Hanesbrands, Inc. Q1 2008 Earnings Call Transcript

| About: Hanesbrands Inc. (HBI)

Hanesbrands, Inc. (NYSE:HBI)

Q1 2008 Earnings Call

April 21, 2008 9:00 am ET

Executives

Rich Noll – Chief Executive Officer

E. Lee Wyatt Jr. – Executive Vice President, Chief Financial Officer

Brian Lantz – Investor Relations

Analysts

Eric Tracy – BB&T Capital Markets

Clark Orsky – KDP Asset Management

Jake [Crandlemere] – No Company Listed

Omar Saad – Credit Suisse First Boston

Steve [Riccio] – No Company Listed

[Reed Kim] – No Company Listed

Neal Halpert – Davenport & Co.

Operator

Good morning. My name is Mindy and I will be your conference operator today. At this time I would like to welcome everyone to the Hanesbrands Incorporated first quarter fiscal 2008 investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. If you would like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question press the # key.

Thank you. Mr. Lantz you may begin your conference.

Brian Lantz

Good morning everyone and welcome to the Hanesbrands Inc. quarterly investor conference call and web cast. We are pleased to be here today to provide an update on our progress after the first quarter of 2008.

Hopefully everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the web cast of this call can be found at the Investors Section of our www.Hanesbrands.com web site.

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 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 10K and 10Q as well as 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. With me on the call today are Rich Noll, our Chief Executive Officer and Lee Wyatt our Chief Financial Officer.

Rich will give a summary of our business performance and trends for the first quarter. Lee will then provide further detail on various aspects of our financial performance for the quarter. Following our prepared remarks we have allowed ample time to address any questions that you may have.

Before I turn the call over to Rich I want to take a moment to thank everyone who attended our Investor Day on February 19 or reviewed the presentation on our web site. Our extended management team enjoyed the opportunity to meet with investors in person to discuss our achievements, strategies and opportunities.

Now I will turn the call over to Rich.

Rich Noll

Thank you, Brian. And thank all of you for joining us today. I am very pleased with the execution of our strategies in the midst of a very challenging consumer environment. We had strong profit growth in a period of soft sales reinforcing the fact that we have many levers to create value. We improved our profit primarily through continued cost reduction initiatives and management of our debt structure.

Let me now provide you more detail on our business.

Our earnings per share excluding actions rose 56%, or $0.15 to $0.42 per share. Net income excluding actions similarly rose 54%, over $14 million as the result of reduced long term debt, lower base rates and operating profit growth.

Let me highlight the three major components of the $14 million increase.

Operating profit excluding actions increased $4 million.

Debt pay down and lower spread contributed $6 million.

Lower Libor rates contributed another $6 million. This increase was partially offset by slightly higher tax expense.

So why do we have such a strong profit result? It is the direct result of executing our strategies of sell more, spend less and generate cash. Operating profit increased because of our globalization and consolidation initiatives. Gross margin benefited from savings directly attributable to our off shore textile ramp up, consolidating into fewer larger facilities and our lean process improvement program.


SG&A also benefited from cost reduction and while up in rate it is flat in dollars. Additionally, the reductions are being offset from a timing shift in expenses into this quarter.

Clearly our strategy of spend less is working even in this challenging environment.

Another important strategy for us is to generate cash and to wisely use our capital structure to create value. Since then we have been consistently paying down debt and have restructured our debt to reduce our interest expense. About one-half of these benefits would have been realized in any rates environment with the other half of the savings due to lower interest rates as the result of the softening economy.

One set of strategies not working well in this quarter is sell more. Sales declined $52 million or 5%. The sales decline was broad based across most categories and most customers. The pervasiveness of the sales decline is one indication that the decline was more the result of macro trends and not specific tactics on our part. This belief is further supported by recent retailer same store sales results. Our sales, while less than expected, were in line with retailer comp performance, soft traffic trends and Easter results.

Our market share for the rolling three months through January confirm our beliefs as we actually saw modest share gains.

Importantly our shipment trends were in line with declining sell through at retail and therefore our retail inventories are very much in balance relative to our sales.

We are now focused on executing sales and marketing programs for the key promotional periods for the remainder of the year. Back-to-school and holiday selling periods are critical for success in our large categories. Our retail partners continue to focus on driving large national brands by offering customers great values at key promotional periods.

So while the soft consumer environment impacted our first quarter and may impact subsequent quarters I am confident we are working on the right programs with our retail partners to drive the very important back-to-school and holiday seasons to help mitigate the current environment.

Let me now turn my attention to the broader macro environment of cost and pricing particularly as it relates to 2009 and beyond. Much has changed since our February Investor Day. We are beginning to see systemic rising input costs. This is a different view than we had in February.

First, cotton has broken out of its historical trading range. Second, we are starting to see some other costs work their way through the value chain. More specifically cotton has recently moved outside of its historical trading range of $0.30 to $0.70 per pound into the high $0.70 range. While cotton prices could move back down there appears to be substantial support at these elevated levels. More importantly current prices for the crop grown this summer which will be used for production in 2009 have been consistently in the mid $0.80’s. This leads us to believe that instead of prices close to the historical average in the mid $0.50 per pound range we need to plan for cotton to be in the mid $0.80’s for later in 2009.


This leads back to pricing. This rising input cost environment is forcing us to think differently about pricing. First it is clear that sustained price deflation is over for much of the apparel industry since most of the industry supply chains have already moved to lower cost geographies.

Second, over time price increases will need to become a tactical tool in this new environment. The question is how much and how soon? We are in an industry where most buyers’ and sellers’ entire careers have been spent in a deflationary environment and mindsets can shift slowly. However we are starting to see price increases in some select areas. How much, how fast and how broad the price changes become remains to be seen. But we will continue to monitor the environment and act accordingly.

To recap, while most of our 2008 costs are known and manageable we are beginning to see increases that may impact 2009 and beyond. Therefore we are beginning to think differently about these issues. Let me remind you that inherent in our goal of increasing operating margins 50-100 basis points per year our gross cost savings could approach or exceed $200 million. We have discussed that these gross cost savings would be offset by both cost inflation and price deflation. So while inflation may be higher than we expect, price deflation will correspondingly decline.

Now coming back to the first quarter of 2008. It is clear that we are in a very tough consumer environment. But remember we have multiple levers to create value. There are opportunities for cost reduction and management of debt as we have discussed before. We also have further flexibility to adjust our tactics if this environment continues. It is still important that we remain sharply focused on executing our long term strategy, but we are also keenly attuned to our responsibilities of maintaining value for our stakeholders. So we will appropriately balance our bias for executing against our strategies with the need for near term performance.

In closing, I am very pleased with our profit performance in the first quarter of 2008. I remain confident that we are in a strong position as we strive to achieve our long-term growth goals for sales, operating profit and earnings per share.

Now I’d like to turn the call over to Lee Wyatt who will review our financial performance.

Lee Wyatt

Thank you Rich. Let me review the first quarter 2008 financial results beginning with sales. Sales for the first quarter were $988 million decreased $52 million or 5% over the same quarter last year. The quarterly sales decrease was broad with declines in both inner wear and outer wear and was across most categories and customers.

On a segment basis inner wear declined 8%. More specifically intimate apparel was down 8%. Socks were off by 10% and men’s underwear dropped by 5% compared to last year.

Regarding the other segments, outer wear declined 4%. Hosiery declined 9% with the international segment growing 15%.

In spite of the sales decline GAAP earnings per share more than tripled in the first quarter to $0.38 compared to $0.12 for the same period last year. Earnings per share excluding actions, which we feel is a better indicator of our performance, increased 56% or $0.15 to $0.42 compared to $0.27 a year ago. Earnings per share excluding actions is described on Table 4 of the earnings release.

As Rich said, our net income excluding actions increased by of over $14 million on the strength of both our cost reduction initiatives and the management of our debt. Let me highlight the drivers.

$4 million came from operating profit excluding actions, which I will discuss in more detail in a moment. $6 million came from debt pay down and lower spreads. The lower Libor rate contributed another $6 million. The increases were partially offset by slightly higher income tax expense.

With regard to operating profit improvement in the first quarter, GAAP operating profit increased by 28%, or $19 million to $88 million. The operating profit margin was 8.9% versus 6.6% for the same period last year. The increase was mainly the result of lower restructuring charges.

Restructuring and related charges were $6 million in the first quarter. These charges are primarily for plant closures and staff reductions. Roughly ½ of the restructuring charges were non-cash. As stated in previous calls we expect to incur approximately $250 million in restructuring and related charges in the three year period following the spin off. Since the spin off we have recognized $122 million in charges.

Now back to reviewing the increase in operating profit excluding actions. It increased $4 million to $94 million or 9.5% of sales versus 8.6% for the same period last year. The increase reflects the benefits of supply chain and consolidation savings initiatives partially offset by lower sales volume and the timing of media and IT spending.

Gross margin excluding actions increased 200 basis points to 35.2% in the first quarter compared with 33.2% last year. The increase reflects $11 million of cost savings from our off shore textile expansion and plant consolidation. First quarter gross margin reflects cotton cost of only $0.54 per pound. Based on the cost of cotton already in inventory and hedges on future purchases we now have visibility to the impact of cotton cost on profit for the full year of 2008. 2008 should reflect an average price of $0.66 per pound for cotton but the second, third and fourth quarters should reflect average cotton costs per pound of $0.62, $0.69 and $0.76 respectively. Therefore the higher cotton costs will put some pressure on gross margin rate in coming quarters.

The SG&A rate excluding actions increased 110 basis points to 25.7% compared with 24.6% last year. The increase in rate was the result of lower sales and a timing shift of some expenses. On a dollar basis SG&A excluding actions was actually $2 million lower than last year. This decrease reflects the benefits of cost savings initiatives offset by $19 million in higher planned media and IT expenses in the first quarter. The higher media and IT cost was planned and it was only timing that increased the first quarter SG&A expense.

Interest expense decreased in the quarter by $12 million to $40 million from $52 million a year ago. Debt pay down and lower spreads contributed $6 million of the decrease as last year we re-priced our term loan fee to reduce our rate spread by 50 basis points, and we replaced a portion of our term loan A and B with a $250 million accounts receivable securitization to save 100-125 basis points.

Lastly, our debt structure using capped allows us to benefit by $6 million from lower Libor rates.

Our income tax expense increased less than $2 million on a $16 million increase in pre-tax income. Normally our tax expense would have increased more but due to our off shore investments from the globalization of our supply chain we were able to mitigate the increase by reducing the tax rate from 30% to 24%.

Now let me review the balance sheet and cash flow. The March 29 balance sheet reflects $652 million of liquidity as we ended the period with $121 million of cash and our $500 million revolving credit facility remained undrawn. We were in compliance with all debt covenants. Given the current economic environment we may choose to be more conservative in the very near term by maintaining a higher level of cash than we were ultimately targeting.

Inventories were $30 million below the first quarter of 2007 and below expectations. We are watching inventories closely to best balance current supply and demand with potential future demand that typically surges when consumers can no longer postpone purchases in our product category.


Long term debt at March 29 is $2.3 billion. Approximately 67% of our debt remains at a fixed or capped rate. We have structured the debt so that $1.7 billion is benefiting from lower interest rates. We repurchased $8 million of our company stock in the first quarter at an average price of $24.69.

Our first quarter cash flow statements reflects $19 million net cash used in operations. Capital expenditures were $28 million increasing significantly in the quarter as we are now ramping up our supply chain investment action. The increase was partially offset by proceeds of property sales of $7 million.

In summary, in the first quarter of 2008 we saw sales decrease broadly as the result of a difficult consumer environment. Yet as we pointed out in our February Investor meeting there are many independent levers that will drive our earnings growth. Operating profit excluding actions benefited from cost reduction initiatives and lower interest expense and contributed to strong EPS growth. We had the flexibility in our strategy and capital structure to react to changes in the business environment to create maximum value.

I’ll now turn the call back over to Brian.

Brian Lantz

Thanks Lee. That concludes our recap of our financial performance for the first quarter of 2008. Before we begin taking questions I want to take this opportunity reiterate that Hanesbrands will continue to follow a policy of not providing quarterly or annual guidance. However our intent is to continue to use these quarterly conference calls to communicate our performance and help investors develop an understanding of our company.

Now we will begin taking your questions and we will continue as time allows. Since there may be a number of you who would like to ask a question I will ask you to limit your questions to two or three at a time so that as many of you can get an opportunity to post questions as possible.

I will now turn the call back over to the operator to begin the question-and-answer session.

Operator?

Question-And-Answer Session

Operator

At this time I would like to remind everyone if you would like to ask a question please press * then the number 1on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Eric Tracey. Your line is open.

Eric Tracy – BB&T Capital Markets

Good morning. Congrats on operating in a very difficult environment. But if we could to kind of start off with the top line, Rich. Maybe just if you could provide a little bit more color to what you are seeing in retail if anything has changed relative to that 1-3% top line growth you expect to achieve over the next 3 years for this year? If not there is obviously an expectation that things improve in the back half of the year with back-to-school and holiday and if you could just talk about your expectations there?

Rich Noll

There is no question the near term is tough and a little bit tougher than we were expecting but I believe we are working on the right things with our retailers to drive those key selling periods. Exactly how much those key selling periods can help overcome the soft start really remains to be seen but we are working on the right things to build our brands and to help our retailers actually bring people back into stores. So we are clearly committed to our long term growth goals of 1-3%.

Eric Tracy – BB&T Capital Markets

Okay fair enough. And then maybe Rich or Lee in terms of the gross margin up 290 basis points year-over-year despite what is obviously a weak environment. Could you talk about what it would be in a more normalized scenario? I’m assuming significant promotional activity was a drag…are you able to sort of quantify that for the quarter?

Rich Noll

What we saw in the first quarter on a dollar basis for margin was a net dollar increase of about $3 million to $348 million. What we saw in the quarter were benefits from our cost reduction initiatives that actually offset the sales decline in the quarter so we were very pleased with our cost reduction initiative. We did see cotton go in the first quarter only at $0.54 per pound versus $0.56 last year so as we stated in our cotton comments we will see that increase in the balance of the year.

Eric Tracy – BB&T Capital Markets

Okay. Then maybe just in terms of capital structure…sort of uses of cash. Obviously seem a little bit comfortable at least with the levels you have got put in a share repurchase. How should we think about uses of cash going forward?

Rich Noll

One thing we like about our capital structure and our business model is we generate strong consistent cash and we have the flexibility to use that in a way that really drives value. I think this year we did repurchase 8 million shares of stock from the company and we are limited to about 30 million this year. We will be very prudent this year in this environment. We’ll keep a little more cash on the balance sheet. We’ll be a little more thoughtful about our uses of cash. But again we are very comfortable with our cash flow. We have good liquidity and we think it gives us a lot of flexibility to maximize value.

Eric Tracy – BB&T Capital Markets

Okay. Then maybe lastly just in terms of some of the non-operational levers that you are able to execute on now. Certainly not non-recurring…in a testament to you guys managing through this, but in terms of the interest expense are you still looking for roughly $40 million kind of improvement year-over-year?

Rich Noll

What we did as you think about modeling interest expense for the balance of the year we’ll go back to what we talked about at the analysts meeting…that blended rate of 6.9% times outstanding debt. That was based on 3.25 Libor rate so we just suggest you make your own assumptions of what Libor is going to be relative to that 3.25 and adjust that 6.9% rate accordingly.

Eric Tracy – BB&T Capital Markets

Okay.

Lee Wyatt

By the way, had you used that 6.9% in the first quarter you would have had a really good estimate of interest expense for the quarter.

Eric Tracy – BB&T Capital Markets

Okay. Then tax still at 22-25% range for the year?

Rich Noll

Yeah. We see, as we said at the analyst day, 22-25%. That seems reasonable. We were at 24% for the first quarter.

Eric Tracy – BB&T Capital Markets

Okay. Fair enough. Thanks guys.

Operator

Your next question comes from Clark Orsky. Your line is open.

Clark Orsky – KDP Asset Management

Hi. Just wondering how you see things trending as you went into the second quarter in terms of top line?

Rich Noll

Hi Clark. How you doing? You know we have always cautioned people to be careful to extrapolate trends in our top line from one quarter of sales and we think it is always better to look at least two quarters to get a sense. So I am going to further qualify that by saying I do see the sell through trends in April and if I’m going to take an even smaller snapshot we have to be careful not extrapolating that too far. That said we have seen retail actually strengthen a little bit…or maybe a better term would be it is a little bit less worse the first few weeks in April. In talking to our retail partners they are actually feeling a little bit better that April is starting to come back a little bit. There was a weird holiday shift with Easter so it is unclear exactly what impact that had to play in it. But I think that we may see improving trends through the year although at this point it is supposition.

Clark Orsky – KDP Asset Management

Okay. And I guess just on the increase in cotton that you see going into 2009, I was kind of estimating that is maybe a $55 million or so hit year-over year. Is that about right?

Rich Noll

Let me just hit on the big picture and then I’ll let Lee talk a little bit to the specific question you had. First of all I want to reinforce as you picked up on 2008 is set and very manageable. What I was talking about in my comments is that right now we are seeing higher prices for cotton that could roll into 2009 and beyond. It is a little unclear at this point if those prices will start to stick. I want to make sure that everybody understands we are watching that very closely and will take appropriate action if we do start to see them stick.

Lee if you want to talk about some of the specifics?

Lee Wyatt

Yeah. Again I think it is important to note that the cotton costs for 2009 could vary greatly from where they are today. When you look at future prices as of today that would suggest that 2009 cotton costs would be a blended cost somewhere between $0.76 and $0.80 with the first half being a little lower and the last half being higher. Those cotton costs can change significantly between now and when we actually buy the cotton. But if the blended rate was in that range of $0.76 to $0.86 yeah the impact would be about what you quantify.

Clark Orsky – KDP Asset Management

Okay. I guess my last question was can you tell me what the non-cash stock compensation expense was in the first quarter?

Lee Wyatt

It is around $7 million.

Clark Orsky – KDP Asset Management

Great. Thank you.

Operator

Your next question comes from the line of [Reed Kim]. Your line is open.

Rich Noll

Hi Reed.

Operator

[Reed Kim] your line is open.

Rich Noll

You can move on Mindy.

Operator

Your next question is from the line of Jake [Crandlemere]. Your line is open.

Jake [Crandlemere] – No Company Listed

Hey guys. Two quick things. Can you give us a sense on the gross margin line that the major [put to take] in terms of basis points of that 300 how much came from price mix, manufacturing efficiencies, cotton, etc.?

Rich Noll

Again, lets look at gross margin on an XA basis that we outline in Table 4 of the earnings release. It was about 200 basis point improvement to 35.2%. In dollars gross margins increased about $3 million. What we saw was an impact on the sales decline, a $52 million sales decline which probably created a sales margin decline of $17-18 million. That was pretty much offset by benefits of cost savings initiatives. So we had about a $2 million benefit from cotton so that gets you to your $3 million increase. So basically two offsetting issues there.

Jake [Crandlemere] – No Company Listed

Got it. Then, can you give us on the cotton costs what you guys paid in 2007? You said $0.56 in Q1. Can you give us a sense of what you paid in the back three quarters? I think you guys said earlier it was $0.58 or $0.59 for the full year.

Rich Noll

Actually cotton costs for 2007 was fairly consistent. It was $0.54 in the first quarter. Averaged $0.56 for the year. So it moved up a few pennies in the last half…$0.57 or $0.58 but it was fairly consistent on a quarterly basis last year.

Jake [Crandlemere] – No Company Listed

Okay. Perfect. Thanks guys.

Operator

Your next question comes from Omar Saad. Your line is open.

Omar Saad – Credit Suisse First Boston

Thanks. Good morning. Rich I’m hoping you can talk about your category a little bit and how it is holding up in the recession? What are your expectations and what you have learned in the past? The inner wear…outer wear…a lot of these businesses do customers need them day-in and day out? I know you guys like to think of yourselves a little bit like a consumer products company. Do you think the business can hold up in a similar fashion?

Rich Noll

Certainly Omar. Let me start by saying that the trends in Q1 because there are fewer promotional activities can really be magnified either up or down…in this case down. But magnified relative to other segments because it tends to be a lower sales quarter. So I think we are sort of being impacted by overall traffic trends. But [AR] categories are very replenishment in nature. There is a high frequency of purchase. So while people will put off the purchase for a period of time they won’t put them off for a long period of time. That is why we are confident that focusing on the key periods such as back-to-school and holiday will be the way for us to help navigate this environment.

You might remember that last year around this time we were seeing similar types of trends because it is not like the tough consumer environment just materialized. It was pretty tough through the fourth quarter holiday period as well. We were able to navigate that so that is really the leverage we have got at our disposal.

Omar Saad – Credit Suisse First Boston

Okay. Quickly on…basing your cotton expectations…can you talk about any strategies you have to deal with the higher input costs? What strategies you have, if any?

Rich Noll

Our strategy is to remain the same strategy of dollar cost averaging for our input costs. We do see blips up and we see blips down. We don’t believe it is smart for us to try and lock in too long. We are much better off sort of buying every couple of weeks buying a little bit of our needs so that over time we will tend to see the long term average price reflected. That prevents us from overreacting if cotton pops up or cotton pops down in the short term. We feel pretty good about 2008 and I think we will be able to appropriately manage the environment in 2009 even if it stays at this level. We have started to see some select price increases in a few areas. For example, hotel t-shirts has had two price increases recently…one in the fourth quarter of 2007 and one just recently, so we’ll see how the environment plays out but I’m fairly confident we will be able to manage it.

Omar Saad – Credit Suisse First Boston

Thank you.

Operator

Your next question comes from Steve [Riccio]. Your line is open.

Steve [Riccio] – No Company Listed

Hey guys. Good quarter. I would be interested on your opinion on cotton pricing. Obviously it is higher. I’m just curious as to whether you think it is due to economic supply/demand fundamentals or maybe some type of speculative investment element that is driving prices higher?

Rich Noll

It is interesting you bring that up. There is clearly a much more of a larger futures open interest than we have seen in the past which leads us to believe there is some speculation on the part of money managers that prices are not only high but they will continue to go high. The fact we have seen them come off recently leads us to believe maybe they will come down for 2009 especially as we see the softer economy take hold and that’s why we don’t want to overreact to the short-term blip that we’ve seen over the last two months but just mindfully watch it and react accordingly.

Steve [Riccio] – No Company Listed

Just a quick follow-up. I’m not sort of an agricultural guy, but based on the numbers of acres planted and the available domestic and overseas supplies right now could you just help me understand better whether or not it really is a supply and demand issue or whether that is playing a larger role in this price run up?

Rich Noll

I can’t tell you exactly what is going on but I can give you a few facts. First of all current inventory of cotton both in the United States and on a world basis are higher than they have been in many, many years. They measure that by a thing called the stocks to use ratio and there is basically about a 6 month supply of cotton in inventory even right before we go into the growing season. That is very high from traditional standards. Normally you see that in the average of 25-30%. So that says that there is a lot of cotton out there. Clearly, however, I think the acreage is coming down which is starting to impact a little bit on the other side. Where it all shakes out remains to be seen. We will manage it closely.

Steve [Riccio] – No Company Listed

Okay great. Thanks guys.

Operator

Your next question comes from [Reed Kim]. Your line is open.

[Reed Kim] – No Company Listed

Hi good morning. Thanks. Sorry about that earlier. Just wanted to ask you guys on the market share pick ups that you cited in the quarter could you maybe tell us which categories and maybe which channel you saw those gains in?

Lee Wyatt

Actually there were lots of small quits and takes. I think the important thing to take away is in aggregate our inner wear share was up slightly so it tells us we are working on the right things to navigate this environment. So we didn’t see up taking at all from one particular area or in one account. It was sort of plus [inaudible] all over the place on balance positive for us.

[Reed Kim] – No Company Listed

Okay. Good. And then I hear you when you say that your sales declines were broad based but I guess digging into that a little further in some of the mass and dollar store channels where you have a consumer that is buying basic necessities maybe more so than department stores. Did you see a little bit better performance there?

Lee Wyatt

For the quarter it was pretty much broad based all channels, all customers, and was really traffic driven. In the quarter retailers are just seeing a lot fewer people going into stores and that impacted us across the board. I don’t think you’ll see exactly that same type of trend play out for the rest of the year. It probably won’t be as broad based across all channels and customers.

[Reed Kim] – No Company Listed

Okay. Another question on the cost increases that you have gone over this morning. You mentioned t-shirts. Did you participate in that increase?

Lee Wyatt

In the wholesale printables channel, yes we actually did increase prices.

[Reed Kim] – No Company Listed

Okay. And so I take it from your comments that as far as other products go you are sort of setting the stage and discussing the issues with them but you are not going forward with other price increases at this time?

Lee Wyatt

We are going to monitor it on a case by case basis. There are a couple of areas where especially for example product we source from Asia we are seeing higher prices we are in fact increasing prices to retailers and it will work its way through the chain. But that is a very small segment of our business. We probably wouldn’t have any broad based across the board action because for example cotton doesn’t impact bras very much but it would have a large impact on say fleece. So whatever we do it would have to be select and focused on the particular areas that are being hit.

[Reed Kim] – No Company Listed

Okay. Then last one…a little bit of multi-part, I was just wondering if you could post us two months after your Investor Day whether your IT and Chinese plant developments are on track, on budget and how in stock performance went for some of the products you have taken off shore? Thanks a lot.

Rich Noll

In thinking about and discussing IT we are right on track with our IT products. Remember we have an evolutionary approach here. We do not want to put our business at risk through systems conversions. We started converting our order to cash systems across the multiple divisions to SAP in 2007. Actually did our first conversion in the fourth quarter of 2007 and that went very well. We are continuing those conversions this year. So it is an evolutionary process.

Lee Wyatt

In terms of China we are right on track with that. We broke ground…that plant actually won’t come on line until next year.

[Reed Kim] – No Company Listed

Thanks a lot.

Operator

Your next question comes from Neal Halpert. Your line is open.

Neal Halpert – Davenport & Co.

Good morning guys. A question about the promotional calendar going forward for the rest of the year. Is the Champion program still online for a big promotion? Can you give us some clarity on that please?

Rich Noll

Champion continues to do well although in this quarter it was also impacted. One of the reasons we feel this was a fairly broad based impact. We’ve got some great plans for Champion further penetration in selected accounts and so we expect sales growth to continue there. So we’re feeling pretty good about it.

Neal Halpert – Davenport & Co.

Okay. Thank you. Anything special in the gross margin changes sequentially that we should keep in mind as a one-time thing? I know we went over cotton but that is only about 6% of the cost of sales anyway. Is there anything else that happened in the gross margin or gross profit that we need to be thinking about going forward for this year?

Lee Wyatt

No. I think as you think about and model gross profit I think you think about the impact of sales on the margin dollars and then benefiting from our supply chain and cost reduction initiatives and then cotton…I think it is that simple.

Neal Halpert – Davenport & Co.

Okay. Thank you. Anything else you can tell us about the restructuring costs? From quarter to quarter it gets to be somewhat lumpy. Can you give us any more insight of how to perceive the rest of the restructuring costs for the rest of the year?

Rich Noll

No. As we talked about on Investor Day we look at that broadly as plus or minus $200 million in gross savings over a three year period. It can be lumpy but we are making very good progress right now.

Neal Halpert – Davenport & Co.

It seems like you are about half way there is what you are saying? Over the three years after the spin?

Lee Wyatt

Yes. Well that’s from a restructuring charge perspective. We have said we would take charges of $250 million over the three year period, half cash and half non-cash. To date we have reported about $122 million so we are about half way there on the charges. The actual benefits are pushed out a little bit farther than that.

Neal Halpert – Davenport & Co.

Right but a lot of it would end up being permanent savings right?

Lee Wyatt

Yes.

Neal Halpert – Davenport & Co.

Okay. Thank you. Great quarter.

Operator

If you would like to ask a question press * and the number 1 on your telephone keypad.

Your next question comes from Eric Tracy. Your line is open.

Eric Tracy – BB&T Capital Markets

Just really want to follow-up real quick. Lee if you could remind us what that percentage of cogs for both cotton and then labor is coming out of the quarter?

Lee Wyatt

Cotton has historically been about 6% of cost to goods sold. Now if it jumps up in 2008 at the $0.66 per pound it will be about a $32 million increase which would take us closer to 7.5%.

Eric Tracy – BB&T Capital Markets

Okay. Then labor?

Lee Wyatt

Labor is around 20%.

Eric Tracy – BB&T Capital Markets

Around 20%. Okay. Great. Thanks.

Operator

If you would like to ask a question press * then the number 1on your telephone keypad.

At this time there are no more questions.

Rich Noll

Thank you everybody. We appreciate you attendance on this call and we look forward to speaking with you after the close of our next quarter.

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