The company’s guidance for continuing operations is based on the following facts. Product pricing, shelf space, and promotion plans for the remainder of 2012 have been finalized with major retail accounts. Virtually all commodity costs have been fixed for the remainder of the year, with the company incurring significantly lower cotton and other inflation impacts in the second half of the year. The majority of sales trends have been substantially tracking to expectations, with the notable exception of a major mid-tier retail account that is undergoing a major strategic shift. Approximately $8 million of company costs, primarily from supply chain restructuring, that had been expected in the second quarter are now expected to occur in the second half.
For margins, Hanes expects continued sequential quarter improvement in gross and operating margins in the third and fourth quarters as the company overlaps last year’s progressively higher cotton costs with this year’s declining cotton costs. Gross margin percentages in the second half are expected to average in the low to mid-30s, while operating margins are expected to average approximately 12.5 percent to 13 percent.
Interest expense in 2012 is expected to be approximately $17 million lower than 2011 as a result of debt reduction. The company completed an amendment in July to reduce its revolving credit facility’s borrowing rate by 100 basis points.
The company’s full-year tax rate now is expected to be in the mid-teens, an increase from previous guidance of a low double-digit rate. However, the company expects increased operating profit to offset the tax rate increase. As is typical for the company, the net tax rate will fluctuate by quarter, with the third-quarter’s rate expected to be slightly less than 10 percent and the fourth-quarter rate being in the mid- to high teens.The company continues to expect full-year free cash flow of $400 million to $500 million after net capital expenditures of approximately $45 million. Free cash flow will primarily be used in 2012 to retire all of the company’s $300 million of floating rate notes, including approximately $150 million of these notes retired on July 12.