Hanesbrands, Inc. Q2 2008 Earnings Call Transcript

Jul.29.08 | About: Hanesbrands Inc. (HBI)

Hanesbrands, Inc. (NYSE:HBI)

Q2 2008 Earnings Call Transcript

July 29, 2008 4:30 pm ET

Executives

Brian Lantz – VP, IR

Rich Noll – CEO

Lee Wyatt, Jr. – EVP and CFO

Analysts

Omar Saad – Credit Suisse

Eric Tracy – BB&T Capital

Scott Krasik – CL King

Jared Orr – Morgan Keegan

Clark Orsky – KDP Investment Advisors

Reed Kim – Merrill Lynch

Robyn Browdy – Highline

Kenric Tyghe – CIBC World Markets.

Jake Crandlemire – Ramsey Asset Management.

Karru Martinson – Deutsche Bank

Neal Halpert – Davenport and Company

Jacob Strumwasser [ph] – Salem Capital [ph]

Dennis O’Rourke – Regiment Capital

Janet Clay – Liberty Mutual

Operator

Good afternoon. My name is Clayton and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands second quarter 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. (Operator instructions)

I'll now turn the call over to Mr. Brian Lantz, Vice President of Investor Relations, Hanesbrands Incorporated. Sir, you may begin your conference.

Brian Lantz

Good morning everyone and welcome to the Hanesbrands, Inc. quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the second 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 webcast of this call can be found in 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 second quarter. Lee will then provide detail on various aspects of our financial performance. Following our prepared remarks, we have allowed ample time to address any questions that you may have.

I'll now turn the call over to Rich.

Rich Noll

Thank you, Brian, and thank all of you for joining us today. We continue to create double-digit earnings per share growth through the execution of our strategies in the midst of a very challenging economic environment.

We had strong earnings growth in a period of lower sales, reinforcing the fact that we have many ways to create value. We continue to improve our earnings primarily through cost reduction initiatives and management of our debt structure.

Let me now provide more detail on our business. Our earnings per share excluding actions rose 20%, or $0.11 to $0.65 per share. Net income excluding actions similarly rose 19% or $10 million as a result of lower long term debt, lower base interest rates, lower income taxes and the benefit of cost reduction efforts.

Partially offsetting the increase, operating profit excluding actions decreased $6 million due to lower sales. We were able to mitigate SG&A deleveraging and maintain our operating profit margin excluding actions at 11.2%, the same as the second quarter last year.

Operating profits continued to benefit from our globalization and consolidation initiatives. Gross margins benefited from savings directly attributable to our offshore textile ramp up, consolidation into fewer larger facilities and our lean process improvement program. SG&A also benefited from cost reduction efforts.

Sales declined $50 million in the quarter. Half of our shipment performance was driven by soft consumer trends especially in intimate apparel. The other half was due to back-to-school timing shift at our largest retailers. This timing shift is masking what we believe is our true underlying performance for the second quarter.

And two facts provide evidence of this timing shift. First, our retail sell-through rates at mass for the second quarter substantially exceeded our shipments. Second, our shipments for the first four weeks of July are up over $25 million. It is important to note that although this July increase is positive, no one should extrapolate these results into an indication of what our total sales results will be for the third quarter.

While we are confident that we have strong back-to-school plans in place, we are still dependent on consumers driving to stores to buy our products. Through May, our market share remained strong even though our categories remained soft. Importantly, private label market share has been down or flat, indicating that retailers are increasingly focused on national brands like Hanes as they strive to improve their retail performance. Remember, unlike many other categories, the price difference between large national brands and private label in our categories is small and this share data shows that consumers are not trading down to save a few cents per item.

Despite the back-to-school timing shift, our solid market shares and a tough economic environment, I am not satisfied with our sales results in the quarter and a half. To improve these trends, we are now turning our attention to the next key selling period, holiday, and we will continue our strategy of driving our largest strongest brands in core categories with key items. These are tried and true strategies that work in good times and bad, and they will get us through the current environment as well.

In the second quarter, we made significant progress with our Asia supply chain network. Construction is well under way on our first Asian textile plant in Nanjing, China, which will be essential to our network. It is scheduled to start production in 2009.

We have also added three company-owned sewing plants in Southeast Asia, two in Vietnam and one in Thailand, giving us a total of four sewing facilities in Asia. In fact, we have more than doubled our number of employees in Asia just this year, from 2,000 in December to 4,000 today. We have plans to add another 2,000 by the end of this year.

We currently have a new larger West Coast distribution facility under construction in California as we prepare for increased product flow from Asia.

Let me now address questions as to whether Asia is still a good location to manufacture products. The answer is emphatically yes. Our Asian network will be balanced across multiple countries in the region. And while we locate our textile production in China, it will only account for 10% of our Asian employees.

Textile manufacturing is a very technical capital-intensive process and we want it to be able to draw on the vast technical expertise in China. For example, in Nanjing, the university system has over 300,000 students from which we can draw highly-educated talent.

The remaining 90% of employees will be located elsewhere in the region mainly in sewing operations in Thailand and Vietnam.

Turning back to our efforts in the Western hemisphere, our larger scale textile plants in Central America and the Dominican Republic are quickly reaching their targets for productivity and efficiency and are on track in contributing to our overall cost savings. In the past quarter we doubled the capacity of our Honduras distribution facility, allowing us to further reduce cost by bypassing our higher-cost US distribution network.

We are very pleased with our progress and right on schedule in implementing our cost reduction and globalization strategies. Now we have stated in the past, these strategies could produce gross cost savings approaching or exceeding $200 million in the future. These savings have been a major contributor to our success today and are laying the foundation for our success in the future.

Let me now turn my attention to inventories. They were $1.3 billion or approximately $100 million higher than the same period last year. There are two primary reasons for the increased inventory. First, we have increased our inventory approximately 4% in order to sufficiently service our business over the next 18 months as we execute our textile transition.

Second, more than half of the current inventory increase is due to cost increases for inputs such as cotton, oil, freight, and currency. This fact leads me to a broader discussion of costs and pricing, particularly as it relates to 2009 and beyond. We continue to see widespread input cost inflation particularly with regard to raw materials, petroleum related items, and labor. These rising input costs now seem to be a systemic change versus the past and price increases will become a tactical tool in this new environment. In fact, we are already implementing price increases in some select areas such as our inventory channel.

We are also laying the groundwork to potentially raise prices in other areas for 2009. If commodity costs stay anywhere near current levels, I think it’s highly unlikely that prices will stay flat.

In terms of our approach, we will balance price increases, the need for further cost reduction, competitor actions, share position, and marketplace response to determine how the best manage this situation. We need to cover our higher input cost; but we cannot and we would not do it at the expense of share.

To recap, we have multiple ways to create value that is allowing us to delivere double digit earnings per share increases. To continue this momentum, we must stay focus on executing our long-term strategies, but also stay nimble to appropriately respond to near term challenges.

By striking such a balance, we will successfully navigate this current economic environment and achieve our growth goals over time.

We are firmly committed to these goals. And while it’s unlikely that we can achieve the sales growth goal in 2008, we are pleased that we have improved our year-to-date operating margin 40 basis points and increased our earnings per share excluding actions over 30%.

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

Lee Wyatt, Jr.

Thank you, Rich. Let me begin with sales. Sales for the second quarter of $1.1 billion decrease $50 million or 4.4% from the prior year. Year-to-date sales were $2.1 billion, a decrease of 4.7 % from the prior year.

The second quarter sales decrease was driven by a decline in the innerwear segment of $55 million or 8%. As Rich discussed, approximately half the innerwear decline was in the intimate apparel category and the other half was a shift in timing in back-to-school shipments.

The outerwear segment declined 1%. The hosiery segment declined 3% which is better than the historical trends. The international segment grew 20%. Excluding the benefit of the currency gains, the growth was 8%. The other segment declined $13 million as planned because we've reduced the need to sell excess fabric and yarn as the supply chain network is reconfigured.

In spite of the sales decline, GAAP earnings per share more than doubled to $0.60 in the second quarter compared to $0.26 with last year. Earnings per share excluding actions which we feel are the better indicator of our performance increased to 20% to $0.65 or $0.11 above last year.

For the first 6 months of 2008, our earnings per share excluding actions increased 32% to $1.07. Earnings per share excluding actions are described on table four of the earnings release.

Turning to net income. Our net income excluding actions increased by $10 million or 19% on the strength of the management of our debt, a lower effective tax rate resulting from our offshore supply chain investments and cost reduction initiatives.

The increases were partially offset by lower operating profit excluding actions, which I will discuss in more detail in a moment. With regard to the operating profit improvement in the second quarter, GAAP operating profit increased by 28% or $25 million to $113 million. The increase was mainly the result of lower restructuring charges.

Re-structuring and related charges were $7 million in the second quarter compared to $40 million last year. These charges are primarily for plant closures and staff reductions. Roughly three-fourths of the restructuring charges were non-cash.

Operating profit excluding actions decreased $6 million to $120 million, and operating margin rate of 11.2%. The decrease in the operating profit reflects the impact of lower sales partially offset by the benefits of supply chain and consolidated cost-savings initiatives. The 11.2% offering margin was flat to the prior year despite lower sale this year.

For the full 6 months, operating profit excluding actions was $213 million, $2 million below last year. Operating margins excluding actions was 10.4% year-to-date compared to 10% year-to-date in 2007.

Gross margin excluding actions increased 100 basis points to 36% in the second quarter compared to 35% last year. The increase reflects $13 million of cost savings from our supply chain initiatives.

Second quarter gross margin reflects cotton cost of $0.63 per pound, a $4 million cost increase over last year. We have visibility to the impact of cotton cost on profit for the full year of 2008, which should reflect an average price of $0.65 per pound. The upcoming third and fourth quarters should reflect average cotton cost per pound of $0.69 and $0.76 respectively. The higher cotton cost will put pressure in the gross margin rate in coming quarters.

SG&A expenses excluding actions were $1 million lower than last year. This decrease reflects the benefit of cost savings initiatives and lower media expense, offset by $4 million in higher distribution cost and $4 million of a planned IT expense increase in the quarter. The SG&A rate excluding actions increased to 24.8% as a result of lower sales.

Year-to-date, SG&A expenses excluding actions were $3 million lower than last year. Higher planned media and IT expenses partially offset the benefit of cost savings initiatives. These media and IT expenses were planned higher in the first half of the year but our only timing, so should reverse in the fourth quarter.

Turning to interest expense, our strategy since the spin-off has been to use our debt structure as a natural hedge against an economic slowdown as interest rates generally decline during those periods. We accomplished this through the use of rate caps that limit exposure to rate increases while allowing us to benefit from rate declines. During the second quarter, we again benefited from this strategy as interest expense decreased $14 million to $38 million.

Our income tax expense decreased $3 million in spite of an increase in pre-tax income excluding actions. Normally our tax expense would have increased but due to our offshore supply chain investments, the tax rate declined from 30% to 24%. This rate is consistent with the first quarter.

Now let me review the balance sheet and cash flow. The June 28 balance sheet reflects approximately $600 million of liquidity as we ended the period with $97 million of cash and our $500 million revolving credit facility remained undrawn. We were in compliance with all debt covenants.

During the quarter, Standard and Poor's raised our corporate credit rating to BB- based on positive momentum in executing our stated strategies. We were pleased with this vote of confidence during this challenging economic environment.

While inventories were $108 million above the same quarter of 2007, the quality remains good. $54 million of the increase was due to higher input cost and currency gains, $45 million of the increase was due to higher inventory levels. The inventory in the range of $1.3 billion during the balance of 2008 is necessary to hedge the supply chain transition and reflects higher commodity cost.

Long tern debt at June 28 was $2.3 billion. Debt structure and rate management is a core component of our value creation. While we are currently benefiting from declining interest expense, we are now shifting our strategy to focus on maintaining this lower level of interest expense.

As the first step in this focus, we have fixed the interest rate on our $500 million floating rate bonds. The all in rate for the nest 4 years on these bonds will be at a favorable rate of 7.64%. $1 billion of our $2.3 billion of debt is now at a fixed rate through substantially all of 2009. We will continue to evaluate opportunities to fix more of our debt through financial instruments or refinancing.

We repurchased approximately $10 million of our company’s stock ended June-July time period, at an average price of $27.79. Year-to-date, we have purchased $18 million at an average price of $26.30. Our year-to-date cash flow statement reflects $15 million net cash used in operations. Builidng inventory in the first half of the year was the most significant use of cash. Since inventory levels are not expected to increase in the second half of the year, inventory should have either a neutral or positive impact on cash during the remainder of 2008.

Year-to-date, capital expenditures were $74 million, increasing significantly in the quarter as we continue to ramp up our supply chain investment actions. The increase was partially offset by proceeds from property sales of $10 million.

Before I give summary thoughts, let me give some reminders to help model the business in the second half. Remember that we have a 53rd week in the fourth quarter. Also, that cotton is higher in the second half of 2008, putting some pressure on gross margins. However, our investment spend categories of media and IT should be lower predominantly in the fourth quarter.

In summary, in the second quarter of 2008, we saw sales decrease based primarily on softness in specific categories of intimate apparel and timing of back-to-school shipments. Yet, as we noted in our February investor day financial review, there are many independent levers that will drive our earnings growth. Second quarter operating profit benefited from supply chain and cost reduction initiatives and lower interest expense and tax rate contributed to 20% EPS growth.

I will now turn the call back over to Brian.

Brian Lantz

Thank you, Lee. That concludes our recap of our financial performance for the second quarter of 2008. Before we begin taking questions, I want to take this opportunity to 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.

We will now begin taking your questions and we’ll continue as time allows. Since there maybe a number of you who would like to ask a question, I’ll ask that you limit your initial questions to two or three and then reenter the queue to ask additional questions.

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 Omar Saad from Credit Suisse. Your line is open.

Omar Saad – Credit Suisse

Thanks. Good afternoon.

Rich Noll

Hi, Omar. How are you doing?

Omar Saad – Credit Suisse

Good. Thanks. I actually want to start with a question for Lee on the SG&A line. In the first quarter, I kind of remember you guys talking about some costs have been pulled forward. It sounded like some of the marketing stuff came out of the second quarter but there were still some IT spend, how do we think about this kind of on a quarterly run rate and on annual run rate? Last year, you had some payroll come out and towards the end of the year in terms of some middle management that you cleared out. Can you help us understand the kind of the puts and the takes on the dynamics on this line item of the P&L?

Lee Wyatt, Jr.

Sure. I think if you think of the second quarter, it’s very much like the first quarter. We continue to have cost savings initiative benefiting the SG&A line but they’re being masked by some timing issues primarily around those timing issues of IT spend which were planed to be higher in the first half and media spend which was higher in the first half and we’ve got some other smaller things like distribution in the second quarter. Most of those are timing issues that kind of mask or offset the benefits from our cost savings initiatives. Those should turn around in the fourth quarter.

Omar Saad – Credit Suisse

Got it. Got it. Okay. And then Rich, on your side of the equation, you think about kind of the revenue trends and the environment and whether people are going to stores and if they’re in the stores, they’re just buying bread and milk or are they buying – are they going to the apparel section. What are your plans? How do you think about driving your business at retail on this environment going to the second half, can you give more details around them, the programs you have in place and how retailers are thinking about things, are retailers just really cutting back on their inventory levels and planning extremely conservatively? Any color would be helpful.

Rich Noll

Certainly. First of all, people are coming into stores every single day and buying lots of our products. I mean, we sell $2.2 billion products a year and each and every week, people are buying it and we are shipping it. What we’re talking about is sort of what the overall impact is on the margin. There’s no question. Consumers are visiting stores slightly less than they were before and spending a little bit less in our categories as more of those dollars go towards the food and so and so forth. To be quite honest in terms of execution, I am actually quite pleased with the plans we have in place for back to school and if this was a normal year, I’d be very optimistic. I think we’ve got the right promotional offering that's stronger than it was last year. We‘ve got better promotional placement and actually timing of our ads, but I am a little bit worried about the overall backdrop and if we’re going to see less consumers come in albeit a little bit judicious with their spending. But we've got a lot of things that are working well. Men’s underwear is doing well. Socks are doing well. Our international business is doing well. I think the one area I called out in my prepared remarks that I’ll reemphasize is intimate apparel. In fact, it's slightly more than half of our decline in the quarter and there's really three reasons that are driving that specifically.

One, the overall intimate apparel market is down and I think that‘s best evidenced by looking at some of the comp store sales of specialty retailers such as Victoria’s Secret.

Two, in our specialized brands such as WonderBra and Barely There, we've seen some losses –tactical losses there as we focused on driving Playtex and Bali and we’ve got plans in place to try and address that.

And then the third issue was we were at a promotional disadvantage for both Easter and Mother’s Day and that’s now reversing as we come into back-to-school.

So that’s probably the one area where we got to concentrate more of our efforts which is in intimate apparel.

Omar Saad – Credit Suisse

Okay and then last question on the inventory. Looks like you got an increasing amount of cash tied up in inventory levels rising a little bit. What are your plans to kind of get that back more in line and what kind of a time frame should we be thinking about?

Rich Noll

We believe that we need this $1.3 billion inventory level going into the second half and entering 2009 to support the supply chain transformation and to reflect these higher costs that are in there.

One of the things that we feel good about is that as we build that –that’s not going to build in the second half where we need to be right now and that’s reflected in our cash flow for the first half. So the inventory from a cash flow perspective in the second half should be neutral or positive cash flow influence in the second half of the year. The other thing I would say just around inventory, is the quality of the inventory is very good, we are building core inventory. These are not French [ph] things, so those –that core inventory carries very low obsolescence risk but to -- early 2009 is what we mean.

Omar Saad – Credit Suisse

Okay, and then, but is this inventory level predicated on kind of continuation of the trends you saw in the first half or is it predicated on improved selling trend and is there risk that if trends don't bounce back, that inventory will continue to go up a little bit more than --

Rich Noll

We think this right around this $1.3 billion level is the right level. I do want to actually point out that we took exactly the same strategy when we started the transition –the textile transitions to the Caribbean Basin and the Dominican Republic. We made a conscious decision then to increase inventories about $100 million. It wasn’t as visible because it was actually when were still part of Sara Lee and we’ re doing that same type of thing now, and so we think it’s the prudent thing to do to help us mitigate any issues that we would have with our textile transition to Asia.

We’ve got the additional burden obviously now where we've got another 50 some odd million dollars of increased costs in inventory that’s due to the inflationary environment.

Omar Saad – Credit Suisse

Got it. Thank you.

Operator

Your next question comes from the line of Eric Tracy from BB&T Capital. Your line is open.

Eric Tracy – BB&T Capital

Good afternoon. Yes, good morning Rich and/or Lee. Could you address sort of where we sit in terms of the operational supply chain moves that have been made already, and sort of how they should manifest as we think about the back half of the year. Lee mentioned pressure on gross margins given the inflationary pressures that are out there, but could you kind of put in context the order of magnitude of what some of the supply chains moves relative to some of those costs could be in the back half?

Rich Noll

Yes, we will continue as we did in the first half to benefit from those of the supply chain initiatives and they'll continue to come along. At the investor day, we talked about between supply chain moves and cost reduction initiatives over the next three years plus or minus $200 million and we're probably at this point only 10%, probably more than 10% but less than 20% of achieving that $200 million. So we have more that to come on the supply chain initiatives.

Eric Tracy – BB&T Capital

Okay. To attack it another way, in terms of kind of percentage of cost to goods sold, if you could quantify for us what labor is coming out of Q2 relative to say cotton and/or freight?

Rich Noll

Let me see if I can answer it in a slightly different way. If you're looking for sort of what our run rate is of cost savings, I think our current gross margins are great indication excluding any impacts of inflation of how well the supply chain moves are delivering cost savings to our company. Clearly, we're going to some of that erode with the higher cotton and oil prices over the next couple of quarters but we’ll obviously need to address that either through pricing and/or further cost reduction. Does that help you out there?

Eric Tracy – BB&T Capital

Yes, that’s fair. Thanks. And then maybe Rich, just to kind of follow on the top line discussion in terms of the visibility that you have with the retailers for both back-to-school and holiday. First, maybe just again, you talked about private label not becoming an issue or not seeing it just because there is such little variability between branded and private label, maybe talk about that and the competitive landscape that you see out there?

Rich Noll

Yes, in terms of private label, the share data continues to reinforce that private label is actually losing share and not gaining share and that's because our categories retailers look for them to help generate and drive traffic and they realize that the best way to do that is offering compelling values on national brands. So we don’t see any major expansions of private label. We don’t see them promoting them more –in fact if anything they're pushing them a little bit less.

Eric Tracy – BB&T Capital

Okay. And then lastly, I don’t know if I'll get this but you don’t provide specific guidance but had alluded previously to that 15% to 25% earnings range yet expected that to be above that this year. Is there any reason to believe that we should adjust our thinking?

Rich Noll

Our long term goal as we talked about double-digit EPS growth, we've delivered on that for the first six months of the year and as we stated back in February, we've got many ways to actually increase value on EPS over time both long term and 2008. The economy ended up being softer than I think we all probably would have predicted back in February but the way that we structured our debt allowed us to overcome that and we're feeling pretty good with where we are in on EPS basis and I think our long-term goals are intact.

Eric Tracy – BB&T Capital

Very good. Thank you guys. Best of luck.

Operator

Your next question comes from the line of Scott Krasik from CL King. Sir your line is open.

Scott Krasik - CL King

Hi, thanks. Just continue the question from before about the drivers of the gross margin. You talked about the cost pressures that will impact you as well as the cost saved. The other aspect of that is really promotionality and how aggressive you guys are going to be in the second half of the year? I think that had an impact on the second half of last year, so can you maybe talk about how that plays through the rest of the year also?

Rich Noll

Yes. We're not seeing any material differences on how much we’ve got to support our brands from a promotion perspective. So that’s really not going to play into this in a big way. That's not to say there’s not some minor fluctuations on a quarterly basis but no major change. It's really making sure we've got the right offerings at the right time with our retailers.

Scott Krasik - CL King

Good. So from a year-over-year perspective, the biggest sort of change would then be the cost inflation, are there cotton or otherwise?

Rich Noll

Yes. No question about it and as I’ve talked about we’re starting to get some price increases but from an overall timing perspective. Regular retail, we wouldn’t see price increases start to hit until 2009. Quite simply during holiday is not the time you could ever –wouldn’t be in our interest or the retailers' interest to try and increase prices. So those discussions are starting to happen now but we wouldn’t really solidify them until the fall.

Scott Krasik- CL King

Okay. Great. And then how do you look at the –if the top line obviously goodies [ph] has that some impact on you guys? I know you sell to Mervyns perhaps Boscov's, Bradshaw. I mean these guys, they’re not your biggest customers but you start putting these together. How does that impact the top line?

Rich Noll

Let me just talk about how we think about our customer mix. Our sales are concentrated in high-quality customers and so from a credit risk stand point, those are very good. And our overall bad debt reserve is about 1.5. That just reflects that quality. So yes, these smaller customers can impact the top line a little bit. They can have small –less material impacts on the bottom line and on our bad debt expense, for example, Mervyns. We think our exposure to Mervyns, we think our exposure to Mervyns if it goes as normal Chapter 11 bankruptcy we’ll –could be exposure in the $1 million to $2 million range, so – nothing that we can’t manage through but we feel pretty good about our quality of our receivables.

Scott Krasik- CL King

Okay and then from a top line perspective, it’s just a few million bucks sort of across the board, is it?

Rich Noll

Yes, these are relatively small accounts. We’re concentrated in big large mass accounts and mid-tier accounts, so there’s always blips but at the end of the day, people are still out there shopping so I don’t see it as a material impact or a drag on our total top line.

So there’s all that timing dislocations but nothing material.

Scott Krasik- CL King

Okay, good. And then just lastly, we’ve seen it with some of the more fashion-related apparel and footwear companies in the last couple of years, the shift, retailers taking back-to-school product later. Have you guys been experiencing this? In years past it’s just become a bigger for expenditure, is this new for you guys?

Rich Noll

The timing shift we’ve talked about with back-to-school is actually very typical in our industry throughout time. Actually let me bring a little bit more clarity to it. Basically our major retailers have specific times that they drop their promotional tabs. Last year our big tab with one of our major retailers was 7/15. They take the inventory in three to four weeks in advance with that tab. The shipments happened in June.

This year, we actually have the better timing of the tab, it’s on August 1st. They’ve taken the inventory in three to four weeks before, which means the shipments were in July. So you can easily have this kind of $25 million or so swing from quarter to quarter just because of that type of timing. So this is very normal, it has nothing to do with the economic environment, it just so happens to be a different tab that we got this year versus last.

Scott Krasik- CL King

That’s really helpful. Thanks guys.

Operator

The next question comes from the line of Jared Orr with Morgan Keegan

Rich Noll

Hi, Jared

Jared Orr – Morgan Keegan

Hi, how are you? I saw that last year, you had $5 million benefit in gross margin, I was wondering is there any one-time benefit that hit this year’s gross margin line like that.

Rich Noll

There were no real one-time benefits this year.

Jared Orr – Morgan Keegan

Okay, thank you. Also the drop in three months LIBOR rate, how will that, how shall I look at the interest expense going forward with that drop, with the rest of your floating rate debt?

Rich Noll

Yes, as we give out modeling kind of information at the February investor day, we said use a blended rate of 6.9% and that was based on a 3.25% LIBOR rate –

Jared Orr – Morgan Keegan

Yes

Rich Noll

And adjust that 6.9% accordingly based on what your assumption is on LIBOR and that should get you the answer. If you’d used that methodology in the first half, you’d have been spot on, on interest expense.

Jared Orr – Morgan Keegan

Alright, thank you very much. Also this other line in the revenues, the one that was about $4 million this year, how should I look at this going forward? Is it going to be more, right about the $4 million range or how it’s been historically?

Rich Noll

Yes, what you’ll see is continued decline during this year. Basically what that is our manufacturing plants sell yarn and fabric to third parties just to balance manufacturing and that’s going to go away by the end of this year. So it’ll be – you’ll see the same 4 million or so each quarter in the second half but substantially down from last year and then it’ll be gone next year, basically.

Jared Orr – Morgan Keegan

Okay, thank you very much.

Operator

The next question comes from Clark Orsky with KDP Investment Advisors. Sir, your line is open.

Rich Noll

Hi, Clark.

Clark Orsky – KDP Investment Advisors

Hi, thanks. Just a question, given you’ve got more cash tied up in inventory, any thoughts on what you guys are going to spend for CapEx this year, roughly?

Rich Noll

Yes, what we said in the past is, in our investor day actually, that over the three years 2008, 2009, and 2010, we’d probably spend around $500 million with the bigger piece of that in 2008. So, the largest of the components would be 2008. We’re still on track, I’d say we have invested some in inventory in the first half but we’re very confident with our cash flow and our liquidity. We’ve invested $74 million to date in CapEx. We’ve funded the inventory to the level now that we need going forward and we bought back $18 million of shares. So we have really strong cash flow. It's a great part of our model. So we’ll stay on track on what we’re going to spend on CapEx.

Clark Orsky – KDP Investment Advisors

Okay, and I guess the other question I had was can you tell me in the second quarter, how much the non-cash stock comp expense was?

Rich Noll

Yes, it’s in the $6 million to $7 million range.

Clark Orsky – KDP Investment Advisors

Okay. Any -- I know you don’t want to give guidance– any thoughts on debt reduction this year?

Lee Wyatt, Jr.

No, what we always we’ll tell you is, we’ll take any excess cash flow and we’ll consider how on an economic basis how best to use that, and we’ll figure that out in the second half.

Clark Orsky – KDP Investment Advisors

Okay, thanks.

Operator

Your next question comes from line of Reed Kim with Merrill Lynch. Your line is open.

Rich Noll

Hi, Reed.

Reed Kim – Merrill Lynch

Hi there, how are you doing Rich? Just a quick question, I know you don’t like to speak about specific retailers, but I was curious if you could comment broadly how the – I guess the off price dollar discount channel is performing for you, if you’re seeing some weakness in department stores which is understandable, how that channel is working?

Rich Noll

In these type of economic times, they actually do pick up a little bit but to tell you the truth even theirr comps have been under pressure because you really got two impacts going on and I think its like some of these big box retailers are doing well. We not only have consumers who are a little bit strapped for cash, there’s no question people are driving less and consolidating trips. I saw an article the other day that said our total miles in US is down 10%, and so you’ve got these big box retailers that offer food and general merchandise that’s also helping fuel their growth or fuel their positive comps right now, and the dollar stores aren't participating in that as much.

Reed Kim – Merrill Lynch

Got you. And then on another topic, you touched on us with the higher inventory on balance but I was just wondering given the supply chain efforts you’re working on, does that –shall we take that to mean that your in-stock positions are still at a pretty comparable and strong level?

Rich Noll

With the transition like ours, there’s always some puts and takes in terms of overall service but we’re shipping product every single week and overall we’re in-stock across most of our categories each and everyday with our retailers. So we’re not seeing any major permanent disruptions in supply and that’s not having any impact on our sales whatsoever. So this is a proven course action to bring up inventories a little bit to further protect service.

Reed Kim – Merrill Lynch

Okay, and then you’re pretty loud and clear on the opportunity in Asia still being very, very strong but just given what we’ve agreed about inflation over there, have you perhaps taken the, sort of the bulk case [ph] in terms of the cost savings down a little bit over time or are you looking at some of those pressures as maybe deemed a little bit more temporary, especially in China?

Rich Noll

Well, a couple of things, when we did our initial modeling to figure out that China was or Asia was a good place to go, we’d assumed that we would face wage increases there for at least mid-teens increases on a compound annual growth rate in perpetuity. So we knew there’s going to be strong wage pressure there. We also made the assumptions that the RNB would appreciate substantially so we actually haven’t seen anything outside of what our initial modeling suggested but I would like to say that around the world we’re seeing these kind of cost pressures show up. It’s not just unique to Asia. In Central America and the Caribbean Basin we’re also seeing cost pressure. Those are mainly oil-based economies, they’re being hit hard right now and from terms of electric cost we’ve got a lot of things in place to mitigate that and you’re also starting to see waging pressure, wage increase pressure in those areas. So I think this input cost inflation isn’t going to be just isolated to Asia. That’s what you’ve been hearing about so far but I think it’s going to be much more worldwide.

Reed Kim – Merrill Lynch

Okay.

Rich Noll

Sorry, let me just end with one thing. So but remember where we’re going from which is the United States, where the wages are 10 to 15 times higher than they are in these other areas of the world. So our offshore and balance strategy makes all the sense in the world.

Reed Kim – Merrill Lynch

That’s good. Thanks, that’s helpful. And then the last one, I just wanted to follow up on the bad debt question, just curious especially in the US business which is obviously the bulk of it outside of, I mean your high quality customers, are there other smaller retailers where you maybe trimming your trade terms or are you tightening up at all?

Rich Noll

Yes, we actually had spin off -- really tighten our trade terms up to basically net 30 days, so we’ve done that. And we watch all those and worked directly with all those customers on a regular basis and based everything on aging and to the extent their aging gets slow, we call them and we’ll go as far as holding shipments until they get back on track. So we watch that a lot and we pay a lot of attention to it. Good news is again our, we had such a concentration in those high quality customers. These other ones are just smaller manageable issues.

Reed Kim – Merrill Lynch

All right, got it. Okay, thanks a lot.

Operator

Your next question comes from the line of Robyn Browdy with Highline. Your line is open.

Robyn Browdy – Highline

Hey guys, I was just hoping that you could help us understand the magnitude of the timing shift on some of the media spends and the IT spends from the first half that's not going to repeat in the second half. Can you just put some quantification around that?

Lee Wyatt, Jr.

Sure. In the first quarter you might remember that between IT and media, there was about a $19 million higher spend versus the prior year that we said would reimburse [ph] in the fourth quarter. We have a little bit of that in the second quarter but not very much because there's some offsetting things so that’s kind of the magnitude that would all – that should reverse in the fourth quarter.

Robyn Browdy – Highline

So, we should expect fourth quarter SG&A to be down $19 million year-over-year?

Lee Wyatt, Jr.

I can't tell you that but what I can tell you that we would expect these timing differences to reverse in the fourth quarter.

Robyn Browdy – Highline

Okay. And then what about the other spend, you said media and IT.

Lee Wyatt, Jr.

Right –

Robyn Browdy – Highline

The 19 was that the both of them combined.

Lee Wyatt, Jr.

Yes, it was.

Robyn Browdy – Highline

Okay, thank you.

Operator

Your next question comes from the line of Kenric Tyghe with CIBC World Markets.

Kenric Tyghe – CIBC World Markets

Good afternoon. Hey! I have a question for you which regard – you mentioned earlier on your commentary on the strength of socks and boy's underwear and inner wear category. I'd like just to follow up and better understand within you outer wear category, I mean to the extent it was steady as its goes across the various groups, fair and well but if you could also maybe just to speak to where if anywhere you saw particular strength or weakness within the outer wear segment as you did on the inner wear. That’s just to better understand where those sensitivities were in terms of consumer purchase packings or otherwise in this environment.

Lee Wyatt, Jr.

Yes. When you look across the sort of the subcategories within outer wear, I think they were all tended to be impact by the overall economic climate, for example, Champion was still up, we have been seeing about I think eight or nine quarters in a row of double-digit increases. That increase is only 5% or 6% for the quarter so it was impacted a little bit, not to a great degree. So all the businesses were impacted a tad, I think that’s sort of a normal backdrop of what was going on where we had the issues as I talked about before was clearly in intimate apparel which accounted for about $30 million to $35 million of our decline in the quarter.

Kenric Tyghe – CIBC World Markets

And just to follow up on that within sort of the active wear or tees or otherwise (inaudible) category but you didn't see any marked change other than perhaps fewer purchase opportunities? One thing in particular change in terms of what brands consumers are necessarily looking at or how they were timing their purchases really.

Lee Wyatt, Jr.

You mean you don't know?

Kenric Tyghe – CIBC World Market

– where people looking at – instead of a lower quality offering or a lesser offering within a particular category or where they still just the case of the frequency of purchase had declined.

Lee Wyatt, Jr.

We are not seeing any big pervasive patterns that are unique to one particular area or another. I would remind you that most of our products including Champion are positioned in a value space and so if we are going to see any benefits that trade down, we'd actually accrue those benefits, but nothing that really pops out on the overall outerwear channels.

Kenric Tyghe – CIBC World Markets

Great. Thanks very much.

Lee Wyatt, Jr.

Certainly.

Operator

The next question comes from the line of Jake Crandlemire from Ramsey Asset Management. Your line is open.

Jake Crandlemire – Ramsey Asset Management

Hey guys! Can you – outside of cotton, can you kind of quantify for us what kind of headwinds you are seeing on your basket of other raw materials. I know highlighted kind of 4 million. Just trying to get a sense of what everything else is looking like and how you see it going forward into kind of second half of '08 and '09.

Lee Wyatt, Jr.

I think, probably the best way to think of cost overall commodity cost increases is the increase in inventory levels. We talked about $54 million of it or about half of that $108 million inventory increase over last year was cost related. You think can back out about 10 million of that for FX gains, leaves you about $44 million. You can back out then the cotton piece of it because cotton in the second half is going to be at $0.69 and $0.75 respectively in the quarters and the balance is all these other kind of costs per se.

Jake Crandlemire – Ramsey Asset Management

Got it. Great. Thanks. And was there any material impact to you that you can quantify for us in terms of dollars or margin that you guys received from your – essentially from higher utilization rates from your plants in this inventory build.

Lee Wyatt, Jr.

Yes. Nothing out of the unusual or out of the ordinary there – no, pretty standard.

Jake Crandlemire – Ramsey Asset Management

I mean, did you guys receive a benefit, just from running your plants at higher utilization that was quantifiable?

Lee Wyatt, Jr.

Our plant operations were run very effectively. We did get benefits but a lot of that is around supply chain globalization and kind all those cost initiatives. So you roll that in and we definitely get a benefit.

Jake Crandlemire – Ramsey Asset Management

Got it. And just one more, in terms of your pricing strategy or the potential price increases in kind of in '09, is that going to centered more around actual dollar increases or reducing the amount of promotion that you guys offer value packs and the like?

Rich Noll

No. We're –it wouldn't be by cutting back promotion and actually in our categories, you need to make sure you're adequately supporting promotion. So what we're talking about with retailers and what we've done if talking about sort of frontline price increases, not by simply cutting back in promotion areas. And also, it won't be a broad-based across-the-board type of increase. We have to look at each individual category, understand the dynamics, the competitive actions, the marketplace responses, and figure what the right percentage increases would be.

Jake Crandlemire – Ramsey Asset Management

Great. Thanks guys.

Rich Noll

Certainly.

Operator

Your next question comes from the line of Karru Martinson with Deutsche Bank. Your line is open.

Karru Martinson – Deutsche Bank

Good afternoon. As we look at kind of the the broader macro outlook, I was wondering if you could give some color on what underpins your view of the retail market going forward in 2009?

Rich Noll

You know, clearly we're seeing consumers being very judicious with their spending and with retail traffic being down slightly but things ebbs and flows and we're fairly confident that if we get the right value equation for the retailers, they'll use us to really help drive the traffic and bring people back into the stores especially during back-to-school and holiday.

Karru Martinson – Deutsche Bank

Are you seeing any pushback from the retailers given the inventory levels in every way it says that they want to be very lean on paper but are you actually seeing that bolster your numbers?

Rich Noll

When you account for the timing shift that I talked about earlier, actually our retail inventories are just a tad lower than they were this year than last year, so we're not –in our category not really seeing that type of push. They are right in line with where they should be historically and so we're not having any major build up nor are we seeing any major build down.

Karru Martinson – Deutsche Bank

And just from a competitive standpoint, going back to the cotton prices, are you seeing others being more aggressive or less aggressive in response to the rising raw material cost that we're seeing out there?

Rich Noll

When I look at the broad landscape, there is no question that there's a lot of vendors talking to retailers about price increases. It clearly varies by category because each category is under a lot of different pressures. Categories that are sourced, for example, solely from China maybe they're probably they probably have been out there more aggressive than people that source from other areas of the world, manufacture in other areas of the world. So it's not going to be one answer, but clearly those discussions are happening.

I want to remind you, we've experienced in our industry, in apparel, deflation for well over a decade. So there's a lot of buyers that don't even understand what it's like to operate in an inflationary environment and they are the ones that tend to push back more. There's other retailers and channels that actually do understand the benefit of across the board price increases because it helps them actually cover their rising input costs and actually increase comp store sales. So you get different reactions from different channels, different categories, and different people and that's why it's a complex topic to manage over the next couple of months.

Karru Martinson – Deutsche Bank

Thank you very much guys.

Operator

Your next question comes from the line of Neal Halpert from Davenport and Company.

Neal Halpert – Davenport & Company

Hey guys.

Rich Noll

Hi Neal.

Neal Halpert – Davenport & Company

In February, you were talking that Champion is one of the least promoted brands that you have within Hanesbrands. Can you give us a little clarity in the second half of the year where the Champion promotions are going to be going so we can kind of factor that into our figuring for the second half?

Rich Noll

Yes, you're absolutely right. Champion is not the type of brand or the product offering that lends itself to big back-to-school- or holiday promotions, so that's mainly in the Hanes category and male underwear and socks and panties and those types of (inaudible) what I've been talking about this big holiday and back-to-school promotions.

Champion is much more of a merchandised story within retailers and while holiday is a stronger period of time, than say the first quarter of January or February time-frame, it's not something that we're out there promoting in a major way and we have no plans to change to that.

Neal Halpert – Davenport & Company

Okay. You were talking about the higher inflation and then you mentioned the labor. Are there any labor pressures coming from the Central America or the Caribbean Basin that you guys can give us some insight on?

Rich Noll

Yes, and I think those things are just starting. As I said before, many of those economies are oil based. They're seeing their cost of living go up and we're seeing some of the governments in certain countries actually now give wage increases to the public sector and generally the private sectors tend to follow along. So they are feeling those pressures and I expect to see some wage increases happening throughout Central America and the Caribbean Basin over the next 4 to 6 months.

Neal Halpert – Davenport & Company

Is there any basis points or percentage points that you can give us?

Rich Noll

At this point it is a little unclear and it is one of the reasons that we had this strategy to balance across hemispheres. I want to remind you that the wage base in Central America or Caribbean Basin is actually substantially higher than in Asia. Actually on the order of three times, it might be a $0.60 an hour in some countries in Asia; it would be a $1.60 an hour in Central America or Caribbean Basin. You have also got to take that into account when you are hearing the percentage increases because it's the penny increases that actually matter.

Neal Halpert – Davenport & Company

Okay. One last question, in terms of the restructuring cost guidance that you gave back in February and the number was pretty low this quarter. Are you still holding to the guidance that you gave or that means a lot more is coming soon?

Rich Noll

Yes, we have not revised that guidance again. That was a broad estimate for a three-year period. It looks a little high at this point but it is too early to change it.

Neal Halpert – Davenport & Company

Okay. Thank you.

Operator

Your next question comes from line of Scott Krasik with CL King, your line is open.

Scott Krasik – CL King

Thanks Rich. Just a quick follow-up, we've seen in December cotton futures sort of crazy over the last couple of months. Where have you been in terms of forward buying, have you been taking advantage when they have been at $0.70 level? Do you have some sense on what it looks like for the first half of 2009?

Rich Noll

Yes, and clearly we bought through 2008. We are partway through the first quarter of 2009. But we have actually been seeing those cotton prices declining significantly, so we are buying a little closer in now. We are waiting for those to continue to decline. We do not want to get out there and be aggressively buying right now in a declining price market and lock in some high prices. We are covered to a way. We got first quarter reasonably covered but were standing pretty close right now.

Scott Krasik – CL King

So that – guidance that you've given a sort of 75 to 85 right now, you would feel pretty good about it and maybe being at the lower end of that.

Rich Noll

Yes. If you will look at the December contract right now, it is around $0.73 a pound so it is lower than that range.

Scott Krasik – CL King

Yes, great. Okay thanks very much.

Operator

Next question comes from the line of Clark Orsky with KDP Investment Advisors.

Clark Orsky – KDP Investment Advisors

Hi. Can you repeat what the FX benefit was for international in the second quarter?

Rich Noll

Yes, on sales, it was about $12 million in sales and profit is $1 million to $2 million, very immaterial.

Clark Orsky – KDP Investment Advisors

Okay, I guess I just wanted you to repeat what you have said about the issues you saw in intimates. Yes, you said the intimate market was down and there were two other comments you made that I didn't catch, if you could just kind of expand on that and any view you may have on how things went as you moved into July.

Rich Noll

So the second 2 things were one, we are seeing softness in our special brand such as WonderBra, Just My Size, and Barely There. Those are brands that reach about anywhere around $100 million or so and we got tactical plans in place to turn those around. A lot of those brands especially Barely There and WonderBra are strong in the mid-tier and department store channel. The other issue is with panties and most of that is attributable to a promotion disadvantage at Easter through Mother’s Day which is now sort of corrected itself as we've come in to back to school timing when we are normally on promotion, as well as our competition is on promotion.

Clark Orsky – KDP Investment Advisors

Okay. Any feeling on how things are going in July? Are you seeing similar trends?

Rich Noll

Yes, well in terms of our shipments, I talked about my prepared remarks that actually for the first 4 weeks of July, our shipments were up over $25 million, all due to the timing shift that we are talking about from the back to school from June to July. In terms of sell-through out retail, it is a little early to tell how back to school is coming; the major promotion timing really does not start until August 1. So you really have to see how sell-through goes through August to get a read on how back to school is going.

Clark Orsky – KDP Investment Advisors

Okay thanks.

Operator

Your next question comes from the line of Jared Orr with Morgan Keegan. Your line is open.

Jared Orr – Morgan Keegan

Hi guys. I have a follow-up question about the bad debt. What kind of effect is this going to have on your allowance for doubtful accounts like Mervyn's and Goody’s? Is that going to have a negative impact on the allowance for doubtful accounts?

Rich Noll

The Goody's has happened and that was definitely immaterial. The Mervyn's – again it could be – and that will foll through on the P&L that would be $1 million to $2 million in that range, but it’s early. That’s just quick guess, but if it goes as a normal bankruptcy, well they are at Chapter 11, they’re going to come out of it, they’ve got good financing. Looks like they’ll be pretty manageable and it shouldn't be that material to us.

Jared Orr – Morgan Keegan

Okay. Thank you very much.

Operator

Our next question comes from the line of Jacob Strumwasser [ph] from Salem Capital [ph]. Your line is open.

Rich Noll

Hi Jacob.

Jacob Strumwasser – Salem Capital

Hi guys. How are you? Just to follow up on the question that was asked. Last quarter, you decreased allowance as a percent of gross receivables, so I guess I’m trying to understand why given more retailer defaults, i.e., Mervyn's and Goody’s, did you think that made sense?

Rich Noll

Let me be really clear on what happened in the first quarter with our receivable reserves. That $11 million reduction in the balance sheet reserves did not impact profit. Those were just some normal write offs as we cleared deductions and other chargers, really didn’t relate very much to bad debt. There were other type reserves and charges. So, unrelated, we’re at 1.5% bad debt reserve which has been very consistent over the last couple of years again reflecting that good quality. So those write offs in the first quarter did not impact profit and really didn’t reflect anything to do with accounts receivable bad debt reserves.

Jacob Strumwasser – Salem Capital

Got it. Good. Thank you. That’s it.

Operator

Our next question comes from the line of Dennis O’Rourke from Regiment Capital. Sir, your line is open.

Dennis O’Rourke – Regiment Capital

Yes. Hi, could you remind me what your the stock buy back plan is for the year and what are the restrictions under your credit agreements to buy back stock?

Rich Noll

Yes. We are limited this year to $30 million of share repurchases, and to date, we’ve repurchased about $18 million.

Dennis O’Rourke – Regiment Capital

And does that reset every year or is it a one time $30 million?

Rich Noll

No. It resets every year. Next year is $35 million under the current covenant.

Dennis O’Rourke – Regiment Capital

Okay. Thank you.

Operator

Our next question comes from the line of Janet Clay with Liberty Mutual. Your line is open.

Janet Clay – Liberty Mutual

Hi. You mentioned that you’re in compliance with your covenant, I was just wondering how much of a cushion do you have at the moment under the leverage test?

Rich Noll

We have significant cushion. We obviously follow that from an EBITDA’s standpoint, it’s over a $100 million of cushion so its – we track it. We’re very comfortable with our covenant.

Janet Clay – Liberty Mutual

Okay and then, I do have a question – you mentioned the later timing in the back-to-school shipments. I’ve seen some stuff in the press talking about the retailers looking to pull the back-to-school forward a bit with promotions, are you not seeing that or is it in different types of products?

Rich Noll

Yeah. I’m not sure what comment you’re about but this is crystal clear. We’ve seen this type of thing over and over again. As I said they take three to four weeks in advance of the promotion circular dropping, that’s when they take the inventory. Last year we’re at 7/15 so the shipments went in June. This year, we’re at 8/01. The shipments gone in early July. These are pallet displays and shippers that go on secondary locations and big (inaudible) and things like that around the store. They don’t want to bring it in too early because they’ll sell out before the promotions are clear [ph] ahead. So, it’s all very well timed and orchestrated and this is just sort of a typical swing at back-to-school.

Janet Clay – Liberty Mutual

Okay. And just one other thing. On your international sales, I got on the call a little bit late, but what was the impact of FX on that change in the international sales?

Lee Wyatt, Jr.

The sales were up 20% in the second quarter, if back out the FX benefit, they were up 8%.

Janet Clay – Liberty Mutual

8%. Okay. Thank you very much.

Rich Noll

Certainly.

Operator

With that, we have reached the allotted time limit. I’ll now turn the call back over to Mr. Lantz. Do you have any closing comments?

Brian Lantz

Thank you. We’d like to thank everyone for attending our quarterly call today and look forward to updating you after the third quarter of 2008. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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