T.C. Robillard - Richard A. Noll - Chairman and Chief Executive Officer Gerald W. Evans - Chief Operating Officer Richard D. Moss - Chief Financial Officer.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division Omar Saad - ISI Group Inc., Research Division Susan K. Anderson - FBR Capital Markets & Co., Research Division Matthew McClintock - Barclays Capital, Research Division Christian Buss - Crédit Suisse AG, Research Division David J.

Glick - The Buckingham Research Group Incorporated Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division Steven Louis Marotta - CL King & Associates, Inc., Research Division Jim Duffy - Stifel, Nicolaus & Company, Incorporated, Research Division Danielle McCoy - Wunderlich Securities Inc., Research Division Taposh Bari - Goldman Sachs Group Inc., Research Division Andrew Burns - D.A.

Davidson & Co., Research Division Carla Casella - JP Morgan Chase & Co, Research Division.

Good day, ladies and gentlemen, and welcome to the HanesBrands Third Quarter 2014 Earnings Call. [Operator Instructions] Please note, today's conference is being recorded. I would now like to hand the conference over to T.C. Robillard, Vice President of Investor Relations. Please go ahead..

Good afternoon, everyone, and welcome to the HanesBrands Quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the third quarter of 2014. 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 hanes.com website. I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks are detailed in our various filings with the SEC, such as our most recent Forms 10-K and 10-Q, and may be found on our website as well as in our news releases and other communications. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Unless otherwise noted, today's references to our consolidated financial results, as well as our 2014 guidance, exclude all onetime charges and expenses.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release, which is available in the Investors section of our hanes.com website.

With me on the call today are Rich Noll, our Chief Executive Officer; Gerald Evans, our Chief Operating Officer; and Rick Moss, our Chief Financial Officer.

For today's call, Rich will highlight a few big-picture themes, Gerald will provide a sense of what is happening in our businesses and Rick will emphasize some of the financial aspects of our results. I will now turn the call over to Rich..

our organization is executing very, very well. Our marketing teams are connecting with our consumers, our sales teams are working well with retailers, our supply chain teams continue to increase efficiency, our IT and administrative teams are digitizing processes and our entire organization is effectively integrating acquisitions.

This superb execution has led to EPS doubling in just 2 years and it supports our belief that we can continue increasing earnings at double-digit rates for many years to come. Over the past several years, Innovate-to-Elevate has been an important margin driver.

Equally as important has been the performance of our overall supply chain, which, in my opinion, is often overlooked. But it's our vertically integrated company-owned supply chain that is truly the foundation of our business model. It is what enables Innovate-to-Elevate.

It enhances margin through ongoing offering efficiencies and it represents the leverage point for creating value with acquisitions. By driving more and more volume through our supply chain with acquisitions, we can generate substantial cost synergies, and therefore, create significant opportunity for margin improvement.

We saw this with Gear for Sports and we're seeing it with Maidenform, and we expect to see it with DBA and all of our future acquisitions. Speaking of acquisitions, let me provide you a brief update. We have just passed the 1-year closing anniversary for Maidenform.

In that time, we were able to complete the integration, begin internalizing production, rationalizing our product portfolio and introducing innovations into their design process, a remarkable achievement in only 12 short months. And I think this achievement demonstrates our core competency in acquisition integration.

Maidenform is now being run as part of our core business, and going forward, it will be considered as such. Their business continues to perform well this year, and we remain confident in our ability to deliver $80 million in operating profit by 2016. Turning to DBA. We have now owned the company for roughly 2 months.

Last month, we hosted 50 of their top executives in Winston-Salem, while earlier this month, Gerald and I spent the week in Europe as the integration teams are diligently working on detailed plans. We are very impressed with the quality of DBA's management team.

And the closer we get to their business and their people, the more excited we are that this is a great acquisition for HanesBrands. So in summary. We have the right set of strategies, we are executing extremely well and this is evident in our results.

Looking forward, we believe our ability to leverage the power of our business model by effectively deploying our cash flow positions us for continued double-digit earnings growth for the next several years. With that, I'll turn the call over to Gerald..

Thanks, Rich. Our business continues to perform extremely well and we're confident this momentum can continue. Our supply chain is delivering strong results as factory efficiencies and ongoing optimization efforts are helping drive margin improvement.

Innovate-to-Elevate continues to deliver benefits across the organization, and our acquisitions of Maidenform and DBA are contributing nicely to profits. Let me start with a brief update on the overall retail environment now that back-to-school is over and we're heading into holiday.

As we mentioned in early September, back-to-school at retail got off to a slow start in July, but we saw momentum build in August. The sell-through momentum, particularly within our Innerwear and Basics categories continued through September, helping drive share gains during back-to-school. Looking to holiday.

While we expect the overall consumer environment to remain challenging, we believe we are well positioned as our retail inventories are in line with last year's levels and the sell-through momentum in Basics has continued into early October. Turning to our segments. Innerwear had another solid quarter.

Revenue, excluding Maidenform, was up slightly from last year while operating margins improved 200 basis points, driven predominantly by efficiency gains in our supply chain. Our Basics business had a strong quarter with shipments up mid-single digits, driven by solid POS trends.

In our intimates business, we saw positive POS trends in our core bra brands, which were up mid-single digits in the quarter, driven by innovation. However, shipments in our base intimates business were down from last year, due to tighter inventory management in the mid-tier channel and planned brand consolidations.

Touching briefly on our platform innovations. ComfortBlend and X-TEMP now represent nearly 13% of our Basics revenue as these platforms continue to expand their space. X-TEMP, in particular, is seeing solid gains as we expand the platform into new products and channels of distribution, while driving strong productivity results for our retail partners.

In our bra business, our ComfortFlex Fit platform continues to perform well. It represents over 20% of our bra business and is seeing sell-through increase 14% year-to-date. Switching to Activewear. Sales in the quarter increased 5% over last year driven by strong double-digit growth in our Gear for Sports business.

Revenue in our Champion business is up 5% year-to-date with strong results in the sporting goods, mid-tier and department store channels being somewhat offset by mass.

For the full year, we now expect Champion revenue to increase high single digits with continued opportunities for expansion at sporting goods, mid-tier and department stores going into 2015.

Activewear delivered an operating margin of 16.1% for the quarter, up from 14.4% last quarter and 10.9% in the first quarter as the benefits from Innovate-to-Elevate continue to drive margin improvement. Turning to international. Sales, excluding DBA, were up 1% over last year and up 5% on a constant currency basis.

Excluding DBA, operating profit increased 23%, while our operating margin improved 270 basis points to 15.3% due to contributions from Maidenform as well as continued benefits from our regionalization strategy. So to sum up. Our business continues to perform extremely well.

The combination of our company-owned supply chain, our Innovate-to-Elevate strategy and the effective deployment of our cash flow are driving strong returns for shareholders, and we're confident this momentum can continue. I'll now turn the call over to Rick..

Thanks, Gerald. We had another quarter of strong results. Contributions from acquisitions, efficiency gains in our supply chain and benefits from Innovate-to-Elevate combined to deliver earnings per share growth of 41% for the quarter and 44% year-to-date, providing further evidence of the power of our business model.

For the quarter, revenue increased 17% over last year to $1.4 billion as our core business contributed 1 percentage point to our growth rate, while Maidenform contributed roughly 9 points and DBA added approximately 7 points.

Our gross profit margin increased 190 basis points from last year to 37.1% with DBA accounting for approximately 60 basis points of the increase. Despite only owning the business for 1 month in the quarter, DBA had an outsized impact on our margin due to the fact that European companies typically carry higher gross margin rates and higher SG&A rates.

For the quarter, SG&A costs increased 120 basis points to 21.6% of sales with 90 basis points attributed to DBA. Our operating profit increased 23% or $40 million from last year with the growth roughly split between contributions from our acquisitions and improved margins in our core business.

For the quarter, our operating margins increased 70 basis points to 15.5% as the 30 basis point headwind from DBA was more than offset by 100 basis point increase in the remainder of our business.

Interest and other expense as well as our tax expense were in line with our previously stated guidance, resulting in EPS for the quarter of $1.73, which was slightly ahead of our plan. Turning to full year guidance.

We continue to expect full year revenue to be between $5,350,000,000 and $5,375,000,000, which includes approximately $500 million from Maidenform and $275 million to $300 million from DBA. We've increased our operating profit guidance $15 million to a range of $750 million to $770 million.

The midpoint implies an operating profit margin of 14.2% or 130 basis points above last year, a great achievement that more than overcomes the dilution from Maidenform, and now, DBA. Inherent in our full year operating profit guidance is approximately $45 million from Maidenform and approximately EUR 20 million from DBA or about $25 million.

We expect roughly $93 million in interest and other expense and a full year tax rate of approximately 13% to 14%. Given our performance year-to-date, we've raised our EPS guidance to a range of $5.55 to $5.65. The midpoint represents an EPS increase of roughly 43%, which would come on top of last year's 49% increase.

We've also increased the low end of our cash flow from operations guidance, bringing our new range to $550 million to $600 million. For the fourth quarter, our guidance implies a sales range of $1,550,000,000 to $1,570,000,000, an operating profit range of $187 million to $207 million and an EPS range of $1.35 to $1.45.

Note that the quarter includes a 53rd week, which should result in a $25 million to $30 million increase in sales and an approximately $3 million increase in operating profit. As suggested earlier, DBA should have a positive effect on our gross margin and a negative effect on our SG&A rate.

Inherent in our guidance, on a year-over-year basis, is the assumption that a full quarter impact of DBA could add roughly 170 basis points to our fourth quarter gross profit margin and add roughly 270 basis points to our SG&A rate. So in closing. We had another strong quarter despite the challenging consumer environment.

Margins continue to expand in our core business, and our acquisitions have become meaningful contributors to our growth rates. Going forward, our ability to effectively deploy our cash flow in ways that will best leverage our business model positions us for continued double-digit earnings growth over the next several years.

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

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

Operator?.

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

I guess, Rich or even Gerald, for you, a follow-up just in terms of what you guys are seeing as we enter into holiday within the mass channel and innerwear, specifically. Looks like sequentially, picking up a bit, but maybe just a little bit more color on the environment.

And then within that, sort of this deflationary aspect going on, be it cotton or oil, the puts and takes in how you think that impacts the business..

Yes, so Eric, let me go and talk about the macro environment and I'll turn it over to Gerald to talk a little bit more explicitly about holiday as well as sort of into '15 in terms of pricing and things like that.

So the macro environment, from a consumer perspective, has been the same for, actually, at least the last 2 years where we're seeing consumers come out at certain times and spend and then it seems like they go back and they hunker down. So it's sort of up and down, marginally positive.

And fortunately, coming into the year, we've made the assumption that, that was going to continue and it was going to be a relatively choppy muted environment, and unfortunately, it turned out to be the case.

The great thing is our business model was fine-tuned to operate really well in a low-growth environment and you're seeing it in our earnings results this year. And our expectation is that kind of environment's going to continue, but we feel really good about being able to navigate it.

Gerald, do you want to talk more specifically about holiday?.

Yes, Eric, as we look toward holiday, I think Rich is spot on. We anticipate it'll be somewhat the same kind of environment, up and down, choppy with a modest sort of upward trend.

As we entered October, we saw the first week of POS, for example, down, followed by an up week and then a flat week, which sort of reaffirms that sort of choppiness in the environment. Coming out of back-to-school, we think we came out certainly clean on inventory.

And along with the offerings we have in the market, we think we're positioned well to benefit even in a choppy market, and so we feel good about where we sit and certainly have built that in our guidance as we look forward. As we look to 2015, yes, pricing is pretty settled in the market right now.

I think the one thing that our retail partners have learned over time is it's really value creation through innovation and things that drive growth over time, not discounting, and we think that the retailers are positioned well to continue that into the New Year and have benefited from it through the back-to-school period..

Yes. And let me just actually talk a little bit about inflation expectations. I think that I'd like to remind everybody that -- Rick, don't we have about 15% of our cost of goods is labor and....

That's right. And cotton's less than 10%..

Less than 10%. So -- and I do think that everybody, especially all the retailers, understand that wages in the developing world are going up at high single digits to double-digit levels. And that while cotton may be a little bit of a tailwind, they do recognize that there's other inflationary pressures.

And we're going to be in a moderate cost-push inflation environment over time, and that's where brands thrive and that's, I think, another advantage that we're going to have over the next couple of years..

Perfect. And then if I could just follow up. In terms of the acquisition pipeline out there, Rich, I mean, obviously you've got to digest DBA a bit here, but as you look forward, maybe just speak to the landscape. I know you're not going to get specific on particular assets.

But just again, how you kind of continue to refresh, use the free cash to go out and find accretive acquisitions that you can leverage the supply chain and scale of a business?.

Yes, you're absolutely right. We've owned DBA for 2 months. We need to focus on developing our integration plans. But that said, we have very strict criteria that guide our acquisition thinking, one being in our core categories and the second one is being able to leverage that global supply chain where we can create a lot of value for our shareholders.

And when you think about the types of companies, domestically and globally, that are in our core categories, that actually, over the last decade or so, got out of their supply chains, we believe we've got a lot of opportunity to continue to create value through acquisitions for many years.

And it's why it's become one of, not the only, but just one of our strategic initiatives to create value and we think we're doing it well..

Our next question comes from the line of Omar Saad from the ISI Group..

Europe and DBA, can you -- I know you haven't owned the asset that long, but can you talk about what you're learning about the market. You look at your business in the U.S. and you look at the European economy, it's roughly the same size as North America, give or take. But you look at this huge business and platform you've built in the U.S.

across the different brands and categories and channels that you operate in, can you talk about what you're learning about the European market? Is there an opportunity to scale it up there? Or is it fundamentally different in terms of more fragmented across different countries and different retailers and channels and different regions? Is that an inhibiting factor? Do you think this platform could be a much bigger platform, longer term, in Europe?.

One, platform innovation can work across countries, it can work across brands and it's a great way. We find that consumers are looking for the same types of things in innerwear products in a lot of those countries as they are in United States, Mexico, Canada or Brazil.

So we'll be able to drive our platform innovations across countries and across brands. And then the second thing is, obviously, the global supply chain.

So you're going to see it's going to be a bit of a hybrid model in Europe where there's going to be country-specific brands and commercial organizations that are focused against that local trade and the local consumers, but we're going to be able to get scale advantages by driving Innovate-to-Elevate platform innovation across as well as leveraging our global supply chain.

So I think from our perspective, acquisitions work extremely well in this. You can buy strong #1 or #2 positions, plug them into your global platforms and supply chain and really create a lot of shareholder value..

And that's kind of my follow-up. In Europe, you obviously got a -- now you have a pretty decent size presence across a lot of these countries.

Is there -- is organic growth the way to attack newer markets or newer segments of the market in Europe across the various countries? Or is it possible that there could be future acquisitions to layer on to your new European platform?.

So again, the answer is yes to both. You're going to find in some of those more developed markets, there's strong branded positions, for example, in Germany. While we have a strong -- with the DBA acquisition, we have a strong position in hosiery, we don’t necessarily have a strong position in men's underwear or even women's intimate apparel.

We've got efforts to drive organic growth there. But an acquisition in that market might not be out of the question from a long-term prospect. I'm not saying that we're focused on any target there today.

In other markets such as Eastern Europe and some of the other countries where there's a lot more fragmentation and you don't see those kind of strong brands, I think continued organic growth with some of the European brands could also make sense.

So we're going to have to look at that country-by-country, category-by-category, but we've got a lot of opportunity once we fully integrate DBA to the degree that we need to drive the results with that business that we can use that as a platform for continued growth in Europe for a long time..

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

I was wondering if you could maybe touch on maybe more broadly just where you see the drivers of double-digit earnings growth going over the next 2 to 3 years given, in the U.S. market, your top line is probably like low single to mid-single digits.

So I guess if you could maybe rank getting to that double-digit, from acquisitions, I2E, share repurchases, international, et cetera?.

So I think I'll break that into a couple of components because I firmly believe we've got that opportunity to continue double digits for many, many years. And, obviously, we want to drive -- continue to drive I2E in our core businesses.

But also remember, those core businesses generate a tremendous amount of cash, and so that cash flow gives you the ability to deploy that to also drive earnings growth at a faster rate than sales or even operating profit growth. And we can deploy that cash, either returning it to shareholders through dividends or making smart acquisitions.

So acquisitions is obviously going to be a piece of that, but let's not ignore the fact that we've got that cash flow coming from those core businesses, which also put sort of a strong base from which we continue to drive earnings over time. I think we've got still a lot of categories that can benefit from Innovate-to-Elevate.

It's further along in some areas than others, but you're just seeing the beginnings of that show up in the Activewear segment where, for the first time, we hit double-digit operating margins just last year. That's improving so far again this year, but we're not done there.

So we've got a lot of opportunity to drive margin expansion in core business, use that cash flow, use acquisitions as a part of our strategy to continue driving double-digit EPS for many, many years..

Got it, that's helpful. And then just one follow-up on the Activewear. So it looks like Gear For Sports really kind of drove everything with double-digit growth.

Is this a new base that we should expect? And then, I guess, on everything else excluding that, it looks like it was a little bit on the lighter side, if you can maybe add a little bit more color on that?.

Yes, I'll talk a little bit about Gear. I'll turn it over to Gerald to talk about Activewear and probably Champion, more specifically, in Activewear. So Gear for Sports was our first acquisition. We closed it at the end of 2010. It's doing extremely well. It's got a lot of strong, solid top line growth this year.

But most importantly, their operating profit growth has been at an even faster rate. We've hit all of the synergies that we were looking for over time. We feel really good about the momentum of that business and believe that it could be a platform for further growth within the Activewear segment, again, for a number of years.

So it was a great acquisition and you're really seeing it start to shine through, especially in this last quarter of this year.

Gerald, do you want to talk about rest of Activewear, including Champion?.

Sure. Really, when you look at the rest of Activewear, the heart of that is the retail Activewear business and that's the Champion business. And if you look at it on a year-to-date basis, Champion sales have increased 5% over the prior year.

And on a full year basis, we're still expecting Champion sales to grow in the high single digits, down slightly from the 10% rate we talked about earlier, but still a very solid high single-digit rate. The Champion brand, itself, continues to resonate very well with consumers.

It's performing very well in the sporting goods, mid-tier and department store channels. Its success is being diluted somewhat in the short term by some challenges in the mass channel. We'll overlap these challenges in the mass channel in the fourth quarter, and we're also implementing a number of actions to accelerate mass growth going forward.

So as we look to the fourth quarter, we have real good visibility now to our order bank and we feel good about returning a very solid growth across the sporting goods, the department store and mass channels in the fourth quarter.

And we also continue to see gains in distribution coming in the sporting goods and mid-tier department store channels end of '15. So we feel good about where the Activewear business is going..

And our next question comes from the line of Matt McClintock from Barclays..

Rich, I know you probably can't talk too much on this. But in your prepared remarks, you talked about the cross-company integration planning for DBA.

I know it's only been 2 months, but can you just share any maybe early results or lessons learned or anything in more detail in terms of how you're thinking more about that integration?.

Well, I can't give you any more detail on the integration plan because we literally are right in the midst of it now, so it would be premature to try and talk about it before we actually formulate those plans. I think we will have a lot more to say about it in our fourth quarter call in late January.

But what we have learned over the last couple of months is that they've got a really, really strong management team. Their brand positions in their respective markets are really, really good.

We do think we've got a lot of opportunity to drive some of those platform innovation across in some of the selected markets, especially where we don't have strong share positions. I think I referred to somewhere like Germany before. German, the market, there's a lot of aspects of the basics market there that look a lot like the U.S.

and we think some of those products may be applicable to go in and rifle shot and go after some organic growth, leveraging our global supply chain. So we feel really good about what's there. With the -- about the only negative that sort of emerged is it looks like the macro headwinds in Europe are a little bit softening in some of the key geographies.

Southern Europe seems to have stabilized and that hasn't changed, but I think you hear in the media a little bit about slowdown in France and/or Germany, so we'll be mindful of that. But we didn't buy this business for the short term.

We bought this business for the long term, and we feel really good about our ability to get all the leverage and synergies that we talked about. But it's too early to really hit on any specifics yet..

That's completely fair. But as a follow-up question, just the acquisition of DBA does somewhat change your geographic mix.

And with exchange rates fluctuating as much as they do, I mean, how should we think about FX pressures going forward on the various levels and your ability to manage through them?.

First, let me talk about how FX might have impacted the DBA acquisition and then I'll turn it over to Rick to talk more specifically about how exchange rates impact our near-term and going-forward P&L.

So when you look at the DBA acquisition, we bought the company in euros, Rick actually financed the debt in euros and we intend to use their cash flow in euros to pay off that debt over time.

So when you look at the after-tax internal rate of returns, it's not really impacted virtually at all by the difference in exchange rate from when we announced the acquisition to when we completed it.

We still also feel very good about leveraging our size and scale in getting all those synergies, more than doubling their operating profit over 3 to 4 years and ultimately having it contribute $1 of earnings per share. So no real impact there.

In terms of the P&L in the near term and go forward, Rick?.

We've seen a moderation of the impact of FX rates on the business as the year's gone by -- as this year has gone by. We were about -- it was about $5 million of FX impact on the top line in the third quarter.

In terms of going forward, keep in mind that DBA will be incremental to us for a full year, therefore, constant currency comparisons really won't be impacted by the DBA acquisition until, really, until the fourth quarter of next year..

Our next question comes from the line of Christian Buss from Crédit Suisse..

I was wondering if you could provide some perspective on how you're thinking about retailer inventory management as we head into the fourth quarter? And what your expectations are for that European business as well from an inventory standpoint?.

So our expectations on retail inventories going into holiday and our expectations on how they're managing it, Gerald?.

Going into holiday, we feel like that we're well positioned from a retail inventory standpoint. We had a good sell-through coming out of back-to-school, entered in a solid position and we think we're well positioned for how the sell-through will go in that period of time.

So from the standpoint of where we're positioned going in, it looks good and don't really have any overhang from inventory at this point in time..

And in terms of coming out -- the expectation what might be coming out, generally when inventories do get pulled down towards the retailers' year-ends, generally that happens in January. We have seen 2 times in December of '08 and December of '11 where retailers pulled their inventories down a little bit earlier in December.

That tends to be more unusual. Our planning assumption now is that the inventories will probably be reduced in January.

But Rick, correct me if I'm wrong, but even if they do pull it up, it's not a huge impact on our overall business, wouldn't you say?.

Right. It might push us a little bit more towards the lower end of the range on sales and profit, but that's all. About all it would do..

And our next question comes from the line of David Glick from Buckingham Research..

A couple of questions. First, in terms of the -- it sounds like inventories are well under control at retail.

And I'm just wondering if retailers are continuing to see inflation as their friend and whether there's any changes in terms of whether some of maybe your weaker competitors are getting more aggressive from a promotional standpoint? Or you've seen the continuation of what you're seeing over the last year or so? And then secondly, you clearly have an opportunity to build scale in your European business, wonder how you think about the Asian market from an M&A standpoint?.

Let me take the first part of the question first, David, from the standpoint of promotion and volatility in the business right now. We're seeing actually that pricing has been very stable. The retailers actually generally performed and priced through the back-to-school period as we expected.

The retailers that won generally had a little improvement in their average selling price, and certainly, our innovations helped drive that in many of our core categories and it was for that reason that we certainly feel we gained share as well. So we're seeing stability right now in the market from that standpoint..

In terms of Asia as a potential for M&A. David, I know you know our acquisition criteria very well, but I'll just recap it for some others. In our core categories, high-probability cost synergies with supply chain or SG&A leverage, complementary revenue growth opportunities by geography or segments or channel and quickly accretive.

And so we don't necessarily have anything that prioritizes one acquisition over another after that. So we don't -- we're not prioritizing Europe over Asia or domestic or Innerwear over Activewear. Once things get -- through that screen, we look at all of the opportunities we'd have.

And when a deal looks right for us and for the other side and we can make a deal that's going to be in interest of our shareholders, we'll go ahead and do so. So there's no real sub-prioritization. So Asia, we've done some acquisitions there, some small acquisitions over time.

It's either not off of our radar screen nor is it the next highest priority either. It's just in the mix..

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

Can you talk a little bit about the decline in the Activewear margin, what were the drivers behind it. And then secondly, it sounds like you're assuming an acceleration in the Activewear business. I think you said you expect to overcome some of the challenges you've seen in the mass market.

Can you talk a little bit about -- more about why that assumption?.

Go ahead, Gerald..

Let me take the first part of your question. First, from the standpoint of Activewear profitability, it's improved nicely over the year. It's up 15% year-to-date, up 90 points from an operating margin standpoint.

Over the last 2 years, we put down sort of a gauntlet that we'd take the business from a single digit kind of operating margin into the double digits. We achieved double digits last year and we pushed it even higher this year.

So we think profitability is actually performing quite well and we're quite proud of where that business is going, and it's a real example of what Innovate-to-Elevate brings to a business as we see it.

From the standpoint of where we sit now and where we view the fourth quarter on the Activewear side, our order book does look strong for the fourth quarter and we do expect that our trends will improve in the Champion business, in particular, in the fourth quarter..

Our next question comes from the line of Bob Drbul from Nomura..

My question's [indiscernible]..

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

What was the year-over-year inventory growth excluding acquisitions?.

Steve, it was about $16 million..

Okay. And Rich, you touched on it earlier regarding the European market, maybe you can go into a little more detail.

Does it track the domestic market at all from a traffic standpoint? When things are choppy here, things are choppy there; things are down here, things are down there; up here, up there? Can you talk is there any correlation whatsoever? And if not, what's happening there right now from a traffic standpoint in general?.

So it doesn't track that closely and I think for a couple of reasons. One is the mix of business there is a little different than what we have in the U.S. That business is all Innerwear and is more heavily weighted towards hosiery. And so the cadence, the seasonality of it is very different.

If you remember, we've said when we gave the initial guidance for DBA this year, we said over half of their profitability is delivered in the 4 months of September through December, which is different than the rest of our business, and it's mainly due to hosiery. So that traffic pattern's a little different.

The other thing is some of those business -- I don’t like to use the weather word because, to me, weather can impact the business in a very short term, but it doesn't impact it over the medium to long term. But clearly, the weather is going to impact hosiery sales just like it would impact fleece sales in the short term.

And the weather in Europe, obviously, is independent of what's going on here. So you don't see the same correlation. And the other thing is, I think, we're seeing a little bit of a divergence of the macro economy. Now I'm going out on a limb here because I'm not that experienced with the European market nor do we have economists that are telling us.

But it sounds like what you read in the papers, the European market is slowing down a little bit yet the United States isn't yet. So there's a little bit of a disconnect. But at the end of the day, we're still in the innerwear category.

And one thing I know is you've got weekly or monthly or even quarterly volatility, but there, like here, the pairs -- purchase per person per year, all of my Ps, tends to be very stable and even out over time and be pretty consistent year in and year out..

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

Raising the guidance 5 times in 1 year, not too bad. Congratulations on the success. I'm hoping -- a couple of questions.

First, can you share some perspective on your sight lines to shelf space for some of your key product categories into spring '15?.

Well, I think that as we look towards '15, we are beginning to see the gains early, so we feel like there will be gains across a number of our businesses, certainly our innovations and our Basics continue to resonate well, and I think by virtue of our share gains, you get a sense of the power of what we're doing and that we're driving share gains with that as well as we can also see them now in the Activewear business coming as well, as I referenced in my comments, going into the start of next year.

So good solid gains across-the-board..

Okay. And then supply chain efficiencies continue to come through nicely, again really strong gross margins with the focus on the legacy business.

Looking forward, can you maybe highlight some of the larger opportunities for ongoing supply chain efficiencies?.

It's -- we couldn't be prouder of our supply chain. We look at what's it doing, we've gone from building it to just running it and optimizing it and it's just running beautifully.

And so we're seeing performance really across-the-board from the standpoint of the efficiency improvements, through better utilization of our factories and equipment, to improved quality standards, to service improvements. So everywhere we're touching, we're driving cost improvements.

And I think that it really speaks well to our ability to continue to drive, not only efficiencies in what we're doing with our current business, but as we incorporate our acquisitions in there to even drive those further improvement in costs..

Our next question comes from the line of Danielle McCoy from Wunderlich..

Just wanted to touch base on Maidenform and switch gears a little bit. In our channel checks, we've really been seeing a lot of better placement and elevated images really across-the-board.

So I was wondering if you could just talk and give us a little bit more color on some of the work that you've done there? Any -- the products, SKU rationalization, space gains and pricing adjustments..

Maidenform, for us, is playing out exactly as we planned. We certainly have gone in where we knew there were some SKUs and so forth that needed to be out of there and we rationalized it down. We're well on course to hit the sales objective we put in place.

And the exciting part is now we're beginning to apply our own Innovate-to-Elevate concepts to the line, and that literally next week at market, we begin to show the first of our products for fall '15, which were designed by our new design group and apply our Innovate-to-Elevate approach to those products. So we think we're making great progress.

We're beginning to see performance improvement in many areas of the business..

Yes, and I'll also add that you'll also begin to see at retail, if you do a lot of channel checks, probably early next year where we're taking some of the smaller brands and transitioning them into the larger brands because we're going after fewer, bigger, not only just with some of the Maidenform brands, such as Lilyette, but also some of our -- what was in the HanesBrands portfolio, some of the smaller brands, because what we're trying to do is we've got very different, distinct positioning for our 4 big brands and we intend to drive those and subsume the smaller brands into that larger positioning.

So you'll see more to come..

Our next question comes from the line of Taposh Bari from Goldman Sachs..

I wanted to just quickly revisit product costs, cotton, et cetera.

I know that it sounds labor is a bigger component, but like-for-like, are product costs expected to be down for you next year? Part 2 of that question, can you just remind us what the lag looks like between buying cotton or spot cotton and how that impacts your P&L? And finally, if you can just give us some context as to what kind of wage inflation you're seeing?.

Sure. I'm sure between Gerald and myself, we can figure this out. Cotton continues to be a lower and lower percentage of our cost of sales as we have done the Maidenform and the DBA acquisition -- DBApparel acquisition. And so, it will be below 10% next year. That's been falling in recent years.

So yes, we will see lower cotton costs in the second half of next year. That's about how long it'll take for what you're seeing on the December contract today to actually be harvested and then sold, put into production. So it'll be the second half of next year before you see that.

But keep in mind that, as I said earlier, about 15% of our cost base is in labor and we're seeing double-digit wage increases in developing markets. And again, against a low base, but still that's having an upward pressure on costs. And just in general, we're seeing a return to a modest inflationary environment. So as Rich said, that's great for us..

Our next question comes from the line of Andrew Burns from D.A. Davidson..

It's amazing that the Maidenform, from a supply chain perspective, was integrated in under a year, a phenomenal time line there.

Is that something that can be replicated on most acquisitions? Or was it particularly unique in terms of the product that enabled that compressed time line?.

So as I said, I believe that we are developing, if we don't already have, a distinct competence in acquisition integration.

And we're basically leveraging the skills that we developed in transforming our own organization when we spun off 8 years ago where we had to actually take 8 independent divisions, integrate them into one operating company and we've picked up our supply chain and moved a lot of it around the world.

We kept those same types of very detailed, disciplined action planning processes where we come together as an organization and make sure everybody's doing their part on time and we're now applying that to external acquisitions. And I think with the Maidenform, you can see, I think, it worked well.

Now not every acquisition's going to work at exactly the same speed. We've already talked about the difference between Maidenform, which was a U.S.

acquisition, and DBApparel, which is a European acquisition, where with Maidenform, we expect the full synergies within 3 years, but with DBApparel, because in Europe it takes -- things just take a little bit longer, we've said 3 to 4.

So we've got to adjust the time line depending upon the product category, the geography and a number of other things. But clearly, I do think and we intend to continue to improve our ability to integrate acquisitions and create shareholder value..

And in the prepared remarks, you talked about ComfortBlend and X-TEMP reaching 13% sales and still growing.

I was hoping you could elaborate a bit on sort of the new products and channels of distribution you were referring to in growing that product? And have you seen any pushback in terms of pricing for any of those innovations, given the premium versus the basic product?.

Sure, let me take that question and I'll answer the last part of it first. We haven't seen pushback on pricing and I think because we've carefully researched these products and the consumer clearly sees the value in the innovation that they're purchasing. From the standpoint of where we're gaining space, we're gaining space in multiple ways.

We're gaining space across channels, but also within the accounts because, remember, we're treating these as platforms. So as we drive them out, we're driving them across underwear and socks, and in the case of X-TEMP, it's now crossed into panties and to women's socks as well.

So we've seen expansion both within our channels and across new channels and now we're beginning to do the next extension of some of these innovations in channels as well. So mass channel, mid-tier channel, across-the-board we're seeing expansion..

And let me also reiterate, a lot of times I get asked if this trade-up is creating a price umbrella where other competitors can come in and undercut you and not with the strategy that we're doing because our core products are still out there and we maintain and we monitor those price gaps like we always have.

And these trade-up products are over and above that core pricing, so it doesn't create a pricing umbrella. What it does is it segments consumers into those that are a little bit more price sensitive and aren't willing to pay for those extra features and benefits.

The core product is still there and it sells very well and we make great money off of those products. And those that want those extra features and benefits like ComfortBlend are willing to pay 30% to 40% more or X-TEMP willing to pay even more than that, and that's how we go about this trade-up strategy..

Our final question for today comes from the line of Carla Casella from JPMorgan..

Just one question related to capital structure and your comfort level with leverage.

How long do you think it'll take to get back down to your leverage in the 2s?.

Well, Carla, we've said of late is that the great thing about our capital structure is that -- and the cash flow that we have is it gives us a lot of opportunities. We don't have to focus on a leverage ratio range per se. We love being at our BB+, BB rating. We feel very comfortable with that.

We think that gives us a lot of flexibility to continue to drive our strategy with respect to how we deploy our cash flow. So really not thinking of it quite in those terms, but we'll -- going to continue to generate a lot of cash and deploy it in similar ways that we've been doing it..

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

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

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