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Edited Transcript of HBI earnings conference call or presentation 2-May-19 12:30pm GMT

Q1 2019 HanesBrands Inc Earnings Conference Call

WINSTON-SALEM May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of HanesBrands Inc earnings conference call or presentation Thursday, May 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry A. Hytinen

Hanesbrands Inc. - CFO

* Gerald W. Evans

Hanesbrands Inc. - CEO

* Thomas C. Robillard

Hanesbrands Inc. - VP, IR

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Conference Call Participants

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* Carla Casella

JP Morgan Chase & Co, Research Division - MD & Senior Analyst

* David Swartz

Morningstar Inc., Research Division - Equity Analyst

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* Jared B. Orr

Cowen and Company, LLC, Research Division - Associate

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Luke Chamberlain Hatton

B. Riley FBR, Inc., Research Division - Associate

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Simeon Avram Siegel

Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst

* Tiffany Ann Kanaga

Deutsche Bank AG, Research Division - Research Associate

* Tracy Jill Kogan

Citigroup Inc, Research Division - VP

* Matthew Gulmi

Wells Fargo Securities - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the HanesBrands First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. T.C. Robillard, Vice President, Investor Relations. Sir, please go ahead.

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Thomas C. Robillard, Hanesbrands Inc. - VP, IR [2]

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Good day, everyone, and welcome to the HanesBrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2019. 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 investors 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 in 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 2019 guidance exclude all acquisition, integration and other action-related 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 Gerald Evans, our Chief Executive Officer; and Barry Hytinen, our Chief Financial Officer.

For today's call, Gerald and Barry will provide some brief remarks, and then we'll open it up to your questions.

I will now turn the call over to Gerald.

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Gerald W. Evans, Hanesbrands Inc. - CEO [3]

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Thank you, T.C. We had a very strong quarter. Our business momentum continued to build as our first quarter results exceeded expectations for revenue, operating profit, earnings per share and operating cash flow. Our strong start to the year puts us firmly on pace to achieve our full year outlook, and we remain on track to deliver on the goals we laid out at last year's Investor Day.

For the quarter, organic constant currency revenue increased 10% over the last year while reported revenue grew 8%. Our growth was broad-based across businesses and geographies, a clear indication that our diversification strategy and growth-related investments are delivering their intended results.

On an organic constant currency basis, International sales were up over 18%. Activewear revenue increased 17%. Consumer-directed revenue, which we define as our branded stores and all online channels, was up 16%. And global Champion growth, excluding C9, accelerated to 75%.

Looking further at the quarter's organic constant currency performance, in each region of our global Innerwear business, we delivered sales and operating profit that were above or in line with our forecast.

International Innerwear sales were up over last year with growth in Asia, Australia and the Americas more than offsetting the expected decline in Europe.

We are encouraged by the performance of our U.S. Innerwear business in the quarter. While our revenue was down compared to last year, we were pleased that both sales and operating profit were above our expectations. The upside was driven in part by a better-than-expected net benefit from pricing.

We also saw continued strong performance from our innovation platforms, including Comfort Flex Fit and Hanes and Cool Comfort in Maidenform. In addition, Hanes displaced a private label sock program at a national value retail. This reinforces the view that brands remain the number one driver of consumer purchase intent in our categories.

We're committed to returning our U.S. Innerwear business to long-term growth with specific actions in 2019 that include increased marketing investments, particularly within Intimates, as well as the launch of additional innovations.

Touching on Champion. We continued to experience strong consumer demand for the brand around the world. In the quarter, excluding C9, we saw double-digit growth across our wholesale and direct-to-consumer channels in each of our main geographies. We're also seeing strong consumer engagement with the brand in Australia as we leverage our in-country operations to broaden Champion's distribution in that market.

The success of Champion over the past several years is a result of our highly coordinated global strategy to elevate the brand after it was reunited in 2016. Our broad strategy integrates design globally. We're optimizing our supply chain and distribution operations from improved efficiency and service. The brand is engaging directly with consumers, particularly millennials, across various digital platforms with both regional and global campaigns.

And our strategy involves a detailed segmentation plan to drive differentiation between channels. This plan allows us to expand our distribution without overextending the brand. In wholesale, we're working with our retail partners to offer the right mix of product to their specific customer base. And within our direct-to-consumer platform, we're continuing our online efforts while developing a network of branded stores, particularly in Asia. We believe Champion has a long runway for growth, and we remain ahead of pace on our 2022 sales goal of $2 billion.

At our Investor Day last year, we spoke about our efforts over the past several years to strengthen our business model by diversifying our revenue base and honing our operations to fully leverage our global scale, all with a focus on delivering more consistent organic growth and unlocking full cash flow potential. We are seeing the benefits from our efforts reflected in our results as well as in our 2019 outlook.

We have grown our organic constant currency revenue for 7 straight quarters, and we expect organic growth to continue as we increase our brand-related investments.

We're leveraging our global scale, and we're streamlining our supply chain to further lower cost and increase our speed to market. This should generate margin expansion this year even with our increased investments to drive future growth. We're also on track to accelerate operating cash flow growth this year as our outlook reflects 17% growth at the midpoint.

And as we generate higher levels of cash flow, we believe we're well positioned to accelerate value creation to our shareholders over the next several years.

And with that, I'll turn the call over to Barry.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [4]

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Thanks, Gerald. Overall, we delivered strong first quarter results as we exceeded our expectations across all of our key metrics, including sales, operating profit, earnings per share and cash flow.

For the quarter, sales were $1.59 billion, an increase of $117 million over last year. Adjusted operating profit increased 2% over last year to $169 million. Adjusted and GAAP earnings per share were $0.27 and $0.22, respectively. And cash flow from operations was a use of $194 million.

With that summary, let's turn to the details of the quarter's results.

Sales increased 8% over last year, including $18 million from acquisition contributions and a $46 million headwind from foreign exchange. With the relatively stronger U.S. dollar, currency was a greater headwind as compared to our guidance. Organic constant currency sales were strong in the quarter, up 10% over last year.

Adjusted gross margin of 40.2% increased 10 basis points over prior year in line with our outlook. The increase was driven by improved gross margin in our U.S. Activewear and Innerwear segments as well as the nonorganic contribution for Bras N Things. Partially offsetting this was the impact from the stronger U.S. dollar.

Adjusted operating profit in the quarter was $169 million, which included $6 million of currency headwind as compared to last year. Versus the midpoint of our guidance, this was $7 million higher on a reported basis and $9 million higher on a constant currency basis.

Adjusted operating margin of 10.7% reflected our planned investments to support future growth initiatives and increase in variable compensation accruals as well as an unexpected bad debt charge of $4 million for a single customer in the printwear channel. Absent the bad debt charge, adjusted operating margin would have been 10.9% and earnings per share would have been about a penny higher.

For the quarter, acquisition and other related charges of $21 million were essentially in line with our guidance, as was our tax rate of 14%. Adjusted earnings per share increased 4% from $0.26 to $0.27 while GAAP earnings per share of $0.22 was consistent with last year.

Now let me take you through our segment performance.

U.S. Innerwear sales were down 3% compared to last year while operating margin increased 130 basis points to 22%. Basics revenue increased 1.5%, our second straight quarter of low single-digit growth. Intimates sales declined 12% of the quarter in line with our expectation. Bra sales were lower, as planned, while our shapewear revenue growth for the third consecutive quarter. Shapewear's growth was driven by continued positive consumer reception to our new product designs and cool comfort innovation.

U.S. Activewear's performance was very strong in the quarter with sales up 17% and profit up 14% over last year. Excluding C9, Champion Activewear sales increased more than 80%. The growth was driven by strong comps and space expansions at existing accounts, new distribution including the sporting goods channel as well as growth in our consumer directed channels.

Champion's growth more than offset the expected declines in our remaining Activewear businesses, including C9.

Activewear's operating margin declined 30 basis points to 10.8%. We incurred higher levels of expediting costs in order to keep up with the strong Champion demand. We also further increased our investments to support growth.

In our international segment, sales increased 13% or $76 million. This included a nonorganic contribution of $18 million from Bras N Things and a $46 million headwind from the effects of foreign exchange rates. On an organic constant currency basis, sales increased 18% or $104 million compared to last year. We grew across all of our international regions, Europe, Asia, Australia and the Americas, and exceeded our expectations in both our Innerwear and Activewear businesses during the quarter.

International's operating margin increased 80 basis points over last year to 14.3%. This marks the third consecutive quarter in which international's operating margin was above the corporate average as we are benefiting from volume-driven leverage and acquisition synergies.

Turning to cash flow and the balance sheet.

Consistent with our normal seasonality, cash flow from operations was a use in the quarter. Though, we used less cash than planned, thanks to higher net income and a stronger working capital performance. For the quarter, our cash cycle improved by 5 days as compared to last year. Our leverage at the end of the quarter was 3.5x, down meaningfully from last year's 3.9x. We remain on track to bring our leverage down to 2.9x by the end of the year.

And now turning to guidance.

We reiterated our full year 2019 guidance, so I'll point you to our press release and FAQ document for more details. I would like to share a couple of points to characterize our full year outlook.

We're pleased with our strong first quarter results and the momentum we're seeing in the business. That said, it's early in the year, and we remain cautious with respect to our outlook, including the U.S. retail environment and the strengthening U.S. dollar. Our full year guidance now includes currency headwind of $115 million in revenue and $17 million in operating profit, which is higher than our previous outlook by $55 million and $10 million, respectively. In effect, this incremental FX headwind has been fully offset by the $9 million of outperformance in our first quarter operating profit.

We also issued second quarter guidance, which at the midpoint, implies total sales growth of approximately 2% and constant currency sales growth of approximately 4%. Our guidance reflects nearly $40 million of currency headwind in the second quarter, which is approximately $15 million higher than our prior outlook. I'll note that reported and organic sales are the same this quarter as we anniversaried our Bras N Things acquisition last quarter.

With respect to our segments, the midpoint of our second quarter revenue guidance assumes a 2% decline in our U.S. Innerwear segment. This is unchanged from our prior outlook and reflects our continued cautious stance as it relates to door closings in the mid-tier and department store channels.

In U.S. Activewear, the midpoint of our second quarter guidance assumes revenue growth of approximately 11%. This outlook reflects strong double-digit growth in Champion, excluding C9, and also reflects a mid-single-digit decline in the rest of our Activewear segment.

In our international segment, the midpoint of our guidance assumes reported sales growth approaching 1% and constant currency sales growth of approximately 7.5%. Our constant currency outlook for the quarter and the remainder of the year is unchanged from our prior outlook. And as we said last quarter, this may prove to be conservative given the strong trends we're seeing in Champion.

Our second quarter operating profit range is $238 million to $248 million. Our guidance reflects the incremental currency headwinds I mentioned earlier as well as an acceleration within the year of our growth-related investments, including brand support for Champion and U.S. Intimates. I'll note that our full year expectation of a $25 million increase in growth-related investments over last year remains unchanged.

We expect interest and other expense of approximately $56 million and a tax rate of approximately 14%.

Our second quarter guidance assumes diluted shares outstanding of slightly more than 365 million and approximately $15 million of acquisition, integration and supply chain-related charges. Our full year outlook for $55 million of charges is unchanged.

Therefore, at the midpoint, our second quarter adjusted net income guidance is approximately $161 million, and our adjusted and GAAP earnings per share are $0.44 and $0.41, respectively.

So in closing, we had a strong first quarter. Our diversification efforts are working and our business momentum continues to build. We're on pace to achieve our full year outlook, and we remain on track to generate higher levels of operating cash flow.

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

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Thomas C. Robillard, Hanesbrands Inc. - VP, IR [5]

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Thanks, Barry. That concludes our prepared remarks. We'll now begin taking your questions, and we'll continue as time allows. I'll turn the call back over to the operator to begin the question-and-answer session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Omar Saad with Evercore ISI.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [2]

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I really just wanted to follow up on Champion. The ex-mass number is a pretty significant acceleration. I mean the brand has obviously got tremendous demand globally. And you guys are doing, from what we could tell, a really nice job segmenting the products, layering in new products. If you could talk about, especially in the context of C9 business going away, holistically where you see this brand going. Are there any plans for a mass channel kind of segmented brand piece? And then where do you see the kind of higher end of the brand, how big can that business be given where it's current strength is on a global basis?

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Gerald W. Evans, Hanesbrands Inc. - CEO [3]

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Thanks, Omar, for the question. This is Gerald. First of all, I'd like to just comment, we're very proud of the quarter. We think we really had a strong quarter and exceeded our expectations from a revenue, operating profit, and earnings per share basis. And from an operating cash flow, we're ahead of plan and certainly well on track to get back within our leverage range.

Our diversification and brand investment strategy is really showing through. It was broad-based growth. It wasn't just a Champion event. And we saw it across our International business, both in Innerwear as well as our Activewear business. And our consumer-direct business continues to grow, and we're also very pleased that our U.S. Innerwear business performed better than our expectations in the quarter.

Now certainly to your question, Champion also had a very strong quarter, up 75%, excluding C9, on a constant currency basis. We're delighted with this growth. We're delighted what the management team is doing with the brand, and it was broad-based growth. It was across regions. It was double digit in both wholesale and consumer, and we're really seeing the benefit of our activities. We're segmenting the business and it's driving additional growth opportunities where we are. And it's opening up additional growth opportunities and new customers as we commented in the sporting goods channel, for example, is now growing nicely for us as well. And we're seeing on a global basis not only in the markets we're in but we see expansion opportunities in Asia, for example, and other European countries.

So we see a lot of road ahead to build this business, and we're investing in the business as well. We continue to drive our digital campaigns. In our 100th anniversary, we're driving our global campaign to connect with that millennial consumer. We feel really good about the momentum. We note we continue to believe we'll grow at a 30% rate this year and continue to drive a high teens growth rate in the second half in spite of overlap and some really strong comps from last year.

So we're well ahead of pace on our $2 billion goal for 2022 at this point in time. And so where we see our self now is that we have the opportunity to continue to deliver that goal first but we're beginning to lay internal goals to take us beyond that $2 billion goal in the years ahead. We've got a lot of momentum and a lot of room to run here.

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Operator [4]

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Our next question comes from the line of Susan Anderson with B. Riley FBR.

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Luke Chamberlain Hatton, B. Riley FBR, Inc., Research Division - Associate [5]

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This is Luke Hatton on for Susan. Nice job on the quarter. Can you dig into the details around the Innerwear beat versus your original guidance and then also how you're thinking about the next steps in the Innerwear revitalization initiative sort of for the rest of the year?

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Gerald W. Evans, Hanesbrands Inc. - CEO [6]

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Sure. Let me take that, and I'll let Barry comment on the backside on the elements side of it. But let me just say first, we're delighted with the Innerwear performance in the quarter. It was better than our expectations from both an operating profit and a sales standpoint. And there were a lot of encouraging signs in the quarter. Our price increases went in place, and we saw better-than-expected flow-through from those price increases in the quarter. Our Basics business was up for a second consecutive quarter at a low single-digit rate, and we're now putting our expanded space in place, including the sock space that we commented in our prepared comments.

Our Intimates business also performed to expectations in the quarter for the second quarter in a row, and we're seeing real traction out of our early initiatives to revitalize that business and that was in our shapewear business where we've seen now 3 quarters in a row of solid growth behind our cooling innovation.

So we feel good about where we were in the quarter and we've got a lot coming for the balance of the year. We're ramping up our investments with particular focus on the Intimates business. We've got a really strong back-to-school program plan for our Basics business, and we've got a number of innovations coming across both our Basics business as well as our bra and shapewear business.

So we feel good about where we're going with this business. We feel that we're heading in the right direction. And we expect we're well on pace, we think, to return it to consistent growth over time.

Barry, do you want to comment on the details of the quarter?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [7]

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I think the only thing I would add as it relates specifically on Innerwear as we go forward for the second quarter, we're planning it down, as I mentioned it in my prepared remarks, down 2%. That's totally unchanged from our prior outlook. And it's just us remaining prudent as it relates to the retail environment. We feel good, as Gerald was mentioning, about how things play out, Basics being up and Intimates being in line and strong growth in shapewear. So we feel good about how Innerwear performed and appreciate the question. Thank you.

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Operator [8]

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Our next question comes from the line of Laurent Vasilescu with Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [9]

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Barry, on the last call, I think you called out that the U.S. Champion outside mass should grow at a high 20 percentage rate for FY '19. I think based on the up guidance for total U.S. Activewear of up 4% for the year, should we assume U.S. Champion outside of mass grows closer to 40% for the year? Maybe we'll talk a little bit about the cadence by quarter, and then I have a follow-up question on C9, if I may.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [10]

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Okay. A few thoughts there, Laurent. Thanks for the question. We certainly are seeing or saw a very strong outperformance as compared to even our guidance for Champion around the world in the first quarter. And if I take that up a level first, I would say our global Champion sales outlook now, excluding C9, would be around $1.8 billion in constant currency. And that's kind of a low 30s percent growth rate, which is up from our prior outlook of high 20s, and really just reflects the fact that we outperformed in the first quarter.

We obviously see a really long runway for growth in Champion globally. And as Gerald mentioned, we're running ahead of our goals. As it relates to within U.S. Activewear, I would say it does imply an improvement in terms of the rate of growth for the full year. But once again, all we've done, Laurent, is roll forward the improvement in our first quarter performance. So we have Champion, excluding C9, up on a percentage basis in the low 30s range versus our prior guidance of 20s, as I mentioned. And that represents about $200 million of growth within U.S. Activewear segment, reflecting both the better performance in the first quarter. And as I mentioned last quarter, we would expect the growth rate to naturally taper as we go through the year as we go through larger comps. And certainly, we would still expect double-digit growth in all quarters. And if you think about it, I think the back half expectations that we've got there, I'll just reiterate what I said last time, I think could prove conservative because frankly the business is just doing great and the team is doing a phenomenal job with Champion.

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Operator [11]

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Our next question comes from the line of John Kernan with Cowen.

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Jared B. Orr, Cowen and Company, LLC, Research Division - Associate [12]

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This is Jared Orr on for John. I was wondering if you could talk a little bit about the other U.S. Activewear that's not in the Champion piece of business? I believe you said it had to be down mid-single digits for the second quarter. How do you expect that to progress throughout the year? And what was kind of driving that decline in Q2?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [13]

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Okay. Sure. This is Barry. Thank you, Jared. That's another good question. If you look at the second quarter with respect to U.S. Activewear, maybe I'll just go through the whole thing for you, we've got it growing about 11% in our guidance. C9 in Activewear is expected to decline kind of mid- to low single digits. If we call that 4%, that's about $4 million. It would be about $86 million of revenue. Champion, excluding C9, I just mentioned, but in terms of the specifics on the second quarter, we would say a strong double-digit rate probably in the 40-plus percent range for the quarter and that would equate to over $55 million worth of growth. And then the rest of U.S. Activewear is expected to decline mid- to high single digits rate, which would represent a decline of about $10 million in the quarter.

And as we talked about before, that's the continuation of a long-term plan to migrate to higher-margin products. And that's one of the main drivers of seeing gross margin expansion in our Activewear business, both in the most recent quarter and as we go through the year. So we feel very good about the way the Activewear business is trending. And I'll just note that all of those expectations I gave for the second quarter are essentially unchanged from what we gave in the first quarter.

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Operator [14]

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Our next question comes from the line of Jay Sole with UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [15]

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Barry, I just want to follow up on SG&A. SG&A dollars in the quarter maybe a little bit higher than was expected going back to the guidance in February. And then I think that for 2Q, you're calling out a forward acceleration within the year from the second half, approximately $5 million of growth related to investments. I'm assuming that's SG&A. Can you just talk about exactly -- give a little bit more color, you touched on it but more about what you're investing in and what kind of return you're expecting on investment and where we should see it?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [16]

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Okay. Thanks for the question. And I'll take the first part of that, and maybe I'll let Gerald speak some to the specifics on how we're investing. In the first quarter, you're right, we did have some incremental SG&A as compared to the original guide and makes the performance I think that much clearer as it relates to how strong the margin performance has been. In specific, there's just a couple of 3 things that I'd probably call out for you, Jay. In Activewear, we did spend about $1 million more in brand support than we initially anticipated. So we were kind of $6.5 million, $7 million of brand support where I think we're planning $5 million, $6 million in the initial guide. And then we also had about $1 million for expediting cost because frankly the Champion business is growing so fast that we needed to expedite some to keep up with demand and maintain service levels.

And then as we called out in the corporate line, we had about $4 million of bad debt for that one specific customer in the printwear business that went bankrupt, and we charged that fully off. And then we also have some incremental variable compensation accruals, which would be about the same amount. I guess I should note that we stopped shipping to that customer that we took a bad debt charge in the fourth quarter. So there were no sales to the account in the quarter or in our prior guidance.

And maybe I would -- as it relates to rolling forward, for the full year on corporate cost, I'd probably use the first quarter level, excluding the 2 items I just mentioned, as kind of a run rate and obviously corporate cost can ebb and flow some quarter-to-quarter but that would get you kind of full year in line with where we're guiding.

In the second quarter, you're right, I called out that we are going to accelerate some of the brand investment spend. Recall, on the last call, we indicated we would spend about $25 million incremental year-on-year to support the growth of our brands and that's in things like media, marketing, distribution, et cetera, to really support the fuel of the growth of not just Champion but also our U.S. Intimates business and some of our Innerwear brands around the world. And at that time, we said we probably plan for that proportionately quarterly through the year.

We're seeing very strong ROI on those investments and exhibit would be the outperformance in sales. And so we've chosen to bring about $5 million of that into the second quarter from the back half. So we're not increasing the level for the full year, just moving it in the year. And the vast majority of that incremental $5 million that will occur in the second quarter will be in the U.S. Activewear segment. And Gerald, do you want to...

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Gerald W. Evans, Hanesbrands Inc. - CEO [17]

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Yes. Just to build up on that from the standpoint of where we're spending the investment, both in the quarter and over the year. From the standpoint of the pull-forward, that was in Activewear. And certainly from a standpoint of where we're going to spend, we're spending heavily against our Champion business. It's obviously growing very well. As Barry noted, it's showing good returns, and we're driving our 100-year anniversary celebration as part of that on a digital basis around the world and seeing really good traction.

The other place we're focusing heavily is in our U.S. Innerwear business as we continue to focus on returning that business to growth and we've added, particularly in our Intimates business this year. And so we just began, for example, a campaign behind Maidenform, targeted at the millennial consumer tied to influencers. And we're already seeing results of that traction in the first week that we started the campaign. So we intend to keep driving our Innerwear business as well, and then we're selectively spending in our International businesses, including Australia, to drive innerwear there as well.

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Operator [18]

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Our next question comes from the line of Ike Boruchow with Wells Fargo.

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Matthew Gulmi, Wells Fargo Securities - Analyst [19]

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This is Matt on for Ike. Congrats on a good quarter. You mentioned there's better-than-expected flow-through on pricing in the quarter, and I think you previously mentioned we should see a benefit to gross margins in the back half as the result of declines in lower margin product. Can you speak to the gross margin dynamics that you're expecting to see in 2Q? And then any updates in the back half?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [20]

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Okay. Thanks, Matt, and thank you for the kind words about the quarter. We appreciate that. As it relates to the second quarter on gross margin, we've got it relatively consistent year-on-year, which is a conservative outlook for sales and mix and really not counting on much benefit from pricing on a net basis. And that's consistent with the way we were thinking about it previously. And then as it relates to the full year, you should expect gross margin for the total company to be up, let's say, in the vicinity of 50 basis points for the full year.

And as a reminder, certainly as we move through the year, we've got more net price benefits. Certainly, in the back half, we'll have all of that, and we'll have more favorable mix because, for example, we'll continue the migration to higher margin products in Activewear, as I mentioned. And obviously, as Champion continues to grow, that's helpful to total mix. And so there's a lot of good things happening in the gross margin. And we have a good feel for that being up in the 50 basis point level.

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Operator [21]

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Our next question comes from the line of Simeon Siegel with Nomura Instinet.

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Simeon Avram Siegel, Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst [22]

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A nice start to the year. Barry, you mentioned several times, you mentioned marketing or something along the lines today, and I think you have a fairly low marketing rate as a percentage of sales at a company level, let alone on a brand level. So just to the point about that incremental ROI and obvious customer reception you're seeing, would there be a reason to push that marketing rate up more meaningfully? And then maybe an adjacent question, obviously congrats on the ongoing Champion strength. Could you just talk about how the cost to run the business are changing? So you mentioned the margin contraction for the fulfillment. Is that a onetime? Or are there more recurring foundational spend that need to happen? And then there's marketing and on the flip side, are there benefits you get as you scale upwards?

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Gerald W. Evans, Hanesbrands Inc. - CEO [23]

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Simeon, let me take the investment part, and then I'll let Barry follow on some of the other. We definitely look at return on investment and investment in our brands. And where we see it, we will definitely spend the money to drive the business, and we're certainly proving that through what we put in place this year to drive the businesses and a focus on both the Activewear business where you're seeing the growth and where you're also seeing the more consistent performance out of our U.S. Innerwear. So we will spend to get the return. And I think if we feel there's opportunity, we'll take advantage of it.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [24]

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And Simeon, I would say as it relates on the distribution side and fulfillment, the $1 million I called out in the quarter was really onetime in nature. But in that $25 million that we talked about earlier in the call and last quarter as well, there's a small amount there for distribution as we continue to build out our network to fulfill what is increasingly high levels of consumer demand for things like Champion. So yes, there's some there. But I would say that after this year, we feel good about where we are in terms of relative levels of spend.

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Operator [25]

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Our next question comes from the line of Tiffany Kanaga with Deutsche Bank.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [26]

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I know you touched on it a bit as part of your Innerwear commentary. But in light of your competitor discussing good momentum and net shelvings for their private label men's underwear program yesterday. Would you provide some additional color on your men's underwear business in terms of market share trends and how performance might vary by channel and what you're most excited about in the innovation pipeline?

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Gerald W. Evans, Hanesbrands Inc. - CEO [27]

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Yes. We continue to be very excited about our men's underwear business. It continues to perform very well. And you can see that in the performance of our Basics and total is up in the quarter and certainly underwear is a key part of that. Our shares built nicely in the most recent rolling 3-month period as we see broad growth in that business as we look at our branded business. We continue to feel brands matter. The research and the numbers consistently say that. It's hard to dispute the facts. And in the case of the numbers, they suggest that brands in Innerwear generally hold an 80% to 90% share of the market and have consistently done so over time. And as we look at brands in the U.S., for example, that share has actually grown over the last 12 months and we know why because consumers, the key purchase driver is brands and price is a distant fifth.

So we continue to feel great about our underwear business and we continue to feel great about our brands in general. We've got some great innovations and our Comfort Flex Fit innovation has worked very effectively in our underwear business. And in fact, we're going to be pushing it in the back half of the year and to our women's underwear business as well. And we're getting ready to upgrade our X-Temp to an X-Temp 2.0, which works even faster in cooling the consumer. So our Innovate-to-Elevate continues to be an important part of our underwear business, and we're continuing to drive that.

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Operator [28]

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Our next question comes from the line of Heather Balsky with Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [29]

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Question on working capital and then excess cash. So first, can you just update us on your initiative on working capital and the progress you've made? And then also can you just talk about your long-term priorities for free cash once you get your leverage target rate? It sounds like you're pretty confident that you're pretty close by the end of this year. And so how are you thinking about acquisitions and share repurchases?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [30]

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Heather, this is Barry. Thanks for the question. I'll take the first part, and then I'll hand it over to Gerald. As it relates to working capital, I think the team is doing a great job here. So our cash cycle improved 5 days versus last year in the quarter. A lot of that is due to improvement in terms of payables and payables terms. And obviously, you would appreciate that's a big team effort. So we are seeing good traction there. I think we've got continued opportunity as it relates to inventory. And as you move through the year, I expect inventory to be a nice source for the rest of the year. I would think about it in terms of directionally trending more like '17 as supposed to '18 when we were accelerating growth.

And then if you think about working capital through the remainder of the year on accounts receivable, it will likely be a bigger source of income than normal in light of the fact that our trajectory on sales is such that we have significant amount of sales growth in the first half and then more decelerating with the wind down of C9 as we go to the end of the year. So that is a natural incremental source of working capital benefit that you should see play out. So we feel really good about the working capital initiatives we got underway. We see a lot of opportunity over the next couple of years to continue to improve it.

And Gerald, do you want to talk about the free cash?

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Gerald W. Evans, Hanesbrands Inc. - CEO [31]

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Yes. I think from the standpoint of our long-term capital allocation strategy, it's unchanged. We are return-centric on our approach. We invest first in the business. We invest second in a dividend, and we've target a 25% to 30% payout ratio. We target a debt -- a net debt-to-EBITDA leverage range of 2 to 3x. And when we're in that range, we use our free cash to repurchase shares and we use debt to make acquisitions. Now we purposely went outside of that range over the past several years to make acquisitions and diversify the business, and I think we're certainly seeing the values of those acquisitions flow through in our results. But we also have made the decision that we want to get back in that range.

So we're focused right now in using our cash to bring our leverage back into that range, and we expect to be there by the end of the year in that 2.9 range by the end of the year and solidly back into the range as we get into 2020 so -- or 2020. So from the standpoint of M&A, M&A has always been part of our strategy and will certainly become part of our strategy as we look forward and get back within our range and like that when we're in that range because it gives us the most ability to use all the leverage of our allocation strategy.

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Operator [32]

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Our next question comes from the line of Paul Lejuez with Citigroup.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [33]

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It's Tracy Kogan filling in for Paul. I have a follow-up question on your Activewear margins. I know you talked about some factors that impacted the margins this quarter and I think you also mentioned a spending shift for second quarter. But as you look out to the margins for the full year for the Activewear business, where should we expect them to fall? And as a look out into the future, what should we expect from the margins in that business?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [34]

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Okay. Thank you for that question. As it relates to the first quarter, the Activewear margin was just slightly down and that was, call it, a couple of million of dollars, which is the 2 items I called out. And as we look at the second quarter, we're expecting a slight year-on-year decline in U.S. Activewear's operating margin and expansion in the second half as compared to the prior outlook. That's due to the, if you will, acceleration of the spending into the second quarter from the back half.

And where can it go in the future? Well, I think, it's clearly growing higher. The gross margin on the segment is increasing and there are -- we have high visibility on that continuing for an extended period of time, thanks to, one, Champion growing and that mixing to a better margin business for us; improved pricing, leverage and scale. And in addition, as we remix out of some of that lower margin product and the rest of Activewear that I mentioned, that just gives us an incremental tailwind. So over the foreseeable future, I would anticipate, starting in the back half and going forward, U.S. Activewear's operating margins to expand and continue to.

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Operator [35]

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Our next question comes from the line of Carla Casella with JPMorgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [36]

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A supply chain question. Champion's growing so quickly and you seem to be keeping up with it nicely. Can you just talk about supply chain? And what's your lead time? How long is it taking you as you're coming up with new products and if you see any changes on the supply chain front going forward?

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Gerald W. Evans, Hanesbrands Inc. - CEO [37]

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Well, we certainly have kept up with the growth of Champion. We've done that by working very carefully across the organization to forecast the business and then build and then put the appropriate capacity in place. This product is coming through our standard supply chain using our current fabrics and things that we develop largely in-house. So we're leveraging that way. This is a pre-booked business that we sell from season to season, and it behaves very much like our other seasonal businesses. So we're very much focused on forward view on where the business is going and continuing to have the appropriate capacity in place to handle it.

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Operator [38]

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Our next question comes from the line of David Swartz with MorningStar.

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David Swartz, Morningstar Inc., Research Division - Equity Analyst [39]

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Do you expect any effect on your Champion licensing revenue from the bankruptcy of Payless Shoesource?

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Gerald W. Evans, Hanesbrands Inc. - CEO [40]

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Payless Shoesource license was a relatively modest portion of the Champion business. But given the pace at which the business is growing, we think that it will be more than covered by the upside we're seeing throughout the business.

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Operator [41]

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And we have a follow-up question from the line of Laurent Vasilescu with Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [42]

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Barry, did you guys actually call out how global Champion actually grew for the quarter? And then any thoughts about how Europe did for the quarter? That would be great.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [43]

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Okay. Sure. Hi, Laurent. Total global Champion was nearly $490 million in the quarter on a constant currency basis. And that was up, as we mentioned in Gerald's remarks, 75%, which was about $210 million of growth. Internationally, it was up high 60s on a percentage basis to nearly $290 million. That's up $115 million on a constant currency basis. And then if I help you with the domestic side, that leaves about $200 million in the domestic business.

In U.S. Activewear, we had nearly $190 million of sales within Champion, excluding C9. That was up over 80% or $85 million worth of growth. And then outside of U.S. Activewear, we had about $10 million of Champion, for example in Basics and things of that nature. That, of course, was growing even faster. So we feel really good about how Champion is performing.

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Operator [44]

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And I'm showing no further questions in queue at this time. I'd like to turn the call back to T.C. Robillard for closing remarks.

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Thomas C. Robillard, Hanesbrands Inc. - VP, IR [45]

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

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Operator [46]

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