漢佰 (HBI) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hanesbrands fourth-quarter 2016 earnings conference call. (Operator Instructions) As reminder, this conference is being recorded.

I would like to turn the floor over to T.C. Robillard, Chief Investor Relations Officer. Please go ahead.

Good day, everyone, and welcome to the Hanesbrands quarterly investor call and webcast. We are pleased to be here today to provide an update on our progress after the fourth quarter of 2016.

Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document, and the replay of this 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 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 2017 guidance represent continuing operations and exclude all acquisition and integration and other action-related charges. 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 Gerald Evans, our Chief Executive Officer, and Rick Moss, our Chief Financial Officer. For today's call, Gerald and Rick will provide some brief remarks and then we will open it up to your questions.

I will now turn the call over to Gerald.

Thank you, T.C. Hanesbrands delivered another year of strong results. Revenue increased 5%, earnings per share grew 11%, we generated over $600 million in cash flow from operations, completed over $1 billion of acquisitions, and returned nearly $550 million to shareholders through dividends and buybacks.

But 2016 wasn't without its challenges, particularly in the fourth quarter. Last year in the US, roughly 1,200 retail doors closed, several retailers filed for bankruptcy, and there was further inventory tightening as the retail industry continued to adjust to the disruption caused by the shift to online.

For the quarter, our revenue grew 12% and our EPS grew 20%. These are very strong results, but they were clearly below our expectations. We are not at all satisfied with that.

The reason for the shortfall was straightforward. While our domestic online revenue growth rate across all channels accelerated to 28% in the quarter, the current scale of our online business was not enough to offset the pressures in US brick-and-mortar.

Store traffic trends during the holiday came in below even our various expectations, and a large mass retailer cut replenishment orders in the key November and December periods. Both of these impacted our revenue and profit in the quarter.

Despite the headwinds and a challenging fourth quarter, we were still able to deliver record results for the full year through a combination of acquisitions, execution of our online growth strategy, synergies from prior deals, product innovation, and strong working capital management. Our results provide further proof that our multifaceted business model is designed to create significant long-term returns for our shareholders, irrespective of the overall end-market environment.

So as we look forward, we expect the overall retail environment in the US to remain challenging as the ongoing channel disruption drives additional store closings and tighter inventory management. That said, we believe we are well positioned to manage through these near-term challenges.

Our international business, which is expected to be roughly 30% of our revenue in 2017, continues to grow. We are aggressively growing our online business as we continue to consolidate the fragmented market share. And our multifaceted business model generates strong, consistent cash flow that drives a balanced, return-centric capital allocation strategy. All of this gives us confidence that we can deliver another year of solid growth, despite the challenging environment.

At the midpoint, our guidance calls for 8% revenue growth, 7% EPS growth, and cash flow from operations that is approaching $700 million. And our confidence is driven by four things. First, we have the wrap from last year's acquisitions in the first half as well as approximately $15 million of expected synergies from prior acquisitions.

Second, we will continue to aggressively follow the consumer. Over the past several years, we have reallocated resources to grow online across all channels, and it's working. Our online revenue growth accelerated in each quarter last year as our market shares expanded. Moreover, we consistently outpaced growth in the online apparel category.

Online revenue across all channels was 11% of our domestic sales in the quarter, and revenue from a large online pure play grew at a strong double-digit rate last year, making them our fifth-largest customer. As the online pace accelerates this year, we will continue to shift our internal resources so we are positioned to remain ahead of the growth curve. For example, we will broaden our assortments across all online channels and we'll continue to shift our media budget, with digital expected to represent over half of our total media spend in 2017.

A third source of our confidence is that we will build on the momentum of our core business fundamentals. Within innerwear, we will continue to push our focus on the core initiative in Basics. This initiative is working, as we gained market share last year, driven by our FreshIQ innovation. While still early, on a like-for-like basis, retail has experienced an uptick in point-of-sale trends with our FreshIQ products when compared to our prior offerings.

In Activewear, global Champion revenue growth accelerated, up 10% in the quarter, driven by Europe, Asia, and the US mass business. For 2017, activewear is well positioned to return to growth as we anniversary the sporting-goods bankruptcies, benefit from our global Champion growth initiatives, and expand distribution within our licensed sports and apparel business.

And fourth, we planned more conservatively within the bricks-and-mortar channels for 2017. The shift online is not only pressuring store traffic, but it is also reshaping traditional shopping patterns as store visits are becoming more concentrated around key promotion events. Therefore, we're going to be more targeted with our promotions and we are planning for tighter inventory management at retail.

Before I wrap up, let me touch briefly on our capital allocation strategy as it relates to 2017. Last week, we increased our dividend by 36%, reflecting confidence in our ability to consistently drive growth in earnings per share and cash flow from operations. Given the current dislocation in our stock price, you should also expect us to be buying back shares. And with respect to acquisitions, our focus in the early part of the year is on integrating the portfolio of acquisitions we completed last year.

So in summary, we delivered another year of record revenue, earnings per share, and cash flow from operations. While the continued evolution of the US consumer has created a challenging retail backdrop, we believe we are extremely well positioned to win in this environment.

We are broadly distributed, including online and internationally. We operate in heavily branded replenishment categories, where we hold the number one or number two brand. We're delivering successful innovation.

We own our supply chain, which provides us low-cost manufacturing and the flexibility to navigate a variety of economic and political environments. We generate a significant amount of cash flow. We employ a disciplined, return-centric approach to deploying all our cash, all of which positions us to deliver another year of strong returns for our shareholders.

With that, I'll turn the call over to Rick.

Thanks, Gerald. When we entered 2016, you may recall that we took a very cautious view of the overall US consumer environment, particularly the holiday period. Unfortunately, the environment proved to be more challenging than even our bearish assumptions.

While this drove the shortfall relative to our fourth-quarter expectations, we were still able to deliver solid growth in both the quarter and for the full year. For 2016, we grew revenue and earnings per share, expanded our operating margins, brought our core inventory back in line, significantly reduced acquisition- and integration-related expenses, and generated record levels of cash flow from operations.

Our ability to deliver solid results despite unexpected challenges highlights the health of our strategies as well as the power of our multifaceted business model. More importantly, these strategies along with our business model position us to grow revenue, EPS, and cash flow from operations once again in 2017, even in the face of a challenging retail environment.

Now let me walk you through some specifics for the quarter. Sales increased 12% over last year, and like many diversified global companies, we had various puts and takes across our multiple business lines. Acquisitions were once again a strong contributor, adding approximately $240 million of revenue in the quarter.

We delivered organic growth in several of our businesses, including online, Asia, Champion at mass, and Licensed Sports Apparel. This growth was partially offset by declines in our Basics business, Champion in the sports specialty channel, as well as the exit from our catalog business.

Looking at our segments, innerwear sales decreased 8% versus last year, driven by declines in Basics and Hosiery, while Intimates was flat in the quarter. Despite easy comps, additional shopping days, and more seasonal weather, traffic declines at bricks and mortar actually accelerated from the prior year during the holiday period and were below even our bearish expectations.

This created two headwinds that weighed heavily on our Basics business and accounted for the vast majority of the miss relative to our guidance. First, within the midtier and department store channels, the lower-than-expected traffic trends drove reduced point-of-sale, which resulted in fewer reorders.

Second, in the mass channel, we had a large retail aggressively manage their total store level inventory by cutting replenishment orders in the key November and December periods, which bought their Basics inventory to record low levels. This destocking alone represented roughly 600 basis points of headwind to Innerwear revenue growth in the quarter.

Having said that, our brands remain strong. For the full year, our basics revenue was essentially flat, which was better than the 2% decline in the overall category, as we gained share through our focus on the core initiative and the launch of our odor control innovation, FreshIQ. While innerwear operating margins remained strong at 22.5%, lower volume and the mix impact from lower Basics sales resulted in a 200-basis-point decline in the quarter versus last year.

Turning to our Activewear segment, revenue increased 3% over last year in the quarter. Total US Champion revenue growth accelerated, driven by the second straight quarter of double-digit growth in the mass channel.

Revenue from our Licensed Sports Apparel business increased double digits in the quarter, driven by our expansion into the high school channel and organic growth in the college bookstore channel. As expected, our operating margins rebounded from the third quarter as volume and product mix normalized. For the quarter, Activewear operating margins increased 90 basis points over last year to 16.8%.

Switching to our International segment, revenue increased 78% in the quarter as contributions from acquisitions and organic growth in Asia more than offset the decline from our strategic decision to exit certain unprofitable businesses in Europe. The operating margin increased approximately 370 basis points over last year to 14%, driven by our focus on more profitable revenue and synergies from Hanes Europe. In fact, this was Hanes Europe's second straight quarter with double-digit operating margins.

Touching briefly on margins, gross margin in the quarter increased 20 basis points over last year to 39.6%, as the positive mix from international acquisitions more than offset the volume impact from lower sales. Operating margins increased 90 basis points over last year to 15.9%, as the 130-basis-point improvement in our core operating margin more than offset the short-term dilution from recent acquisitions. The increase in our core operating margin was driven by synergies from prior acquisitions as well as SG&A cost controls.

Interest and other expense increased over last year due to higher debt balances in the quarter, while our tax rate declined as we generated lower profitability in the US. These, combined with strong revenue and operating profit growth, drove a 20% increase in earnings per share for the quarter.

Inventory in the quarter, adjusting for recent acquisitions, declined by roughly $132 million from last year as our actions to reduce inventory delivered their intended results. This, along with the increased profitability over last year, helped drive nearly $400 million in cash from operations in the quarter and brought full-year cash flow to over $600 million.

Now let me speak to our guidance, which calls for another year of growth in revenue, earnings per share, and cash flow from operations. Beginning with revenue, at the midpoint, our guidance range implies 8% growth for the year and includes approximately $410 million from acquisition wraps in the first half.

We expect continued strong double-digit growth in our online business as we expand our product offerings across all channels and continue to aggressively shift resources. And we are being prudent with respect to US bricks and mortar, where we expect additional pressure as retailers continue to prune stores and tighten inventory.

Therefore, on a segment level, we expect innerwear sales to be essentially flat for the year. In activewear, we expect modest growth as we overlap bankruptcies, continue our momentum in Champion and mass, and expand our Licensed Sports Apparel business.

And in our international segment, we expect solid double-digit growth as organic growth on a constant currency basis, combined with acquisition contributions, should more than offset FX headwinds.

We expect operating profit to be $935 million to $975 million, which includes roughly $25 million from acquisition contributions in the first half. At the midpoint, it implies roughly 50 basis points of margin decline due to the short-term dilution from lower-margin acquisitions. Over the next two to three years, as the synergies from Pacific Brands and Champion Europe begin to flow through, we expect meaningful improvement in our operating margins.

Our EPS guidance of $1.93 to $2.03 represents 7% growth at the midpoint and includes following assumptions: interest and other expenses of approximately $175 million; a tax rate that is roughly flat versus last year; and approximately $300 million of share repurchases. Finally, we expect cash flow from operations of $625 million to $725 million, with the growth driven mostly by increased profitability and lower cash-based acquisition and integration expenses.

So in summary, despite a challenging environment, we delivered solid results for the year. And we are extremely well positioned to grow revenue, earnings per share, and cash flow from operations once again in 2017. Our ability to drive consistent, strong returns to shareholders, irrespective of the end-market environment, is the direct result of our powerful, multifaceted business model.

Over the past four years, by using all the various levers of our business model, we've added $1.5 billion of revenue, nearly tripled earnings per share, generated roughly $2 billion in cash flow from operations, made approximately $2 billion in acquisitions, paid over $500 million in dividends, and bought back more than $700 million worth of stock. And it's this powerful business model that gives us confidence in our ability to continue to deliver strong shareholder returns in 2017 and beyond.

And with that, I'll turn the call back over to T.C.

Thanks, Rick. That concludes our prepared remarks. 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 the call back over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) Christian Buss, Credit Suisse.

Looks like it is been challenging to predict what the sales book is going to look like from your key partners. What are you doing to try and improve visibility to avoid the kind of challenges that you've seen in the last 18 months?

Let me take that question, and let me just sort of break down 2016 and really address your question that way. We had a strong year overall. If you look at our sales, they were up 5%, EPS was up 11%. And Q4, by most standards, was very strong revenue: up 12% and EPS up 20%.

But we did come in below our expectations in Q4. And really from that standpoint, US traffic was well below even the weak trends that we had anticipated coming off of last year's very warm period. And as those trends held, our retailers took the steps of curtailing their orders to control their inventory.

When they take steps like that mid-quarter, they really only cut off their replenishment businesses. And so that weighed particularly heavy on our basics business at that point in time. And generally, our accounts reduce their orders in line with their traffic and POS, while one large mass retailer took a more aggressive stance in rightsizing their inventory across the store and actually chose to forgo some of their additional holiday builds and with their inventory dropped to levels that we typically wouldn't see until mid to late January. In fact, that destocking along was 600 basis points of headwind to our innerwear business in Q4.

Now, while the order flow has normalized out of that one account in particular, as we look to 2017, and to address your question on how we are more aware of what's coming and like to have a better look at it, we've planned cautiously with our bricks-and-mortar accounts. We expect that the environment will remain challenging in the bricks and mortar, and early in the year, we anticipate some more store closings as well as some inventory pruning.

And that's why as you look at our organic guidance, you will see in the innerwear business that it's actually flat for the year. And the guidance, it is actually down in Q1 as we anticipate those store closings affecting that business.

But that's really the great thing about our multifaceted business is while we've planned that flat, we have got a lot of other levers to pull. And we're certainly going to continue to drive our online growth very hard. We are enjoying double-digit growth both in the US and we are also seeing it in our international markets. We hold leading shares and we are going to drive that very hard across the businesses.

Our activewear momentum is building, and as we come out of the overhang of the sporting-goods bankruptcies, we feel real solid about the organic growth we will get there.

And then third, we've diversified our business substantially, and our international business now represents 30% of our business. And between the organic growth we are seeing in our -- in the sections of that business, particularly in Asia, along with our acquisition wrap, we are going to generate a very strong results there as well as continue to harvest synergies.

And then finally, we're going to deliver record cash flow again that gives us confidence that we can continue to drive our capital allocation model and deliver these solid sales and EPS results for our customer. And so we're really planning it cautiously, but having these other levers to pull, irrespective of our end-market environment, makes us feel that we are well positioned to deliver another good year in 2017.

That's very helpful. Thank you very much and best of luck.

Jay Sole, Morgan Stanley.

My question is on the operating cash flow for 2016. You generated $605 million this year. The guidance was for $750 million to $800 million. Can you talk about where the difference was between those two numbers and how that played out in 4Q?

Yes. We were actually pretty well on plan as we got through the third quarter. It was really the sales miss in the fourth quarter and as a result not getting those collections that caused us to come up short on the cash flow. That was the key driver.

Okay. And then maybe just to talk about the shift from brick and mortar to online, can you give us maybe just a big picture roadmap of how -- at what point the channel shift gets into balance of your business. Where you stop seeing big declines in the brick-and-mortar channels and kind of offsetting with -- or almost offsetting with online growth, where both are pretty stable and can collectively deliver positive growth in innerwear consistently going forward.

We are in the midst of a transition. It's one that we've talked about for several years is that that consumer generally is increasingly shifting online. And we've focused heavily, began to focus heavily last year, our resources, shifting both people and our marketing resources.

We are seeing a rapid acceleration in our growth. Overall, online reached 8% of our US business last year, but it was up to 11% in Q4. And our growth rate actually went from about a midteens growth rate in Q1 up to a 28% growth rate in Q4, and we saw similar rates to that 28% around our international businesses.

And so we see it as an opportunity to continue to broaden our assortments and shift our resources across the various online channels. So working with our brick-and-mortar retailers as well as our own sites and certainly our pure players, and continue to drive that. And we think that over the next few years, you will see that go to a midteens rate.

When you get to that level and you are driving that kind of growth at that rate, it will really help balance out the pressures in the bricks-and-mortar level. And we believe in time our share can be higher online than it is in bricks and mortar, our market shares.

Susan Anderson, FBR.

Thanks for taking my question. I just want to follow-up really quick one the innerwear guidance. Assuming brick-and-mortar down, are you guys assuming it's down next year? And then that's offset by online and Amazon?

And then also on your inventory front, it looks like it's pretty clean, down excluding the acquisitions. Is there anywhere that you guys feel heavy that you are still going to have to clear through? And then I'm assuming that, given the replenishment issues, you are not going to have to take time out of production?

So let me talk about the inventory question first. Yes, we came out of the year with a really clean inventory position. I think we are very pleased to be where we were, especially given the softness of the quarter and the softness of retail. So we feel like we are in really good shape on the inventory front.

In terms of the innerwear business, basically what we are saying is that in the first quarter, we expect innerwear sales to be down as a result -- as that segment of the business continues to digest the announced store closings at retail and this inventory tightening that we've seen taking place. And so then we should see it normalize, the innerwear business normalize in Q2. And then, again, for the full year, it should be about flat.

Got it. And then just given the lower replenishment for this quarter and I guess maybe first quarter, that's not going to cause any production time taken out either, is it?

No. I think our manufacturing group did a great job of balancing the inventories as we came through the end of the year. And we are in good shape to run the supply chain through the year.

Okay, great. Good luck next quarter.

David Glick, Buckingham Research.

Couple quick questions. Rick, your tax rate has come down steadily over the last several years. How low can it go if current tax law doesn't change? And how do you see it? If it is going to go higher, how do you see that play out over time? And are you more concerned about changes in tax laws pertaining to transfer pricing or the border adjustment tax? And then I had a follow-up on cash flow.

Sure. Well, on the tax rate, we are seeing it flat this year. Dave, as you well know, it's a function of what percentage of profitability is coming from where in the system. And so we are looking at some similar dynamics in 2017 as we saw in 2016.

So we've always said that over time we expect the tax rate to go up and as profitability in the US over time continues to improve, and that's obviously in the context of the current tax code. So that's why we pegged it where it is for this year.

Let me pick up on that, David. Just from the standpoint of look, the US corporate tax reform has got many elements that are being discussed at this time and they are likely to evolve over 2017. And we are engaged in that process, working with our advisors and our industry groups and reps and we will stay involved in that throughout.

Specific to your question about border adjustability, there are elements such as border adjustability that are being discussed that would impact imports. And they would impact the entire apparel industry as well as US retailers, and would ultimately need to be offset by a price increase.

Now, we are advantaged in this situation because we own our own supply chain. And there is a substantial amount of US content that's in that supply chain and the production we do within our supply chain, while most of our apparel competitors and our retailers import. And it's predominantly imported content.

So as we begin to look at this, and certainly the proposals are still in development, but as we look at it relative to what it might mean in pricing, it's in no means in any similar size. It's much smaller than the cotton bubble that we worked through that we would be putting in place.

And as we look at it, what we saw during that cotton bubble was that brands in particular perform well in periods of rising prices. So we will stay involved in it, but we understand the shape of it. Once again, we view that our supply chain advantages us because it allows us flexibility in US content to respond.

Do you see how you saw product, i.e., multiple units in a package, as an advantage in terms of how you respond in that kind of environment? Whether you put five in a package instead of six or something like that? Is that how you think about the business?

No, we perceive it more that in a branded business that your brand can carry the required increase to offset any cost increase.

And then if I could follow up, Rick, on the cash flow from operations. So basically what you're saying is the shortfall in sales translate to higher inventory, which translated into the divergence in cash flow from operations versus your projection. Is that pretty much it?

No, actually, it affected us more on the accounts receivable side -- or the flow through accounts receivable. If you think about it, once we get -- with the turns we have an inventory, once we get into the fourth quarter, the key driver is really collecting sales because we have already, in essence, from a cash standpoint paid for all the expenses associated with those sales.

So with as quickly as our receivables turn, it becomes really very much a sales-driven quarter in terms of cash flow. Does that make sense?

Anna Andreeva, Oppenheimer.

Thanks for taking our question. I was hoping to follow-up on innerwear. We were not clear, but what is driving the recovery in this segment starting the second quarter? Are you guys expecting better replacement either in mass or department stores?

I think you mentioned in mass the large partner has stabilized now. And how much are the store closures alone expected to impact this category?

And then secondly, so inventories look clean, you have easy gross margin compares here in the first half. How should we think about gross margins for the year? And any color on the cadence first half versus back half?

Let me start with the question about the cadence of the innerwear business. The business does pick up as we overlap some of the store closings and so forth that we do anticipate being the heaviest in the first quarter. And then we overlap that as we go forward.

In addition, we will continue to push our innovations such as FreshIQ behind the business. And of course, with the double-digit growth rate that we are experiencing online, that also gives us some additional acceleration as we go down through the year.

Let me walk you through how we view the year unfolding from a cadence standpoint, and let me do it by business line. We've already talked about the innerwear business from a top-line standpoint being down for the reasons we talked about in Q1, normalizing in Q2. And that would then imply being up a little bit in the back half of the year to come back to flat for the full year.

With the TSA bankruptcy behind us now, we expect the Activewear business to be pretty consistently modestly up during the course of the year. We see in the DTC business, as you know, that has struggled a little bit because of our exit of our catalog business and a couple other things.

And so that's going to continue to be a headwind through the first two quarters, so we expect DTC sales to be down in the first half. But in the second half, you will see better how our online business is growing. And so you will see growth in the second half and should be basically flat for the full year, for DTC. So the growth in the second half offsetting the down in the first half.

In our international business, you are going to see growth in the first half from the acquisitions of Pac Brands and Champion Europe. And then you should, in the second half as we wrap those acquisitions, in the second half, you should see some organic growth in the international business.

Now it's going to be moderated, we think, by a strengthening dollar in the back half of the year. So we are thinking about $30 million to $40 million of FX impact, mostly in the back half of the year. And so that will take a little bit of a bite out of the organic growth from those businesses. But we still think that will be -- especially how we see the top line flowing out.

In terms of gross profit, our expectation is that it should be up year over year and generally should be up each quarter. Now, operating profit, if you look at the midpoint of our guidance, we expect to be down about 50 basis points. As I said in my prepared remarks, that's going to be a function of the impact of these lower-margin acquisitions, primarily in the first half of the year. So about 50 basis points at the midpoint for the full year.

Michael Binetti, UBS.

Gerald, can I just ask you quickly? Can you help us with a little more -- related to your comment earlier about M&A and that the first half would be more focused on integration? I'm assuming that what's behind that comment is that that's more the focus than looking for new acquisitions at this time. And maybe just any of your thinking on what you meant by that and how the first half of the year looks.

Yes, I'd be happy to do that, Michael. First of all, we're going to continue to follow our disciplined approach to returning capital to our shareholders. We got strong cash flow. And over time, that's been a mix through dividends, acquisitions, and share purchases.

And our focus over time has really been for that to be a balance. And we've increased our dividend, we've got -- by 36%. We've got confidence in our ability to consistently grow EPS and cash flow, and we indicated that certainly with the delivery of that dividend. We also see our stock is a value at this point in time. And so as we noted, we're planning to buy back stock during the year.

And then finally, acquisitions are still a very important part of our strategy going forward. And I want to be clear on that. We did make $1 billion in acquisitions, so in the first part of the year, we've got our hands full finalizing those integration plans.

But at the same time, as we've always said, we are out talking to people. We are assessing opportunities and we will let you know when the next one is ready to be discussed. But clearly, there will be more acquisitions in the future.

Okay. If I could for a minute, I know this has come up a couple times in Q&A. But I think what people are struggling with is the organic guidance here with -- I know you said your number five retailer is a large online play, but I have to guess at least half of your other 10 have some door closures coming this year that they haven't told us about it. And within those, the ones that have spoken, for example, Macy's, obviously a bellwethers, one that is on top of those door closures negative compares.

So I'm trying to get more comfortable with how we get to even the low end of your organic growth rate, given what you guys have baked into your forecast for -- we don't have official door closures, we don't have official negative comp guidance from a lot of the channel in the US yet. But I think it's fairly generally accepted that that's the direction we're going to head.

And then you mix that in with a mass retailer that you mentioned, and a couple times over the last year we've seen that retailers are perhaps willing to take their days inventory to lower places than they have been historically. Can you help us think about how you thought about that kind of a negative bias to the market as you planned out the year?

Let me take a crack at it. Again, I think it gets back to business by business. We've tried to be prudent in our approach to the bricks-and-mortar channel -- various channels in this upcoming year in our guidance. So I remind you that we do have confidence in our ability to continue to drive strong online growth.

And so we think that there's an opportunity there for us to offset -- we do understand that there are door closures coming this year and we've tried to factor that into our thought process on the innerwear business. The activewear business has good momentum right now, particularly in the Champion business and in the Licensed Sports Apparel businesses.

Those businesses are doing really well and again have some really good momentum. And again, the TSA bankruptcy is behind us. And so we feel really good about the ability of that business to continue to drive growth.

And in the international business, which is now 30% of our business, we are not only getting the acquisition piece, but with those acquisitions that we made last year are really more growth-oriented acquisitions, top-line growth-oriented acquisitions. We expect to see those businesses -- that result in international having a higher growth rate than our domestic businesses -- a higher organic growth rate than our domestic businesses.

So Michael, I hope that's helpful to kind of give you a sense of where we think that -- and thus, and you put all that together, we have a -- at the low end of our guidance, we are talking zero organic growth. For the top end, we're talking about 2% -- actually a little less than 2% organic growth. We think that given all those factors, that's a reasonable expectation.

Omar Saad, Evercore ISI.

Thanks for taking my question. Wanted to ask -- a lot of the shifts and channel disruptions and store closures and negative traffic and choppy traffic -- as it relates to the categories that are really important to you guys, how do you feel or do you feel consumer behavior is changing in terms of how they buy these categories?

Is there any evidence in terms of the basket sizes people buy in your categories when they are buying online directly from your website? Or what the basket sizes within -- and average price points and types of categories they're buying -- if they are buying from Amazon or in your traditional wholesale channels?

Just trying to understand. It feels like there's something bigger here going on in terms of the shift around the consumer behavior in these categories. And maybe there is some evidence of that in some of those things like basket sizes.

When we look at the per capita consumption that we tend to look at in our categories, we don't see any indication there that there's a change in consumption from that standpoint. Certainly, the disruption of retail stores closing and adjusting inventory changes the cycle of some of those shipments and it's a little harder from quarter to quarter. We get some volatility in there.

What we've seen actually in some of the online accounts is that we can actually sell larger packages. And they will consume bigger packages in some of our package goods than we can sell at retail. So we don't have a clear indication that there's a basket size effect.

We do see that the holiday periods are changing in focus in the key promotion periods and the consumers are buying closer to that promotion event. If you take a holiday period that we just went through, for example, there didn't seem to be nearly that build that you would normally get running up at retail. It was just sort of flat right up to the week before Christmas.

Okay. And then quickly on FreshIQ, it doesn't feel like there may be as much buzz as we had been hoping for. But we don't see the numbers, and you guys have your expectations. Maybe help us understand where that is and what's going right with it and where there's room for improvement around FreshIQ.

Sure. Basics revenue was flat for the year, and while the overall basics category was down 2%, and that was really driven -- our strength was driven by our focus on the core initiative. And the key component of that was our FreshIQ innovation that we drove.

Now, you'll probably remember that it was a flow-in. and so there was a mixed inventory out there as we went into the fourth quarter, but we did have a few stores where we actually completely swapped out the inventories as well as a couple of online sites. And there, we can make a like-for-like comparison and we see a nice lift from one to the other that shows us that -- what the research told us is what happening, that consumers prefer it and they buy it.

So we will continue to build it. This is one that we expected to build over time, and as you know, we get behind innovation platforms and we drive them for 5 to 10 years. And this is one we will be heavily behind us we get into 2017. And a lot of that, as we've put in our comments, we will do in a digital world with our media as we focus more on driving online as well.

Steven Marotta, CL King & Associates.

Gerald, just reiterating your question -- your answer from the first question, you mentioned that the destocking experience in the mass channel in the fourth quarter abated in first quarter and order patterns have normalized. Is that accurate?

Yes. What we saw is that it normalized with the pace that we had seen in a year-prior period, yes.

Okay. Follow-up question is why is Champion Europe and Hanes Australasia, why are those synergies beginning in 2018? Why not sooner?

Well, a couple of things. One is that the nature of those two businesses are such that most of the synergies that are coming are on the supply chain side. And it will just take longer to get to. There are not as many SG&A synergies.

For example, Hanes Australia, the Pac Brands acquisition -- very lean, well-run company where there really isn't much of a need to cut a lot of overhead there. And it's a long way away, and it's very difficult to manage it from here. Just as an example

So there are not a lot of SG&A -- there are not as many SG&A synergies there as we have seen in other acquisitions. And the cadence of cost of sales synergies, supply chain synergies, has always been a couple of years after the acquisition. And that's probably going to hold true for both of those acquisitions.

Ike Boruchow, Wells Fargo.

This is Nancy Hilliker on for Ike Boruchow. We are wondering, are you able to give us any color in terms of AUC, just based on cotton and oil and labor? Any color you can give us there. And then also, is the focus for this year on building up FreshIQ or is there more innovation in the pipeline for this year?

On cotton, we are pretty well hedged already for 2017, so we got good visibility to that. So we are in good shape there. Cotton is now less than 6% of our cost of sales. We are seeing the normal types of labor increases around the world. And so we've planned all of that into our guidance, so nothing out of the ordinary, though.

And the follow up to the last half of your question on FreshIQ is our primary Basics focus for the year. We will support that with media as well as promotions throughout the year. And this year, as we've spoke about in our comments, we will shift more and more of that media to the digital world.

What we have seen with consumers is just as they are increasingly buying online, they go online to get their information as well. And we want to make sure we are engaging with the consumer where they are.

Simeon Siegel, Nomura Instinet.

As e-comm just grows as a percentage of the mix, how do you adjust for that typically add-on nature of an in-store purchase?

What we're doing with the online as well is we are working to identify the ways to drive that same incremental purchase that you get in your peak periods, and we do that through several ways. One is, as I commented earlier, in our large pack programs, we have actually found we can sell even larger packs online.

The other is that the consumers do come online more heavily at certain times of the year, such as holiday. And to make sure you are prepared to capture this consumers online just as you would at retail with the appropriate advertisements as well as offers to make sure that you capture that purchase. Very similar to how we would do it in bricks and mortar.

John Kernan, Cowen and Company.

This is David Buckley on for John Kernan. Thanks for taking our questions. How does the margin profile of your e-commerce business compare to brick and mortar? And then just a follow-up question: with the sporting-goods bankruptcies behind us moving into 2017, how much operating margin recovery is achievable for activewear next year?

Well, in terms of margins on e-commerce versus bricks and mortar, they're very similar for us, given the way we manage it. So we see -- we don't see -- we are pretty indifferent as to where the consumer wants to buy something, whether they want to buy it in the store or online.

In terms of the second half of your question on operating margins in activewear, we actually saw a nice recovery and a normalization of the margins in activewear in the fourth quarter. And so I would expect to see margin expansion in the activewear business next year as they continue to -- operating profit margin expansion next year as they continue to grow that business and leverage their cost base.

Carla Casella, JPMorgan.

One housekeeping on the pension. What do you expect the pension contribution to be next year?

We are not required to make any contributions next year because of our funding status. And we're not planning on making any contributions.

Okay. And then did you give the magnitude of the catalog and other -- the other businesses that you exited for either this quarter or for what it would have been for -- the magnitude for this year?

You are asking about the relatively small direct-to-consumer business we have. Let me address what we did, and I'll let Rick comment on the financial impact of that.

From the standpoint of what we've done, it's a relatively small business and we've proactively shifted that business to what we view as a growth strategy, where we are exiting a legacy catalog business and focusing in on our online piece. That catalog business had been declining for some period of time and had really been masking our double-digit growth in our online site. And certainly as we focus on online, we want that to be very apparent.

At the same time, we have a group of outlet stores in that business. And we had been selling some non-core product there. We exited that noncore product to make room for products we make, particularly activewear, which had been underrepresented there. And given the growth of that category, we think that's very important to pick that up.

So as you can see, we have taken the steps that began last year of winding down the sales impact. And that has been a headwind and it will be a headwind through the first half of this year to focus that business on a growth strategy that will take it to a different level more aligned with where the consumer trends are moving over time. And so it will be a first-half headwind to our sales, which will then pick up in the second half of the year.

In terms of the businesses that we exited, there were really two that I'd call your attention to. One was, as you pointed out, the catalog business and some ancillary things in the DTC world. That was about $18 million. And then we did discontinue -- or we exited some unprofitable businesses in Europe that cost us about $14 million or $15 million in Europe.

And that concludes our question-and-answer session for today. I would like to turn the conference back over to T.C. Robillard for any closing comments.

We'd like to thank everyone for attending the 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 great day.