Hanesbrands Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.29.14 | About: Hanesbrands Inc. (HBI)

Hanesbrands (NYSE:HBI)

Q4 2013 Earnings Call

January 29, 2014 4:30 pm ET

Executives

T.C. Robillard

Richard A. Noll - Chairman and Chief Executive Officer

Gerald W. Evans - Chief Operating Officer

Richard D. Moss - Chief Financial Officer

Analysts

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Eric A. Alexander - Stifel, Nicolaus & Co., Inc., Research Division

Matthew McClintock - Barclays Capital, Research Division

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Kate McShane - Citigroup Inc, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Taposh Bari - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the HanesBrands Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

T.C. Robillard

Good afternoon, everyone, and welcome to the HanesBrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the fourth quarter of 2013. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found in the Investor section of our Hanes.com website.

I want to remind everyone that we may make forward-looking statements on the call today either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC, such as our most recent Forms 10-K and 10-Q and may be found on our website, as well as in our news releases and other communications. The company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

Unless otherwise noted, today's references to our consolidated financial results as well as to our 2014 guidance exclude all onetime charges and expenses. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's press release which is available in the Investor section of our Hanes.com website.

With me on the call today are Rich Noll, our Chief Executive Officer; Gerald Evans, our Chief Operating Officer; and Rick Moss, our Chief Financial Officer. For today's call, Rich will highlight a few big picture themes; Gerald will provide a sense of what is happening in our businesses and Rick will emphasize some of the financial aspects of our results. I will now turn the call over to Rich.

Richard A. Noll

Thank you, T.C. 2013 was a record year for HanesBrands in terms of sales, profitability and cash flow. Our operating profit increased $156 million, operating margins expanded 320 basis points, earnings per share grew 49% and we generated cash flow from operations of nearly $600 million. We also instituted a regularly quarter dividend, purchased Maidenform and completed our multiyear promise to reduce our long-term bond debt to $1 billion. What's even more remarkable is we accomplished all of this in a very challenging retail environment.

We built great momentum all year by remaining focused on our long-term goals and executing on the things we could control. This is most evident in the re-acceleration of Innerwear's revenue growth and the consistent double-digit margin performance in our Activewear segment.

Our Maidenform integration is also on-track and we remain confident in our ability to deliver $0.60 of incremental earnings per share within 3 years. We are fully-integrated on the front-end where our focus is on leveraging our full intimates portfolio to maximize productivity for our retail partners. All personnel decisions have been made and the impact should begin to flow through our P&L later this year and beyond.

2013 was clearly a great year, but I'd like to put our results in a broader context. When you look back over the last 5 years, which included a recession and a period of hyperinflation in cotton, since 2008, we grew sales at a compound annual growth rate of 3%. We were able to magnify that growth rate by driving our Innovate-to-Elevate strategy to deliver an operating profit CAGR of 9%. And by wisely deploying our free cash flow, we were able to magnify that growth rate into an EPS CAGR of 16%. So 3% magnified to 9% and, again, to 16%. And we're not done. As we continue to execute, we see significant opportunity to drive additional leverage in our P&L for many years to come.

Looking to 2014, we are confident that the momentum we have in Innovate-to-Elevate will continue and we're reflecting that confidence by raising our EPS guidance $0.30 to a range of $4.60 to $4.80. As we look to deploy our cash flow going forward, we remain committed to our goal of delivering superior long-term shareholder returns through a combination of dividends, bolt-on acquisitions and, potentially, share repurchases. We delivered on this commitment last year and we're already off to a strong start this year with yesterday's announcement that our Board approved a 50% increase in our quarterly dividend to $0.30 per share. Our strong cash flow generation should allow us to increase the amount of cash we can return to shareholders while retaining ample flexibility to pursue other growth opportunities.

So in closing, we feel great about the momentum in our core business, and when you layer on Maidenform, we believe that we are well-positioned to deliver solid, double-digit earnings growth for the next several years.

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

Gerald W. Evans

Thanks, Rich. We accomplished a lot in 2013. But I'd like to start off with a few of the highlights. First, despite an uneven consumer environment, we ended the year with a positive sales growth and an operating margin of roughly 13%, right in the middle of our long-term goal.

Second, Activewear delivered a record operating margin of 13.1%, up 750 basis points from last year, a remarkable achievement and one that underscores the benefits of our Innovate-to-Elevate strategy.

Third, we took advantage of our strong profit position to further strengthen our brands by investing an incremental $35 million in media.

And fourth, we added Maidenform to our brand portfolio.

We finished the year with strong momentum across the entire business. For the quarter, revenue, excluding Maidenform, increased 3% over last year and 4% on a constant currency basis. This exceeded the high-end of our prior outlook, which in turn drove upside in both our operating profit and earnings for the quarter.

Our Innovate-to-Elevate strategy is firing on all cylinders and we expect this momentum to carry through 2014. Looking at the individual components, our brand power has enabled us to take low to mid-single digit price increases this year in several key categories that we expect will offset inflationary pressures and maintain our margins. It is becoming increasingly clear that apparel is in a moderate inflationary environment where it is critical to have strong brands to be able to offset these pressures. We continue to see success across all of our innovation platforms as they are driving results for our retail partners. In our supply chain, we expect efficiency to remain at current run rates for 2014 as platform volume increases and we continue to focus on four-wall profitability. As Maidenform's production is integrated into our supply chain, we would expect these efficiencies to increase in 2015 and beyond.

Before I get into our segments, I'd like to provide an update on overall retail trends. Our results have varied by retailer. Point of sales trends were generally positive in October and November. In December, some retailers performed well prior to Christmas, while others were better after Christmas. Moving into January, there have been good weeks and bad weeks driven by the weather. We expect this type of uneven environment to continue through 2014. However, we feel very good about the annual consistency of our categories and our strong consumer franchise.

Turning to our segments, I'd like to start with Innerwear, where revenue growth, excluding Maidenform, accelerated to mid-single digits in the quarter. This was led by our Basics group, which was up high-single digits in the quarter with strong performance in men's underwear and socks.

Looking into 2014, ComfortBlend and X-TEMP continue to perform very well and are helping drive space gains. We are also taking the next step with X-TEMP by launching the technology across multiple product categories.

The intimates group also finished the year strong, with sales up mid-single digits in the quarter. Panties grew low-double digits while bras were up mid-single digits. During the quarter, our classics bras performed better than our contemporary bras, mirroring the trend in the overall market.

Our Smart Sizes innovation platform continued to perform well, and for the year, point-of-sale at retail was up double digits.

With respect to Maidenform, the integration is progressing on-plan. Shortly after closing, we went to market with our key retailers to begin refining assortments and positioning with our full portfolio of classic and contemporary brands, and the response from our retail partners has been uniformly positive.

For the quarter, Innerwear margins declined from last year due to the substantial increase in media investments, which was used to support campaigns for Hanes underwear and panties. We expect our media investments to increase approximately $10 million to $15 million in 2014 as we continue to support our brands and begin making investments behind Maidenform brands.

Turning to Activewear, we are very pleased with the team's improvement in profitability over the course of the year. Operating profit increased nearly $100 million from last year, bringing its full year operating margin to 13.1%. We achieved this new level of margin growth by driving our platform innovations, focusing on branded categories and internalizing production of large core programs. On an annual basis, Activewear has reached a new level of sustainable profitability.

Champion grew high-single digits in the quarter and mid-single digits for the full year. Incremental space gains should position Champion for continued growth as we go through 2014. And Gear For Sports also had a nice quarter, with sales up low-single digits and operating profit up double digits.

Switching to International. On a constant currency basis, sales in the quarter, excluding Maidenform, were up 4% and operating profit was up 11%. Currency remained a headwind, taking roughly 10 percentage points of growth off the segment and a full percentage point of growth off total company sales for the quarter. As we look at 2014, we expect growth in our International business, driven by the addition of Maidenform, which will more than offset the expected currency headwinds.

And finally, our Direct to Consumer business had a very strong year, with operating profit up 34%. With the inclusion of Maidenform, we look forward to driving profitable growth in this segment for many years to come.

So to wrap up, our core business is stronger than it's ever been. Profitability is up significantly and we continue to gain market share. 2013 was a great year, but it was just the beginning. Our brands are strong, we believe we are set to expand our sales space at retail and we are confident the momentum in our Innovate-to-Elevate strategy can continue. And all of this together positions us for an even better year in 2014.

I'll now turn the call over to Rick.

Richard D. Moss

Thanks, Gerald. I'm very pleased with our record financial performance in 2013 as we consistently delivered strong results all year. We generated nearly $600 million in cash flow from operations, which we used to drive both current and future returns for our shareholders. We returned nearly $60 million in cash through regular quarterly dividends and invested for future growth with the acquisition of Maidenform. With high levels of sustainable cash flow and a continued focus on effectively deploying our cash, we believe we are well-positioned to deliver outsized returns for many years to come.

The fourth quarter marked another milestone for HanesBrands as we made the final prepayment on our 8% senior notes, thereby achieving the commitment we made 2 years ago to reduce our bond debt to $1 billion by the end of 2013, another example of how focused we are on driving long-term shareholder returns and doing what we say we'll do.

Before I review our financial results, I want to highlight that any reference to our consolidated actual results or guidance will be on an ex-a [ph] basis and will exclude all onetime charges and expenses. Now, let me give you some color on our strong fourth quarter results.

Sales in the quarter were $1.3 billion, up approximately 12% versus prior year. Maidenform accounted for 9 percentage points of this growth, while the rest of the business grew 3%.

Gross margin of 34.5% was flat with last year. But excluding Maidenform, gross margins improved by about 40 basis points.

SG&A spending increased $46 million over last year due to an incremental $18 million in media spending and the addition of Maidenform's business. Excluding both of these items, SG&A dollars were flat with last year.

Operating profit of $152 million was essentially flat with last year. Our operating profit margin was 11.9%, as Maidenform weighed on margins by approximately 90 basis points.

Interest and other expense for the quarter totaled approximately $42 million, including the $15 million prepayment penalty related to the retirement of the final $250 million of our 8% senior notes and approximately $3 million in interest on the additional borrowings associated with the Maidenform acquisition.

EPS for the quarter was $0.98, above the high-end of our guidance range due to a-better-than-expected sales increase during the quarter.

Switching briefly to the full year. We delivered 4 very solid quarters of operating results. Sales, including Maidenform, were slightly over $4.6 billion, a 2% increase over last year.

Revenue grew approximately 1.5% for the year when excluding Maidenform, currency headwinds of $40 million and planned reductions in branded printwear sales of $25 million.

Operating profit of $596 million was $156 million above last year's level, resulting in an operating margin of roughly 13%, right in the middle of our long-term goal of 12% to 14%.

EPS was $3.91, an increase of 49% over last year.

For the year, we generated $591 million in cash flow from operations driven by profit growth and further improvements in working capital, primarily in inventory.

Inventory, excluding Maidenform, ended the year down roughly $100 million due almost entirely to a 13% decline in units as we continued to focus on improving inventory turns.

Net capital expenditures for the year were approximately $38 million, resulting in free cash flow of $554 million.

I'd now like to spend some time on our guidance for 2014. But before I get into the details, I'd like to highlight 2 assumptions. First, our guidance assumes that the overall retail environment remains challenging. Second, and more importantly, our guidance reflects our confidence in the ability of our Innovate-to-Elevate strategy to continue its momentum into 2014.

We expect our 2014 full-year sales to be slightly less than $5.1 billion, with approximately $500 million coming from Maidenform.

Operating profit is expected to be $640 million to $660 million, including approximately $25 million from Maidenform. This implies just under 100 basis points of operating margin dilution from Maidenform.

Interest and other related expense is expected to be approximately $85 million, including approximately $10 million from the higher debt balances associated with the Maidenform acquisition.

We estimate that our full-year tax rate will be in the low-teens, with slightly higher rates in the first half of the year.

Given the strong momentum in our business, we've raised our EPS range to $4.60 to $4.80. Our guidance is assuming a fully diluted share count of slightly more than 103 million.

This year, we're shifting our guidance from free cash flow to cash flow from operations. We expect cash flow from operations to be $450 million to $550 million for the full year.

Net capital expenditures are expected to be between $60 million and $70 million, while annual dividend payments are estimated to be roughly $120 million.

In closing, we had a very strong year. Investors are finally seeing the level of earnings and cash flow that our business model can deliver, and this is just the beginning. As we continue to execute our Innovate-to-Elevate strategy and invest our free cash flow, we see significant opportunity to drive additional profitability for many years to come.

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

T.C. Robillard

Thanks, Rick. That concludes the recap of our performance for the fourth quarter. We will now begin taking your questions and will continue as time allows. [Operator Instructions] I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Eric Tracy from Janney Capital Markets.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Great execution in a really tough environment. So let me just go right to that, Rich. Maybe just speak to, again, what you're seeing in retail. Obviously, a lot of noise out there in terms of the challenging traffic, particularly in the mass channel, yet you deliver a 3% Innerwear business in the quarter. Obviously, Innovate-to-Elevate has a lot to do with that. But just really speak to what -- how you guys are differentiating, how you're driving despite that tough environment.

Richard A. Noll

I think you actually hit the nail on the head. This is all about Innovate-to-Elevate, and we were seeing the benefits all through 2013 and you saw those benefits accrue also in the fourth quarter, and we feel really good about the momentum we're carrying into '14. The other thing is, with our categories, we've got some volatility in the short term. It can be up, it can be down. But over time, what's really going to drive your business is how well your brands and your product innovation resonate with the consumer, and because of the replenishment nature of our business, we're able to sort of smooth out some of those ups and downs over the long-term. So we feel really good about things.

Eric A. Alexander - Stifel, Nicolaus & Co., Inc., Research Division

Well, and then I guess my follow-up then is as it sets off into '14, raising the bar here on the guidance despite the tough environment, clearly, you guys have to have comfortability. Again, maybe just walk through -- is it just -- is it the Innovate-to-Elevate on the top line? In the space gains you see, are there kind of structural sort of margin things at play that give you greater confidence? Or is it the incremental coming out of last quarter to this that gives you the confidence to raise?

Richard A. Noll

Yes, so there's really 2 fundamental reasons why we're taking our guidance up for 2014. And first and foremost, we just have a lot of visibility about 2014 right now. As Gerald said, we've instituted some price increases and so they're locked in and set. We've got most of our promotion plans laid out all the way through back-to-school, so we feel good from that perspective. We have good understanding of what our space gains look like for the first 3 quarters of the year. And in fact, our commodity costs are already locked in through almost all the way through the third quarter. We've also got our integration plans set with Maidenform and we're executing well. So you wrap all that up and you've got good visibility. And then the other thing is, as you just pointed out, we've also got good momentum in our Innovate-to-Elevate strategy. And on top of the 320-basis points margin improvement we just saw in operating margins, implied in our guidance is another 50 basis points of operating margin improvement in 2014 in our core business when you tease out Maidenform. So you put those 2 factors together and we felt it was the right thing to do, to take our guidance up for 2014.

Operator

Our next question comes from the line of Matt McClintock from Barclays.

Matthew McClintock - Barclays Capital, Research Division

Rich, I was wondering if you could focus in on a little bit on Activewear and specifically, Champion. You talked about visibility into 2014. What type of visibility do you have in the Champion business? Are you getting space gains there? What's driving that business? And then when -- Gerald, you made the comment that the Activewear operating margin has reached a new sustainable level. Can you maybe walk us through what makes you feel comfortable with making a statement like that and where that business is operating at, which, clearly, it's operating at one of the best levels it's been in years?

Richard A. Noll

Yes, Matt, I'll just talk to the -- Champion is doing extremely well and Innovate-to-Elevate is what's driving the margin. So let me just turn it over to Gerald to let him give you more specifics.

Gerald W. Evans

Yes, Matt, when you ask about sustainability, the level and so forth, it's a great example of Innovate-to-Elevate. We spent a couple of years really remixing that business away from commodity-oriented segments to where brand -- to the branded segments where brand really mattered, and we could then apply our innovation behind our powerful brands, integrate some of those products into our supply chain and drive that margin. That business has accomplished that, reaching that level of 13.1% margin, which we do believe is sustainable as we've got it now to this branded sort of a level of business model, and now, we're going to drive it, and Champion's the brand we're going to drive it behind with innovations. We've got a number of innovations coming through such as our Vapor products, we've got a marathon bra product coming through that we're gaining space, we're adding space in new retailers as well as where we are. So we've got a lot of momentum in that business right now.

Matthew McClintock - Barclays Capital, Research Division

So if I may, if I could try to quantify that or get some color around that. Innovate-to-Elevate clearly has been driving your businesses in Innerwear for several years. What inning would you say that you're in, in terms of driving Innovate-to-Elevate strategy within the Activewear business?

Richard A. Noll

It's hard to quantify that. The good thing is we took a quantum leap forward in 2013 with Activewear, as you saw us go from those single-digit operating margins, now to double digits; they had a phenomenal year. You can expect that to continue. And I don't want to try and quantify the -- what inning, but we're clearly closer to the beginning of it than we are to the end. And I just think it just is a testament to how well Innovate-to-Elevate is working. And as we graft it onto other pieces of our business and now to the acquisition of Maidenform, that it can continue to pay dividends.

Operator

And our next question comes from the line of Susan Anderson from FBR Capital Markets.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

I was wondering if you can talk about -- you just mentioned on the Activewear category, but any other new product innovations you have coming down the pipeline for '14. And then are you planning -- it sounds like X-TEMP is performing well, the no-size bras, ComfortBlend, are those going to be rolled out to other areas for this year, too?

Gerald W. Evans

Yes, we are definitely -- Susan, this is Gerald. We're definitely going to continue to build on our big innovation platforms. And the beauty of them is ComfortBlend's a perfect example of the success on underwear. We extended it in the socks, and it's been even more successful. We -- our Smart Sizes continues to grow double digits and POS, as you saw, it represents roughly 1/3 of our core bra sales today. So we see the opportunity as we take Maidenform and put our Innovate-to-Elevate into that down the road that we can bring Smart Sizes, for example, into the Maidenform brand as well. And then certainly, X-TEMP, we view as a technology, a temperature-regulating technology that -- it has been successful in the limited area as it is, and we intend to expand it across multiple categories and multiple accounts as we go forward.

Susan K. Anderson - FBR Capital Markets & Co., Research Division

Okay. And then I can't -- I don't remember if you -- did you quantify the benefit to margin from Innovate-to-Elevate this quarter? And then back to the Activewear, too, really quick. Just the good margins that we're seeing there, how much should I think about it being kind of just a move away from that commodity stuff and then how much of it, the Innovate-to-Elevate?

Richard D. Moss

Sure. Susan, this is Rick. The Innovate-to-Elevate accounted -- we talked about 40 basis points of margin improvement, excluding Maidenform. That was really -- that was all Innovate-to-Elevate. What we saw with respect to cotton and other commodities was cotton was a -- it was a modest benefit to us in the quarter, but was offset by expected inflation and other inputs. And so, really, that didn't have much of an impact. So it was really all Innovate-to-Elevate.

Richard A. Noll

Yes, and this is Rich, if I may just expand on that Innovate-to-Elevate in the margin. We've been seeing 100 to 150 basis points of margin improvement from Innovate-to-Elevate starting in Q4 of '12. So we've now just overlapped that and then had the 40 basis points improvement in this Q4 '13 as well. So we feel really, really good. In terms of the split on Activewear, how much of that is getting out of a low-margin business and how much of it is Innovate-to-Elevate driving margins, I think the lion's share of it is Innovate-to-Elevate.

Richard D. Moss

Yes, exactly. It is.

Operator

And our next question comes from the line of Evren Kopelman from Wells Fargo.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

I wanted to ask about maybe the pricing unit dynamics. That's a key question I get a lot of the time. You mentioned you've taken some pricing and a lot of it is said, I believe, at this point for 2014. What's happening with units? If you could comment on that, that would be great.

Richard A. Noll

We went through 2011 and we were raising -- we raised price 3x in some of those basic categories double digits. And in -- and I think cumulatively, there were some categories where we were up over 30%. And in all cases, even with those kind of price increases, units fell off at a smaller rate than prices went up. So the elasticity was always less than 1. Now, what we're talking about is radically different. We're talking about low-single-digit, maybe mid-single-digit increases in those categories. So if it was less than 1 and a double-digit price increases, you're clearly going to see probably even a more muted impact overall. But at the end of the day, we feel really good about our overall business moving into '14.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

That's great. The other question is, you mentioned some of the margin improvement in Active internalizing production of the large core programs. Is there more opportunity of that in 2014?

Gerald W. Evans

Absolutely. We're consistently looking for opportunities to bring more programs inside and we will continue to do that in Activewear as well as the other portions of our business, including our new Maidenform acquisition.

Operator

And our next question comes from the line of Jim Duffy from Stifel.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions around the outlook. As we look into '14 and perhaps even beyond, looking into '14, what are the expectations for price and volumes assumed in the guidance? Are you expecting a net falloff in unit volumes overcome by price?

Richard A. Noll

Jim, we just generally just don't get to that level of detail when it comes to guidance. When you're talking about overall units, you're adding units of socks, say, units of bras and so and so. And we actually are looking at units, we actually have to look into the much lower level of detail than in aggregate for the total company.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Got you. Okay. And you continue to find opportunity in your tax works. What is the source of the year-to-year tax improvement implied in the guidance, Rick? And how sustainable should we think of that rate being?

Richard D. Moss

Well, it's interesting, Jim. If you look at our tax rate over the last 4 or 5 years, it's been -- it's averaged around 13%. The -- and we think there's no reason why acquisitions shouldn't enable us to, going forward as we integrate them into our supply chain both from a manufacturing and sourcing perspective, shouldn't enable us to sustain a tax rate in the low to mid-teens, really, for the foreseeable future.

Operator

And our next question comes from the line of Kate McShane from Citi Research.

Kate McShane - Citigroup Inc, Research Division

It sounds like you made a lot of progress with your inventory this year in the reduction of units. Can you tell us how much more room you have to go with that and what the goal is for your inventory turn?

Richard D. Moss

Sure, Kate. We did see a 13% reduction in units, down $100 million. Our expectation that's kind of built into our cash flow guidance for this year is that working capital in general probably will be fairly flat, though, obviously, on a higher level of sales, that's an improvement. So that puts us, really, this year, it puts us at about 2.5 turns. We continue to believe we can move towards 3 turns. So we're not done yet.

Kate McShane - Citigroup Inc, Research Division

Great. And with regards to Maidenform, now that you've been -- the deal has closed about 3 months, can you highlight any positive or negative surprises within the Maidenform business and where you think some of the low-hanging fruit opportunity is in terms of revenue upside?

Richard A. Noll

Sure. In fact, I think that's a great opportunity, sort of let us give you a sort of a broad view on sort of some of the good things throughout the synergies, not just revenue, but also cost and so on. We've now, as you said, have owned it for about 120 days, so we're intimately involved in the business. And it is crystal clear that the strategic rationale for this acquisition remains very compelling. Just to recap, and originally, we talked about 2014 needing to shrink it down to its core profitable base, getting it to around $500 million in sales, and that's inherent in our guidance. And we also talked about $0.10 to $0.15 of accretion to EPS in this first year. And when you look at that $25 million of operating profit, that actually translates into the higher end of that guidance of around $0.15. And the good thing is, if we've got some upside -- actually, I do think we may have some upside to that number in 2014. We're also talking about growing that $25 million to $80 million of operating profit over time, driven by SG&A synergies, supply chain synergies and then grafting Innovate-to-Elevate onto their business. And we feel really good about that. But let me turn it over to Rick and then Gerald to talk about some specific anecdotes there. Rick?

Richard D. Moss

Sure. As Rich said, the integration of Maidenform into our organization is going very well and is progressing right on plan. We currently expect about half of the cost savings to come from SG&A synergies. The key drivers, which is about a 40% reduction in the overall headcount at Maidenform, we would expect about 60% of this reduction to take place by the middle of this year, with the remaining headcount reductions coming towards the end of September. So you should begin to see the full impact of SG&A savings beginning in the fourth quarter and then into 2015. Now, if that integration process goes faster, then you have an opportunity to see profit improvement, like Rich referred to, probably in as much as the $5 million to $7 million range. Gerald?

Gerald W. Evans

Yes. The other half of our cost savings comes from integrating Maidenform into our supply chain. We're right on-track there as well. We've already integrated the direct -- oversight of management of supply chain into our supply chain management. We're now taking steps to integrate the first of the production into our supply chain beginning into Q3 of 2014. And the savings will rollout in the P&L in 2015 just as we had planned. From a top line perspective, those plans are taking shape just as we thought as well. As Rich mentioned, our plans were to reshape the Maidenform revenue in 2014 down to around $500 million as we expected to exit a number of non-core, unprofitable sales, as well as we did expect some declines in shapewear sales as Spanx extended its distribution. And this is playing out exactly as we thought it would in 2014 and it's now giving us a very solid sales base against which we can grow sales and profits over time. And I'm very excited about the potential of that as we look to graft on our Innovate-to-Elevate strategy and drive sales and we're already making progress there. We've integrated our 2 design organizations into one. We've integrated the market of Maidenform into our brand marketing teams and they're already finding opportunities. They are working diligently on platform innovations for the Maidenform brand that will launch in late 2015. So I'd say, overall, we feel great about the Maidenform acquisition, and what it will contribute in sales and margins both in 2014 and beyond.

Operator

Our next question comes from the line of Scott Krasik from BB&T Capital Markets.

Scott D. Krasik - BB&T Capital Markets, Research Division

So you spoke about last quarter, I think, that you saw actually more de-stocking than usual in September. Do you think that led retailers to de-stock less than you expected in December? And generally, how do retailers feel about carrying the inventory in your Basics category?

Gerald W. Evans

I think certainly, Scott -- this is Gerald. I think coming out of back-to-school week, we did have a little bit of an inventory carry. There was some de-stocking in September. Now we viewed the -- with caution what the landmark or the retail landscape might be like for the holiday season. We did not see additional de-stocking as we went into the holiday period and our POS trends were pretty good in October and December, so we feel like we came through it pretty well and, certainly, that helped with our momentum that we didn't have de-stocking.

Richard A. Noll

In terms of going forward, what's interesting is that there's a couple of phenomenas. While you're hearing some retailers being soft and so on and so forth, we don't see a broad theme at retail where they feel like their overall inventories are high. It doesn't feel like they're trying to -- and this is not just our basic categories -- are across-the-board. I think some of that's, obviously, just to the fact of all the cold weather that they're clearly getting some good sell-through on their cold weather gear, and that's reducing their -- the overall pressure they may feel in terms of inventories. And our inventories at retail feel like they're pretty well in line.

Scott D. Krasik - BB&T Capital Markets, Research Division

Awesome. Okay. And then can you just lay out a little bit of a timeframe for when you need to start to actually add manufacturing capacity to meet the new volume demands in the next couple of years?

Gerald W. Evans

We're really in the process of ramping capacity now to begin to bring in Maidenform in Q3 and we're constantly reassessing our capacity. So we're in the process of looking in that over a longer range period now.

Scott D. Krasik - BB&T Capital Markets, Research Division

Is the CapEx that you laid out for '14, is that a reasonable assumption for the year after, or the next couple of years?

Richard A. Noll

Yes. We've actually talked about, I think we're talking about $60 million to $70 million of CapEx. Remember, our strategy was we were spending above depreciation and amortization for a number of years as we recapitalized the supply chain. We said that would allow us to get down to that $40 million to $50 million level for a couple of years, and then you would expect it to start to float up back towards depreciation and amortization beginning in '14. And so that's the $60 million to $70 million. And that should allow us to easily continue to drive efficiencies in the supply chain and support growth through the Innovate-to-Elevate, as well absorbing the Maidenform acquisition. Over the long-term, you should expect that capital expenditure should ultimately equal depreciation, amortization, not to be a source or use of cash.

Operator

Our next question comes from the line of Steve Marotta from CL King & Associates.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

In the past, you've spoken about $30 million to $40 million worth of supply chain efficiencies on an annual basis, that was the 3-year plan about 3 years ago. Is that still in place over the course of 2014, 2015? Can supply chain efficiencies still hit those levels, or you are you pretty much done there?

Richard A. Noll

When you talk about Innovate-to-Elevate, remember, there are 3 distinct pieces of that strategy. And one is leveraging our brand power, the second is driving platform innovation and the third is using our supply chain as an integral part of all of that to help improve operating margins. So on some of this -- this is why we stopped talking about just cost savings from the supply chain alone because a lot of it's integrated with Innovate-to-Elevate. So as we drive platform innovation, that builds volumes and certain basic SKUs which allows you to then internalize it and drive your overall unit cost down. So it's all caught up in that Innovate-to-Elevate. So I don't want to talk about it as a separate distinct thing, it's really part of our overall strategy. That said, it's an integral part of improving margins. It's what's been helping Activewear as we've internalized some of those bigger programs, help improve margins. So we will continue to be an integral part of us expanding margins with Innovate-to-Elevate forever.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

I understand. And I believe, Gerald, you mentioned early on the call regarding incremental media spend next year. You mentioned it during the Innerwear section. Was that specifically Innerwear or that was consolidated? And as a follow-up, can you talk about what the aggregate media spend is across the company on a -- roughly, on a annual basis?

Gerald W. Evans

I did mention that we would increase our media by another $10 million to $15 million next year, that's correct, over the $35 million that we added this you. The majority of our media spend is in Innerwear, so it's likely that the fair portion of that will go into the Innerwear group. But we do intend to support our Activewear brands as well and we also intend to support the Maidenform brands, specifically, as we look into this year.

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Total media [indiscernible].

Richard A. Noll

The total -- at this point, as others are starting to spend media in these categories, we want to be a little more cautious about talking about our total media spend, although we are talking about the increases.

Operator

Our next question comes from the line of Chad Sutherland from Goldman Sachs.

Taposh Bari - Goldman Sachs Group Inc., Research Division

It's Taposh Bari at Goldman Sachs. I just wanted to ask, Rich, I know you touched about the macro environment. I wanted to ask you just more high-level, about a lot of negative pre-announcements, a lot of questions about kind of structural changes in the way the consumer is shopping. You sell, obviously, to a wide range of channels and customers. Just wanted to get your view, not on a monthly basis, but just generally speaking, what you're seeing if you are in fact seeing kind of secular shifts in the way the consumer is shopping that's, in fact, disrupting your business, if at all.

Richard A. Noll

Well, in terms of it disrupting our business, we had a great 2013 and we feel good about 2014. However, as Rick said, inherent in our guidance is we are expecting this choppy consumer spending environment to continue. And when you tease it out and take out Maidenform, you'll see we're actually talking about our core business being up about 1.5 points and actually, we're reflecting that sort of choppiness, I think, in that guidance. There's mixed signals about what's going on out there. In one hand, you hear the Fed is talking about things are good and there's other areas outside of the core retail that are doing really well with consumer spending. You're hearing isolated instances about certain retailers having traffic issues. You got stuff going on from bricks and mortar to online and all of that stuff out there. The great thing about our business and our categories is that people buy our products and wear our products every single day of their lives and they're going to continue to buy them over the long-term, and that's why we feel really good about being able to navigate a relatively choppy environment. There's no real macro trends that we're seeing, it's more episodical, and a lot of it driven by the weather. We should be relatively insulated from a long-term perspective.

Taposh Bari - Goldman Sachs Group Inc., Research Division

That's helpful. And then the other question I had that we get frequently from investors is as you execute along this strategy of innovating to elevating, I guess, how confident are you in your ability to kind of maintain that margin and keep that margin to yourselves versus having to share that with your retail partners?

Richard A. Noll

We -- I think a testament to how strongly we believe in the sustainability of our overall profit and our ability to generate cash flow is the fact that we took our dividend up 50% yesterday to $0.30 a share. And that is really because of the nature of our categories, how well our business is operating and our believability in what it's going to look like into the future.

Operator

And our next question comes from the line of Eric Tracy from Janney Capital Markets.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Just a quick follow-up if I could. Rich, in terms of the competitive landscape, any changes that you're seeing there? There's always some new entrants, brands developing, that are trying to take share. Anything from -- be it a pricing perspective or just general advertising marketing spend that you feel like stepping up? Anything from -- on the competitive landscape front?

Richard A. Noll

There's been a lot of talk about some of our large competitors making entry into large mass retailers with their own labels and how that might impact our business. When you look at our Basics business, it's in really good shape. It was up in the fourth quarter, it was up in all of 2013. And then when you look at it on a share perspective, according to NPD scanner share data, on a rolling 6-month basis, after we've seen those entries, on a rolling 6-month basis ending December, our shares are actually up 0.6 point. So we feel really good about how well our brands and our innovation is resonating with consumers.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

That's great. And then if I could just a quick one, too, on -- so the raised dividend obviously speaks to your confidence in the fundamentals of the business. As we think about capital allocation, I think you were pretty clear in the release in stating this, but maybe just walk us through any changes to that allocation to potential acquisitions, some of these tuck-in plays in the future. And then if you can, any update on where those assets might lie and the timeframe [indiscernible] of the timing, but just how that might play out?

Richard A. Noll

As we talked about capital allocation, we've got our debt leverage in the target range that we want it to be. And then we've said after that, we wanted to have a priority of dividends. Just given our business model, that makes a lot of sense. We instituted it last year it and we've now got it solidly in our target range of 25% to 30% payout ratio. That still leaves us ample cash flow to actually pursue bolt-on acquisitions or potentially share repurchases. And when you look at things like Maidenform, I think it's a great way for us to use our cash flow to create value for our retailers. We're constantly on the lookout for other things like that. I always tell people that we're always talking to people that it takes a long time to do a deal, and when we finally get one, we'll let you know. But clearly, as we look for opportunities, that's going to be our priority. But don't minimize share repurchases. They're also on the radar screen. And I think when you look back out over a 5 to 10 year period of time, you're going to see dividends, acquisitions and share repurchases, all part of that capital allocation to create value for shareholders.

Operator

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

T.C. Robillard

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

Operator

And ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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