T.C. Robillard - Hanesbrands, Inc. Gerald W. Evans Jr. - Hanesbrands, Inc. Richard D. Moss - Hanesbrands, Inc..

Christian Roland Buss - Credit Suisse Securities (USA) LLC Jay Sole - Morgan Stanley & Co. LLC Susan K. Anderson - FBR Capital Markets & Co. David J. Glick - The Buckingham Research Group, Inc. Anna Andreeva - Oppenheimer & Co., Inc. Michael Binetti - UBS Securities LLC Omar Saad - Evercore Group LLC Steven L. Marotta - C.L. King & Associates, Inc.

Nancy Hilliker - Wells Fargo Securities LLC Simeon A. Siegel - Nomura/Instinet David Buckley - Cowen & Co. LLC Carla M. Casella - JPMorgan Securities LLC.

Good day, ladies and gentlemen, and welcome to the Hanesbrands Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the floor over to T.C. Robillard, Chief Investor Relations Officer. Please go ahead..

Good day, everyone, and welcome to the Hanesbrands quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress after the fourth quarter of 2016. Hopefully, everyone has had a chance to review the news release we issued earlier today.

The new release, updated FAQ document and the replay of this call can be found in the Investors section of our Hanes.com website. On the call today, we may make forward-looking statements, either in our prepared remarks or in the associated question-and-answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC and may be found on our website, as well as in our news releases.

The company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

Unless otherwise noted, today's references to our consolidated financial results as well as our 2017 guidance, represent continuing operations and exclude all acquisition, an integration, and other action related charges.

Additional information including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's press release. With me on the call today are Gerald Evans, our Chief Executive Officer; and Rick Moss, our Chief Financial Officer.

For today's call, Gerald and Rick will provide some brief remarks and then we'll open it up to your questions. I will now turn the call over to Gerald..

Thank you, T.C. Hanesbrands delivered another year of strong results. Revenue increased 5%, earnings per share grew 11%. We generated over $600 million in cash flow from operations, completed over $1 billion of acquisitions and returned nearly $550 million to shareholders through dividends and buybacks.

But 2016 wasn't without its challenges, particularly in the fourth quarter. Last year in the U.S. roughly 1,200 retail doors closed, several retailers filed for bankruptcy, and there was further inventory tightening as the retail industry continue to adjust to the disruption caused by the shift to online.

For the quarter, our revenue grew 12% and our EPS grew 20%. These are very strong results, but they were clearly below our expectations and we're not at all satisfied with that. The reason for the shortfall was straight forward, while our domestic online revenue growth rate across all channels accelerated to 28% in the quarter.

The current scale of our online business was not enough to offset the pressures in U.S. brick-and-mortar. Store traffic trends during the holiday came in below even our various expectations and a large mass retailer cut replenishment orders in the key November and December periods. Both of these impacted our revenue and profit in the quarter.

Despite the headwinds and a challenging fourth quarter, we were still able to deliver record results for the full-year through a combination of acquisitions, execution of our online growth strategy, synergies from prior deals, product innovation and strong working capital management.

Our results provide further proof that our multifaceted business model is designed to create significant long-term returns for our shareholders, irrespective of the overall end market environment. So as we look forward, we expect the overall retail environment in the U.S.

to remain challenging, as the ongoing channel disruption drives additional store closings and tighter inventory management. That said, we believe we are well-positioned to manage through these near-term challenges. Our international business, which is expected to be roughly 30% of our revenue in 2017, continues to grow.

We are aggressively growing our online business, as we continue to consolidate the fragmented market share. And our multifaceted business model generates strong consistent cash flow that drives a balanced return centric capital allocation strategy.

All of this gives us confidence that we can deliver another year of solid growth despite the challenging environment. At the midpoint, our guidance calls for 8% revenue growth, 7% EPS growth and cash flow from operations that is approaching $700 million. And our confidence is driven by four things.

First, we have the wrap, from last year's acquisitions in the first half, as well as approximately $15 million of expected synergies from prior acquisitions. Second, we'll continue to aggressively follow the consumer. Over the past several years, we have reallocated resources to grow online across all channels and it's working.

Our online revenue growth accelerated in each quarter last year as our market shares expanded. Moreover, we consistently outpaced growth in the online apparel category. Online revenue across all channels was 11% of our domestic sales in the quarter.

And revenue from a large online pure-play grew at a strong double-digit rate last year, making them our fifth largest customer. As the online pace accelerates this year, we'll continue to shift our internal resources. So we're positioned to remain ahead of the growth curve.

For example, we'll broaden our assortments across all online channels and we'll continue to shift our media budget, with digital expected to represent over half of our total media spend in 2017. A third source of our confidence is that we'll build on the momentum of our core business fundamentals.

Within Innerwear, we'll continue to push our focus on the core initiative in basics. This initiative is working as we gain market share last year driven by our FreshIQ innovation. While still early on a like-for-like basis, retailers experienced an uptick in point-of-sale trends with our FreshIQ products when compared to our prior offerings.

In Activewear, Global Champion revenue growth accelerated up 10% in the quarter driven by Europe, Asia and U.S. mass business.

For 2017, Activewear is well-positioned to return to growth as we anniversary the sporting goods bankruptcies benefit from our Global Champion growth initiatives and expand distribution within our Licensed Sports Apparel business. And fourth, we plan more conservatively within the bricks-and-mortar channels for 2017.

The shift online is not only pressuring store traffic, but it's also reshaping traditional shopping patterns as store visits are becoming more concentrated around key promotion events. Therefore, we're going to be more targeted with our promotions and we're planning for tighter inventory management at retail.

Before I wrap up, let me touch briefly on our capital allocation strategy as it relates to 2017. Last week, we increased our dividend by 36%, reflecting confidence in our ability to consistently drive growth in earnings per share and cash flow from operations.

Given the current dislocation in our stock price, you should also expect us to be buying back shares and with respect to acquisitions our focus in the early part of the year is on integrating the portfolio of acquisitions we completed last year.

So in summary, we delivered another year of record revenue, earnings per share and cash flow from operations. While the continued evolution of the U.S. consumer has created a challenging retail backdrop, we believe we're extremely well positioned to win in this environment. We're broadly distributed, including online and internationally.

We operate in heavily branded replenishment categories, where we hold the number one or number two brand. We're delivering successful innovation, we own our supply chain, which provides us low cost manufacturing and the flexibility to navigate a variety of economic and political environment.

We generated a significant amount of cash flow and we employ a disciplined, return-centric approach to deploying our cash. All of which positions us to deliver another year of strong returns for our shareholders. With that, I'll turn the call over to Rick..

Thanks, Gerald. When we entered 2016, you may recall that we took a very cautious view of the overall U.S. consumer environment, particularly the holiday period. Unfortunately, the environment proved to be more challenging than even our various assumptions.

While this drove the shortfall relative to our fourth quarter expectations, we were still able to deliver solid growth in both the quarter and for the full-year.

For 2016, we grew revenue and earnings per share, expanded our operating margins, brought our core inventory back in line, significantly reduced acquisition and integration-related expenses, and generated record levels of cash flow from operations.

Our ability to deliver solid results, despite unexpected challenges, highlights the health of our strategies, as well as the power of your multifaceted business model.

More importantly, these strategies along with our business model position us to grow revenue, EPS and cash flow from operations once again in 2017, even in the face of a challenging retail environment. Now, let me walk you through some specifics for the quarter.

Sales increased 12% over last year and like many diversified global companies, we had various puts and takes across our multiple business lines. Acquisitions were once again a strong contributor, adding approximately $240 million of revenue in the quarter.

We delivered organic growth in several of our businesses including online, Asia, Champion at mass and Licensed Sports Apparel. This growth was partially offset by declines in our basics business, Champion in the sports specialty channel as well as the exit from our catalog business.

Looking at our segments, Innerwear sales decreased 8% versus last year, driven by declines in basics and hosiery, while intimates was flat in the quarter.

Despite easy comps, additional shopping days and more seasonal weather, traffic declines at bricks-and-mortar actually accelerated from the prior year during the holiday period and were below even our bearish expectations.

This created two headwinds that weighed heavily our basics business and accounted for the vast majority of the miss relative to our guidance. First, within the mid-tier and department store channels, the lower than expected traffic trends drove reduced point-of-sale, which resulted in fewer reorders.

And second in the mass channel, we had a large retailer aggressively manage their total store level inventory by cutting replenishment orders in the key November and December periods, which brought their basics inventory to record low levels.

This destocking alone represented roughly 600 basis points of headwind to Innerwear revenue growth in the quarter. Having said that, our brands remain strong.

For the full-year, our basics revenue is essentially flat, which was better than the 2% decline in the overall category, as we gained share through our focus-on-the-core initiative and the launch of our odor control and innovation, FreshIQ.

While Innerwear operating margins remained strong at 22.5%, lower volume and the mix impact from lower basics sales resulted in a 200 basis point decline in the quarter versus last year. Turning to our Activewear segment, revenue increased 3% over last year in the quarter. Total U.S.

Champion revenue growth accelerated, driven by the second straight quarter of double-digit growth in the mass channel. Revenue from our Licensed Sports Apparel business increased double-digits in the quarter, driven by our expansion into the high school channel and organic growth in the college bookstore channel.

As expected, our operating margins rebounded from the third quarter as volume and product mix normalized. For the quarter, Activewear operating margins increased 90 basis points over last year to 16.8%.

Switching to our International segment, revenue increased 78% in the quarter as contributions from acquisitions and organic growth in Asia more than offset the decline from our strategic decision to exit certain unprofitable businesses in Europe.

The operating margin increased approximately 370 basis points over last year to 14%, driven by our focus on more profitable revenue in synergies from Hanes Europe. In fact, this was Hanes Europe's second straight quarter with double-digit operating margins.

Touching briefly on margins, gross margin in the quarter increased 20 basis points over last year to 39.6%, as the positive mix from International acquisitions more than offset the volume impact from lower sales.

Operating margins increased 90 basis points over last year to 15.9%, as the 130 basis point improvement in our core operating margin more than offset the short-term dilution from recent acquisitions. The increase in our core operating margin was driven by synergies from prior acquisitions as well as SG&A cost controls.

Interest and other expense increased over last year due to higher debt balances in the quarter, while our tax rate declined as we generated lower profitability in the U.S. These, combined with strong revenue and operating profit growth, drove a 20% increase in earnings per share for the quarter.

Inventory in the quarter, adjusting for recent acquisitions, declined by roughly $132 million from last year, as our actions to reduce inventory delivered their intended results.

This, along with the increased profitability over last year, helped drive nearly $400 million in cash from operations in the quarter and brought full year cash flow to over $600 million. Now let me speak to our guidance, which calls for another year of growth in revenue, earnings per share and cash flow from operations.

Beginning with revenue, at the midpoint, our guidance range implies 8% growth for the year and includes approximately $410 million from acquisition wraps in the first half. We expect continued strong double-digit growth in our online business as we expand our product offerings across all channels and continue to aggressively shift resources.

And we're being prudent with respect to U.S. bricks-and-mortar, where we expect additional pressure, as retailers continue to prune stores and tighten inventory. Therefore, on a segment level, we expect Innerwear sales to be essentially flat for the year.

In Activewear, we expect modest growth as we overlap bankruptcies, continue our momentum in Champion at mass and expand our Licensed Sports Apparel business.

And in our international segment, we expect solid double-digit growth as organic growth on a constant currency basis, combined with acquisition contributions should more than offset FX headwinds. We expect operating profit to be $935 million to $975 million, which includes roughly $25 million from acquisition contributions in the first half.

At the midpoint, it implies roughly 50 basis points of margin decline due to the short-term dilution from lower margin acquisitions. Over the next two years to three years as the synergies from Pacific Brands and Champion Europe begin to flow through, we expect meaningful improvement in our operating margins.

Our EPS guidance of $1.93 to $2.03 represents 7% growth at the midpoint and includes the following assumptions. Interest and other expense is approximately $175 million, a tax rate that is roughly flat versus last year, and approximately $300 million of share repurchases.

Finally, we expect cash flow from operations of $625 million to $725 million, with the growth driven mostly by increased profitability and lower cash based acquisition and integration expenses.

So in summary, despite a challenging environment, we delivered solid results for the year and we're extremely well-positioned to grow revenue, earnings per share and cash flow from operations once again in 2017.

Our ability to drive consistent strong returns to shareholders irrespective of the end market environment is the direct result of our powerful, multifaceted business model.

Over the past four years, by using all the various levers of our business model, we've added $1.5 billion dollars of revenue, nearly tripled earnings per share, generated roughly $2 billion in cash flow from operations, made approximately $2 billion in acquisitions, paid over $0.5 billion in dividends, and bought back more than $700 million worth of stock.

And it's this powerful business model that gives us confidence in our ability to continue to deliver strong shareholder returns in 2017 and beyond. And with that, I'll turn the call back over to T.C..

Thanks, Rick. That concludes our prepared remarks. We will now begin taking your questions and will continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit yourself to one question and a single follow-up and then reenter the queue to ask any additional questions.

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

Operator?.

Thank you. And our first question comes from the line of Christian Buss from Credit Suisse..

Yeah. Thank you very much. So, it looks like it's been challenging to predict what the sales book is going to look like from your key partners.

What are you doing to try and improve visibility to avoid the kind of challenges that you've seen in the last 18 months?.

Hi, Christian, this is Gerald. Let me take that question and let me just sort of breakdown 2016 and really address your question that way. We had a strong year overall. If you look at our sales, they were up 5%, EPS was up 11%. And Q4, by most standards, was very strong, revenue up 12% and EPS up 20%.

So, we did come in below our expectations in Q4 and really from that standpoint, U.S. traffic was well below even though weak trends that we had anticipated coming off of last year's very warm period. And as those trends held, our retailers took the steps of curtailing their orders to control their inventory.

When they take steps like that mid-quarter, they really can only cut off the replenishment businesses. And so that weighed particularly heavy on our basics business at that point in time.

I mean, generally our accounts reduce their orders in line with their traffic in POS, while one large mass retailer took a more aggressive stance in rightsizing their inventory across the store and actually chose to forgo some of their additional holiday builds and let their inventory drop to levels that we typically wouldn't see into mid to late January.

In fact, that destocking alone was 600 basis points of headwind to our Innerwear business in Q4. Now, while the order flow has normalized out of that one account in particular, as we look to 2017 and to address your question on how we're more aware of what's coming to have a better look at it.

We planned cautiously with our bricks-and-mortar accounts, we expect that the environment will remain challenging in the bricks-and-mortar. And early, in the year, we anticipate some more store closings, as well as some inventory pruning.

And that's why, as you look at our organic guidance, you'll see in the Innerwear business it is actually flat for the year. And the guidance, it's actually down in Q1, as we anticipate those store closings affecting that business.

But that's really the great thing about our multifaceted business is while we've planned that flat, we've got a lot of other levers to pull in and we're certainly going to continue to drive our online growth very hard. We're enjoying double-digit growth, both in the U.S. we're also seeing it in our international markets.

We hold leading shares and we're going to drive that very hard across the businesses. Our Activewear momentum is building and as we come out of the overhang of the sporting goods bankruptcies, we feel real solid about the organic growth we'll get there.

And then third, we've diversified our business substantially, and our international business now represents 30% of our business and between the organic growth we're seeing in our – in sections of that business, particularly in Asia, along with our acquisition wrap, we're going to generate a very strong results there as well as continue to harvest synergies.

And then finally, we're going to deliver record cash flow again that gives us confidence that we can continue to drive our capital allocation model and deliver these solid sales and EPS results for our customer.

And so we're really planning it cautiously, but having these other leverage to pull irrespective of our end-market environment, makes us feel that we're well positioned to deliver another good year in 2017..

That's very helpful. Thank you very much and best of luck..

Thank you..

Thank you. And our next question comes from the line of Jay Sole from Morgan Stanley..

Great. Thank you. My question is on the operating cash flow for 2016. You generated $605 million this year. The guidance was for $750 million to $800 million.

Can you just talk about where the difference was between those two numbers and how that played out in 4Q?.

Yeah. We were actually pretty well on plan as we got through the third quarter. So, Jay, it was really the sales miss in the fourth quarter and as a result not getting those collections that caused us to come up short from the – on the cash flow. That was the key driver..

Okay.

And then maybe just to talk about the shift from brick-and-mortar to online, can you give us maybe just a big picture roadmap of how – at what point the channel shift gets into balance for your business, where you stop seeing big declines in the brick-and-mortar channels and kind of offsetting with – or almost offsetting with online growth, where both are pretty stable and collectively you can kind of just deliver positive growth in Innerwear consistently going forward?.

Well, Jay, we are in the midst of a transition, it's one that we've talked about for several years is that, that consumer generally is increasingly shifting online. And we've focused heavily, began to focus heavily. Last year our resources shifting both people and our marketing resources and we're seeing a rapid acceleration in our growth.

Overall online reached 8% of our U.S. business last year, but it was up to 11% in Q4. And our growth rate actually went from about mid-teens growth rate in Q1 up to a 28% growth rate in Q4 and we saw similar rates to that 28% around our international businesses.

And so, we see it is an opportunity to continue to broaden our assortments and shift our resources across the various online channels. So, we're working with our brick-and-mortar retailers as well as our own sites and certainly our peer players and continue to drive that.

And we think that over the next few years, you'll see that go to a mid-teens rate and when you get to that level and you're driving that kind of growth at that rate, it will really help balance out the pressures in the bricks-and-mortar level. And we believe in time, our share can be higher online than it is in bricks-and-mortar market shares..

Thank you. And our next question comes from the line of Susan Anderson from FBR..

Hi. Good evening. Thanks for taking my question. I just want to follow-up really quick one on the Innerwear guidance. Assuming brick-and-mortar down, are you guys assuming it's down next year? And then that's kind of offset by online and Amazon? And then also on your inventory front, it looks like it's pretty clean, down excluding the acquisitions.

Is there anywhere that you guys feel heavy that you're going to still have to clear through? And then I'm assuming that, given the replenishment issues, you're not going to have to take time out of production?.

So, let me talk about the inventory question first. As we came out of the year with a really clean inventory position. I think we're very pleased to be where we were, especially given the softness of the quarter and softness of retail. So, we feel like we're in really good shape on the inventory front.

In terms of the Innerwear business, basically what we're saying is, that in the first quarter we expect Innerwear sales to be down as a result, as that segment of the business continues to digest the announced store closings at retail and this inventory tightening that we've seen taken place.

And so, then we should see it normalize, the Innerwear business normalize in Q2. And then, again, for the full year, should be about flat..

Got it.

And then just given the lower replenishment for this quarter and I guess maybe first quarter, that's not going to cause any production time taken out either, is it?.

No, I think our manufacturing group did a great job of balancing the inventories as we came through the end of the year. And we're in good shape to run the supply chain through the year..

Okay, great. Good luck next quarter..

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

Thank you. Couple quick questions. Rick, your tax rate has come down steadily over the last several years.

How low can it go if current tax law doesn't change? And how do you see it? If it is going to go higher, how do you see that playing out over time? And are you more concerned about changes in tax laws pertaining to transfer pricing or the border adjustment tax? And then, I had a follow-up on cash flow. Thank you..

Sure. Well, on the tax rate, we're seeing it flat this year. Dave, as you well know, it's a function of what percentage of profitability is coming from where in the system. And so we're looking at some similar dynamics in 2017 as we saw in 2016. So, it was always said that over time we expect the tax rate to go up and as profitability in the U.S.

over time continues to improve, and that's obviously in the context of the current tax code. So, that's why we pegged it kind of where it is for this year..

Yeah. Let me pick up on that, David. Just from the standpoint of – look, the U.S. Corporate Tax Reform has got many elements that they are being discussed at this time and they're likely to evolve over 2017. And we're engaged in that process, working with our advisors and our industry groups and reps, and we'll stay involved in that throughout.

Specific to your question about border adjustability, there are elements such as border adjustability that are being discussed that would impact imports and they would impact the entire apparel industry as well as U.S. retailers and would ultimately need to be offset by a price increase.

Now, we're advantaged in this situation because we own our own supply chain and there is a substantial amount of U.S. content that's in that supply chain and the production we do within our supply chain, while most of our apparel competitors and our retailers import and it's predominantly imported content.

So, as we begin to look at this, and certainly the proposals are still in development, but as we look at it relative to what it might mean in pricing, it's in no means in any similar size. It's much smaller than the cotton bubble that we worked through that we would be putting in place.

And as we look at it, what we saw during that cotton bubble was that brands in particular perform well in periods of rising prices. So we'll stay involved in it, but we understand the shape of it. And once again, we view that our supply chain advantages us because it allows us flexibility in U.S. content to respond..

I mean, do you see how you saw product, i.e., multiple units in a package, as an advantage in terms of how you respond in that kind of environment? Whether you put five in a pack instead of six or something like that? Is that how you think about the business?.

No, we perceive it more that in a branded business that your brand can carry the required increase to offset any cost increase..

And then, if I could follow-up, Rick, on the cash flow from operation. So, basically, what you're saying is the shortfall in sales translated to higher inventory, which translated to the divergence in cash flow from operations versus your projection.

Is that pretty much it?.

No, actually, it affected us more on the accounts receivables side or the flow through accounts receivable.

If you think about it, with the churns we have in inventory, once we get into the fourth quarter, the key driver is really collecting sales because the – we've already, in essence from a cash standpoint, paid for all the expenses associated with those sales.

So, with as quickly as our receivables turn, it becomes really very much like a sales driven quarter in terms of cash flow.

Does that make sense?.

Thank you. And our next question comes from the line of Anna Andreeva from Oppenheimer..

Great. Thanks so much. Good afternoon, guys, and thanks for taking our question. I guess, I was hoping to follow-up on Innerwear.

We weren't clear, but what's driving the recovery in this segment starting the second quarter? Are you guys expecting better replenishment either at mass or at department stores? I think you mentioned in mass the large partner has stabilized now.

And how much are the store closures alone expected to impact this category? And then secondly, so inventories look clean, you have easy gross margin compares here in the first half.

How should we think about gross margins for the year and any color on the cadence first half versus back half?.

Let me start with the question about the cadence of the Innerwear business. The business does pick up as we overlap some of the store closings and so forth that we do anticipate being the heaviest in the first quarter and then we overlap that as we go forward.

In addition, we will continue to push our innovations, such as FreshIQ, behind the business and, of course, with a double-digit growth rate that we're experiencing online, that also gives us some additional acceleration as we go down through the year..

Let me kind of walk you through, how we view the year, unfolding from the cadence standpoint, let me do it by business line.

We were talked about the Innerwear business from a top-line standpoint being down for the reasons we talked about in Q1, normalizing in Q2 and that would then imply, being a little bit in the back half of the year to come back to flat for the full-year.

With the TSA bankruptcy behind us now we expect the Activewear business to be pretty consistently, modestly up during the course of the year. We see in the DTC business, as you know that has struggled a little bit because of our exit of our catalog business and a couple of other things.

And so, that's going to continue to be a headwind through the first two quarters, so we expect DTC – pardon me, DTC sales to be down in the first half. But in the second half, you'll see better how our online business is growing. And so you'll see growth in the second half and should be basically flat for the full-year for DTC.

So the growth in the second half offsetting the down in the first half. In our international business, you're going to see growth in the first half from the acquisitions of Pac Brands and Champion Europe.

And then you should in the second half as we wrap those acquisitions in the second half, you should see some organic growth in the international business, that's going to be moderated by we think, by strengthening dollar in the back half of the year. So, we're thinking about $30 million to $40 million of FX impact mostly in the back half of the year.

And so that will take a little bit of a bite out of the organic growth from those businesses. But we still think that will be – especially how we see the top line flowing out in terms of gross profit, our expectation is that, that it should be up year-over-year. And generally, it should be up each quarter.

Now operating profit, if you look at the midpoint of our guidance, we expect to be down about 50 basis points. As I said in my prepared remarks, that's going to be a function of the impact of these lower margin acquisitions, primarily in the first half of the year. So about 50 basis points at the midpoint for the full-year..

Thank you. And our next question comes from the line of Michael Binetti from UBS..

Hey, guys, afternoon. So, Gerald, can I just ask you quickly? Can you help us with a little more – related to your comment earlier about M&A and that the first half would be more focused on integration? I'm assuming that what's behind that comment is that that's more the focus than looking for new acquisitions at this time.

And maybe just any of your thinking on what you meant by that and how the first half of the year look?.

Yeah. I'd be happy to do that Michael. First of all, we're going to continue to follow our disciplined approach through returning capital to our shareholders, we had strong cash flow. And over time, that's been a mix through dividends, acquisitions and share purchases. And our focus over time has really been for that to be a balance.

And we've increased our dividend, we've got – by 36%, we've got confidence in our ability to consistently grow EPS and cash flow and we indicated that, certainly with the delivery of that dividend. We also see our stock is a value at this point in time. And so as we noted, we're planning to buy back stock during the year.

And then finally, acquisitions are still a very important part of our strategy going forward. And I want to be clear on that. We did make $1 billion in acquisitions. So in the first part of the year, we've got our hands full finalizing those integration plans.

But at the same time, as we've always said, we're out talking to people, we're assessing opportunities and we'll let you know when the next one is ready to be discussed. But clearly, there will be more acquisitions in the future..

Okay. I think, if I could for a minute, I know this has come up a couple times in Q&A.

But I think what people are struggling with is the organic guidance here with – I know you said your number five retailer is a large online play, but I have to guess at least half of your other 10 retailers have some door closures coming this year that they haven't told us about it yet.

And within those, the ones that have spoken, for example, Macy's, obviously a bellwethers, one that is on top of those door closures negative compares.

So I'm trying to get more comfortable with how we get to even the low end of your organic growth rate, given what you guys have baked into your forecast for – we don't have official door closures, we don't have official negative comp guidance from a lot of the channel in the U.S. yet.

But I think it's fairly generally accepted that that's the direction we're going to head. And then you mix that in with a mass retailer that you mentioned in a couple times over the last year we've seen that retailers are perhaps willing to take their days inventory to lower places than they've been historically.

Can you help us think about how you thought about that kind of a negative bias to the market as you planned out the year?.

Let me take a crack at it. And again I think it's back to business by business. We've tried to be prudent in our approach to the bricks-and-mortar channel – various channels in this upcoming year in our guidance. So we do have, I would just remind you that we do have confidence in our ability to continue to drive strong online growth.

And so we think that there is an opportunity there for us to offset – we do understand that there are door closures coming this year and we've tried to factor that into through our thought process on the Innerwear business. The Activewear business has good momentum right now.

It's particularly in the Champion business and in the Licensed Sports Apparel businesses, those businesses are doing really well. And again have some really good momentum and again the TSA bankruptcy is behind us and so we feel really good about that, the ability of that business to continue to drive growth.

And then the international business which is now 30% of our business, we're not only getting the acquisition piece, but with those acquisitions that we made last year are really more growth oriented acquisitions, top line growth oriented acquisitions.

We expect to see those businesses give – those – that resulted in international having a higher growth rate than our domestic businesses, higher organic growth rate than our domestic businesses.

So, Michael I hope that's helpful to kind of give you a sense of where we think that – and thus you put all that together we have a – at the low end of our guidance, we're talking zero organic growth for the top end, we're talking about 2%, actually a little less than 2%.

Organic growth, we think that given all those factors that's a reasonable expectation..

Thank you. And our next question comes from the line of Omar Saad from Evercore ISI..

Thanks for taking my question.

Wanted to ask – a lot of the shifts and channel disruptions and the store closures and negative traffic and choppy traffic – as it relates to the categories that are really important to you guys, how do you feel or do you feel consumer behavior is changing in terms of how they buy these categories? Is there any evidence in terms of the basket sizes people buy in your categories when they're buying online directly from your website? Or what the basket sizes within – and average price points and types of categories they're buying – if they're buying from Amazon or in your traditional wholesale channels? Just trying to understand.

It feels like there's something bigger here going on in terms of the shift around the consumer behavior in these categories.

And maybe there is some evidence of that in some of those things like basket sizes?.

Omar, when we look at sort of the per capita consumption, so far we – that we tend to look at on our categories. We don't see any indication there that there is a change in consumption from that standpoint.

Certainly the disruption of retail stores closing and adjusting inventory changes the cycle of some of those shipments and it's a little harder from quarter-to-quarter, we get some volatility in there.

What we've seen actually in some of the online accounts is that we can actually sell larger packages and they'll consume bigger packages in some of our packaged goods than we can sell at retail. So, we don't have a clear indication that there is a basket size effect.

We do see that the holiday periods are sort of changing and focus in the key promotion periods and the consumers are buying closer to that promotion event.

If you take a holiday period that we just went through for example, there didn't seem to be nearly that build that you would normally get running up at retail, it – just sort of flat, right up to the week before Christmas..

Okay. And then quickly on FreshIQ, it doesn't feel like there may be as much buzz as we had been hoping for. But we don't see the numbers, and you guys have your expectations.

Maybe help us understand where that is and what's going right with it and where there's room for improvement around FreshIQ?.

Sure. Basics revenue was flat for the year, and while the overall basics category was down 2%, and that was really driven – our strength was driven by our focus-on-the-core initiative, and the key component of that was our FreshIQ innovation that we drove. Now, you'll probably remember that it was a flow-in.

And so there was sort of a mixed inventory out there as we went into the fourth quarter, but we did have a few stores where we actually completely swapped out the inventories as well as a couple of online sites.

And there we can make a like-for-like comparison and we see a nice lift from one to the other that shows us that – what the research told us is what's happening, that consumers prefer it and they buy it. So, we'll continue to build it. This is one that we expected to build over time.

And as you know, we get behind innovation platforms and we drive them for 5 years to 10 years. And this is one we'll be heavily behind as we get into 2017. And a lot of that, as we've quoted in our comments, we'll do in a digital world with our media as we focus more on driving online as well..

Thank you. And our next question comes from the line of Steve Marotta from C.L. King & Associates..

Good evening, everyone. Gerald, just reiterating your answer from the first question, you mentioned that the destocking experience in the mass channel in the fourth quarter abated in first quarter and order patterns have normalized.

Is that accurate?.

Yes, what we saw is that it normalized with the pace that we had seen in a year prior period, yes..

Okay.

Follow-up question is why is Champion Europe and Hanes Australasia, why are those synergies beginning in 2018? Why not sooner?.

Well, a couple of things. One is that the nature of those two businesses are such that most of the synergies that are coming are on the supply chain side and it'll just take longer to get to. There aren't as many SG&A synergies.

So, for example, Hanes Australia, the Pac Brands acquisition, very lean, well-run company where there really isn't much of a need to cut a lot of overhead there. And it's a long way away. It's very difficult to manage it from here. Just as an example.

So there aren't a lot of SG&A – aren't as many SG&A synergies there as we've seen in other acquisitions. And the cadence of cost sales synergies, supply chain synergies has always been a couple of years after the acquisition. And that's probably going to hold true for both of those acquisitions..

Thank you. And our next question comes from the line of Ike Boruchow from Wells Fargo..

Hi, thanks. This is Nancy Hilliker on for Ike Boruchow. So, we are wondering, are you able to give us any color in terms of AUC, just based on cotton and oil and labor? Any color you can give us there.

And then also, is the focus for this year on building up FreshIQ or is there more innovation in the pipeline for this year?.

First question was cotton, labor (45:23).

Oh, sorry, I'm sorry that I couldn't hear you. No, on cotton, we are pretty well hedged already for 2017, so we got good visibility there. So, we're sort of in good shape there. Cotton is now less than 6% of our cost to sales. We're seeing the normal types of labor increases around the world. And so we've planned all of that into our guidance.

So nothing out of the ordinary though..

And the follow-up to the last half of your question on FreshIQ is our primary basics focus for the year and we will support that with media as well as promotions throughout the year. And this year, as we've spoke about in our comments, we'll shift more and more of that media to the digital world.

What we've seen with consumers is just as they're increasingly buying online, they go online to get their information as well and we want to make sure we're engaging with the consumer where they are..

Thank you. And our next question comes from the line of Simeon Siegel from Nomura/Instinet..

Thanks, guys. Good afternoon.

As e-comm just grows as a percent of the mix, how do you adjust for that typically add-on nature of an in-store purchase?.

Well, what we're doing with the online as well is we are working to identify the ways to drive that same incremental purchase that you get in your peak periods and we do that through several ways. One is, as I commented earlier, in our large pack programs, we've actually found we can sell even larger packs online.

The other is that the consumers do come online more heavily at certain times of the year, such as holiday, and to make sure you're prepared to capture those consumers online just as you would at retail with the appropriate advertisements, as well as offers to make sure that you capture that purchase.

Very similar to how we would do it in bricks-and-mortar..

Great. Thanks..

Thank you. And our next question comes from the line of John Kernan from Cowen & Co..

Hi. This is David Buckley on for John Kernan. Thanks for taking our questions. How does the margin profile of your e-commerce business compared to brick-and-mortar? And then, just a follow-up question, with the sporting good bankruptcies behind us moving into 2017, how much operating margin recovery is achievable for Activewear next year? Thank you..

Well, in terms of margins on e-commerce versus bricks-and-mortar, they are very similar for us, given the way we manage it. So, we see a – we don't see – we're pretty indifferent as to where the consumer wants to buy something, whether he want to buy it in the store or online. In terms of the second half of your question....

Operating margin..

On operating margins in Activewear, we actually saw nice recovery and a normalization of the margin in Activewear in the fourth quarter.

And so, I would expect to see, margin expansion in the Activewear business next year as they continue to – operating profit margin expansion next years they continue to grow that business and leverage their cost base..

Thank you. And our final question for today comes from the line of Carla Casella from JPMorgan..

Hi, one housekeeping on the pension.

What do you expect the pension contribution to be next year?.

Carla, we're not required to make any contributions next year, because we're funding status, and we're not planning on making any contributions..

Okay.

And then did you give the magnitude of the catalog and other -- the other businesses that you exited for either this quarter or for what it would have been for – the magnitude for this year?.

You're asking about the – relatively small direct-to-consumer business, we have. Let me address what we did, and I'll let Rick to comment on the financial impact of that.

From the standpoint of what we've done, it's a relatively small business, and we proactively shifted that business to what we view is a growth strategy, where we're exiting our legacy catalog business and focusing in on our online piece.

That catalog business had been declining for some period of time and had really been masking our double-digit growth in our online side and certainly as we focus on online, we want that to be very apparent.

At the same time, we have a group of outlet stores in that business and we have been selling some non-core product there and we exited that non-core product to make room for products we make, particularly Activewear, which had been underrepresented there and given the growth in that category, we think that's very important to pick that up.

So as you can see, we've taken the steps that began last year of winding down the sales impact and that's been a headwind and it'll be a headwind through the first half of this year to focus that business on a growth strategy that will take it to a different level more aligned with where the consumers' trends are moving over time.

And so, it'll be our first half headwind to our sales, which will then pick up in the second half of the year..

In terms of the businesses that we exited, there were really two that, that I would call your attention to, one was, as you'd pointed out the catalog business and some ancillary things in the DTC world, that was about $18 million.

And then we did discontinue, we exited some unprofitable businesses in Europe that costs us about $14 million or $15 million in Europe..

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

We would 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 on today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day..