as well.

Kate McShane, Citi Research.

It has been speculated that there could be a bankruptcy in the sporting goods arena over the next six to 12 months. And I know one of your brands has some exposure to that. How do you incorporate that risk into your guidance, and how do you mitigate some of the inventory risk if that were to happen?

Well, we monitor all of our customers' credit profiles very carefully and gear our relationships with them accordingly. I think the one you are specifically referring to potentially having the issue at some point, we manage our position with them very well. If something like that were to happen, it would really not have a material impact on our financials.

Okay. And then my second question is unrelated, more to do about the European market. Just wondering, now that you have had DBApparel in your ownership for a while, just what you have learned about the European market? And what opportunity is there in that market for the rest of your portfolio of brands?

Well, I think we have certainly learned that we made a great acquisition with the one we bought. We have a leadership position in a number of countries, and we have potential to build across a number of countries with a very strong management team to do that for us.

The apparel business in general is fragmented in Europe. The continent itself is fragmented in many countries, and so there is certainly, over time, more opportunities to look across for broader acquisitions as well as build our own, and we are very bullish on Europe right now as a future growth -- area of future growth.

Jim Duffy, Stifel.

Rick, a couple questions for you on the cash flow. Just eyeballing it, the spread between your actual cash flow and the initial guidance is more than the increase in inventory on a year-to-year basis. Were there other surprise factors that worked against the cash flow during the year? And then, looking out to 2016, I am curious the seasonality of the cash flow for the year. Can you pull some of that earlier in the year? Or, help me think through that on a quarterly basis.

Sure. I think, in terms of the -- 2015, really the main driver of the cash flow shortfall in 2015 really was the inventory, when you look at the numbers that almost matched up to the -- to what our most recent guidance in 2015 was. It was a sales shortfall, but I think we continue to have production that, while it was something we just weren't able to react in time because of the sales shortfall coming so late in the year.

As for 2016, we normally see our cash flow very heavily weighted towards the back end of the year. I think with Gerald and his team on the inventory adjustment programs and initiatives that they have got, I think you will see that moderate some. It's not going to -- you're still going to see the -- most of the cash flow in the back half of the year. But I don't think you'll see quite a big as peak in 2016 as you saw in 2015.

That is helpful. Thank you.

Michael Kawamoto, DA Davidson.

It is Michael on for Andrew Burns. Thanks for taking my question. I was wondering if you have seen any changes in how Walmart is operating its basic apparel business. I know they outlined quite a few things on their analyst day in November. And I was wondering if you have seen any changes there, positive or negative.

Across our businesses, we haven't really seen, with any of our customers, any significant changes in how we do business. We still have very strong relationships and very strong brand presence -- representation with all of them.

Steve Marotta, CL King and Associates.

Gerald, I have a question for you. And please forgive me if you are more specific as a redundancy of this question. You mentioned that the point-of-sale trends in late December and through January improved. Did they improve to positive or just less negative?

Yes. In our basics business, they improved to low-single-digit positive. And the same in Champion; they were double-digit positive.

Thank you very much. You did say that, and I wanted to verify it. Thank you. That's perfect.

Carla Casella, JPMorgan.

This is (inaudible) on for Carla. We had a quick question about your bonds. We see that your bonds are callable now at 103.188, and it steps down to 102 then this year. Are there any -- do you have any thoughts on any refinancing or coming back to the high-yield market?

Well, we are always looking at what the economic trade-offs are in refinancing versus leaving them out there. I will say that when you are looking at $50 million of cash to refinance the bonds at 3%-plus, we have to evaluate whether there is not a better place for that $50 million cash. And so -- but we are constantly looking at that. And as it steps down again in December of this year, we will be keeping a good close eye on it.

That concludes our question-and-answer session for today. I would like to turn the conference back for any closing 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.