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Hanesbrands Inc (NYSE:HBI)
Q2 2019 Earnings Call
Aug 1, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Hanesbrands Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

I'd now like to introduce your host for today's conference, Mr. T.C. Robillard. Sir, please go ahead.

T.C. Robillard -- Chief Investor Relations Officer

Good day, 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 second quarter of 2019. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and a 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 on 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 2019 guidance exclude all acquisition, integration and other action-related 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. With me on the call today are Gerald Evans, our Chief Executive Officer; and Barry Hytinen, our Chief Financial Officer. For today's call, Gerald and Barry will provide some brief remarks, and then we'll open it up to your questions.

I will now turn the call over to Gerald.

Gerald W. Evans -- Chief Executive Officer

Thank you, T.C. We delivered another strong quarter, highlighted by a strong Champion performance, growth in all geographies and successful product innovation. Revenue, operating profit and earnings per share were at the high end of our guidance range, and we generated $137 million of operating cash flow. For the full year, we believe we're on track to achieve the midpoint of our guidance or higher, given our first half momentum and our second half visibility, including Champion bookings growth, our international strength and additional innovation launches in Innerwear.

Several years ago, we put in place strategies to generate more consistent organic revenue growth and optimize the benefits of our company-owned supply chain, and these strategies are working. Our second quarter results as well as our outlook for the second half show our continued steady progress in unlocking our full cash flow potential, and ultimately, enhancing shareholder returns. Our diversification strategy and increased brand-related investments are delivering more consistent organic growth. On a constant currency basis, revenue increased approximately 5% in the quarter and the growth was broad-based across businesses and geographies.

Activewear revenue increased more than 10%. International sales were up over 10%, driven by Innerwear growth in both Europe and Australia as well as continued growth in Champion. Consumer-directed revenue, which we define as our branded stores and all online channels, increased 12%, and global Champion revenue, excluding C9, increased by more than 50% despite tougher comparisons, driven by continued strength in both Champion Innerwear and Activewear products.

Champion's second quarter growth was 10 percentage points higher than our expectation, and this marks the eighth consecutive quarter that global Champion strong double-digit growth has been at or above 30%. Revenue in our U.S. Innerwear business was in line with our forecast. We were encouraged by Innerwear's performance in the quarter, particularly the sequential improvement in our intimates business, as our new innovations continued to build momentum. Looking forward, we believe we are well-positioned to continue to drive organic growth across Innerwear and Activewear globally.

Our investments in growth-related initiatives are generating strong results. Therefore, we are investing an additional $7 million this year to further build on our revenue momentum. Within our global Innerwear business, we're stepping up our investment and increasing our innovation activity as we drive to return Innerwear to long-term growth. We're increasing brand-related investments in both the U.S. and internationally, and we ramped our Innovate-to-Elevate strategy with a number of innovation launches scheduled in the second half. Let me take a few minutes to give you some insights on our exciting innovations around the world that we believe will further strengthen our global Innerwear business.

In U.S. intimates, we have a numbers of bra and shaper initiatives in place. In bras, our new innovation called Dream Wire, eliminates the discomfort of an underwire without sacrificing support. We've seen positive consumer response to the recent launch in our Hanes and Maidenform Brands. We also recently launched our EasyLight innovation, which is a lighter-weight bra designed to act and feel like a second skin. EasyLight is exceeding our initial expectations, and we'll continue to expand distribution in our Bali brand this quarter, with planned launches in fall 2019 and spring 2020 under our Hanes and Maidenform Brands, respectively. In addition, we are expanding our successful cool comfort innovation to all Maidenform shaper products this year.

In U.S. basics, we're extending our successful ComfortFlex Fit innovation in women's panties. And in men's underwear and socks, we're launching our enhanced X-TEMP, which provides improved cooling and wicking performance. Looking internationally, in Europe, we're introducing a compression innovation in diem hosiery and in Australia, we're launching X-TEMP in Bonds underwear as well as expanding our rapidly growing Bras N Things consumer-direct business, including store openings in new countries. As you can see, we have an exciting global pipeline of innovation that we believe will further strengthen our global Innerwear business.

Turning to Champion, we're seeing continued strength globally in both our Activewear and Innerwear businesses. In the first half, we exceeded our expectations in both the first and second quarter with broad-based growth across geographies and across channels. We have great visibility to our second half bookings that as expected, are up double digits globally. And looking forward, we anticipate continued growth coming from expansion in current customers as well as additional points of distribution. As an example of incremental distribution, in China, we recently added a second distribution partner that will accelerate the expansion of Champion-branded stores and our online presence beginning in 2020.

We believe we're still in the early stages of Champion's long-term growth opportunity. Based on our performance to date and our second half visibility, we expect global Champion sales, excluding C9, to be in excess of $1.8 billion this year. Now turning to our overall outlook for the back half of the year. We believe we are well-positioned for continued organic growth as well as margin expansion. We've got our price increases in place. We're ahead of schedule on improving U.S. Activewear's profitability as we remixed the margin products and we expect to deliver additional synergies from our Australian acquisitions.

Looking beyond this year, we remain on track with our actions to reduce overhead within our Western Hemisphere supply chain network. As a result, we believe we're well-positioned to generate higher levels of operating cash flow. In the quarter, we generated $137 million of cash flow from operations, which was more than double last year. On a year-to-date basis, we're ahead of last year's level, and we're on track to deliver on our cash flow guidance, which at the midpoint, reflects 17% growth over last year.

So in closing, we had another strong quarter. Our geographic diversification is creating value. Our product innovation is working, and Champion's growth continues to outperform. Given our first half momentum and our second half visibility, we believe we're well-positioned to achieve the midpoint of our guidance or higher for the full year.

And with that, I'll turn the call over to Barry.

Barry A. Hytinen -- Chief Financial Officer

Thanks, Gerald. Overall, our second quarter results were at the high-end of our guidance ranges for sales, operating profit and earnings per share. For the quarter, sales were $1.76 billion, an increase of $45 million over last year. Adjusted operating profit increased 1% over last year to $247 million. Adjusted and GAAP earnings per share were $0.45 and $0.42, respectively, and cash from operations was $137 million. With that summary, let's turn to the details of the quarter's results. Sales increased 2.7% over last year despite a $34 million headwind from foreign exchange. On a constant currency basis, sales in the quarter were up 4.6% over last year.

Adjusted gross margin of 39% was consistent with prior year and our outlook as the contributions from pricing and higher Champion margins offset higher input costs and the significant negative impact from foreign exchange. On a constant currency basis, excluding the impact of foreign exchange, our gross margin was up 20 basis points over last year. Adjusted operating profit in the quarter was $247 million. This included $4 million of currency headwinds and approximately $12 million of growth-related investments as compared to last year. Our adjusted operating margin of 14% was in line with the high end of our guidance range. For the quarter, acquisition and other related charges of $13 million was better than our guidance, and our tax rate of 14.1% was in line with our forecast.

Adjusted earnings per share of $0.45 were consistent with prior year, while GAAP earnings per share increased 8% to $0.42. Now let me take you through our segment performance. U.S. Innerwear sales were in line with our guidance, down 2% compared to last year. For the quarter, basics revenue declined 2% while the intimates revenue decline of 3% improved sequentially, reflecting the traction we are seeing with our multi-year revitalization plan. Within our intimates business, shapewear delivered its fourth consecutive quarter of sales growth, driven by our new product designs and innovation, while the decline in bra sales was consistent with our outlook. For the quarter, Innerwear's operating margin of 22% was in line with our expectation.

The 90-basis-point decline compared to prior year was driven by lower volume and investments to support our brands as our recent price increases offset higher commodity costs. U.S. Activewear's performance was strong in the quarter, with sales up 10.5% and profit up nearly 20% as compared to last year. Champion Activewear sales, excluding C9, increased over 50% and were higher than our forecast. The growth was driven by comps and space expansion at existing accounts, new distribution as well as growth in the consumer-directed bookstore and distributor channels. C9 revenue increased more than 8% in the quarter, ahead of our expectation for a decline, driven by strong sell-through.

As we've discussed before, we're focused on remixing parts of our Activewear business to branded products, which drives improving margins. Therefore, sales in the remainder of our Activewear segment declined in the quarter as we exited commodity programs in the mass channel. Activewear's operating margin increased 120 basis points to 15.3%. The strong margin performance was driven by improved Champion profitability, favorable contribution from our remixing activity and pricing, partially offset by significantly higher levels of investments to support our growth initiatives. In our international segment, sales increased 4% on a reported basis.

On a constant currency basis, sales increased 10.5% or $57 million. With strong performances in Innerwear and Activewear, we delivered double-digit growth in Europe and Asia and high single-digit growth in Australia. International's operating margin increased approximately 20 basis points over last year to 14.3%. This is the fourth consecutive quarter in which International's operating margin was above the corporate average as we continue to benefit from volume-driven leverage and acquisition synergies. A key call out for me in the results is that through the first half, we have grown sales and profits in each of our international regions: Europe, the Americas, Asia and Australia.

That's both on a constant currency basis and a reported basis. Turning to cash flow and the balance sheet. In the quarter, we generated $137 million in cash flow from operations, an increase of 114% compared to last year. The growth was driven by improved working capital performance and higher GAAP net income. Consistent with our strategy, our team is focused on driving higher levels of cash generation and reducing debt. In the quarter, the team drove a 5-day improvement on our cash cycle over last year. And on a sequential basis, we reduced our inventory balance and our net debt. Our leverage at the end of the quarter was 3.5x, down from last year's 3.9x. We're on track to lower our leverage to 2.9x by the end of the year.

And now turning to guidance. I'll point you to our press release and FAQ document for more details. However, I would like to share a few thoughts to frame our outlook. Today, we issued third quarter guidance which at the midpoint, implies total sales growth of approximately 1.5% on a constant currency basis or up slightly on a reported basis. Our guidance reflects nearly $20 million of currency headwind in the third quarter. And as we previously discussed, in the second half we project our Activewear segment will be impacted by the planned wind-down of C9 and the exit of commodity programs in the mass channel. Adjusting for this, our third quarter guidance at the midpoint implies total company sales growth of approximately 3% and constant currency sales growth in excess of 4%.

With respect to our segments, the midpoint of our third quarter revenue guidance assumes a 2% decline in our U.S. Innerwear segment, unchanged from our prior outlook. In U.S. Activewear, the midpoint of our third quarter guidance assumes revenue is consistent year-over-year, reflecting high teens growth in Champion, excluding C9. For the remainder of our Activewear segment, our guidance assumes a year-over-year decline of approximately 12% or $40 million. Adjusting for the wind-down of C9 and the exited businesses, our third quarter guidance implies Activewear growth of over 8%. I'll note our Activewear assumptions are consistent with our previous guidance. However, our momentum in Champion has consistently outperformed our expectations across the first half of the year.

In our international segment, the midpoint of our guidance assumes reported sales growth of approximately 3.5% and constant currency sales growth approaching 7%. Our third quarter operating profit range is $276 million to $286 million. At the midpoint, our guidance implies a $3 million increase as compared to prior year. Recall, in the third quarter last year, our results included a charge related to the Sears bankruptcy, which was partially offset by variable compensation adjustments. As we previously discussed, in the back half and in the third quarter, we anticipate Activewear's operating margin to continue to expand, driven by the growth in Champion and a remixing activity we discussed.

Our guidance reflects approximately $13 million of increased brand support in growth-related investments, including the additional $7 million that Gerald mentioned. Therefore, our full year outlook reflects an approximate $32 million increase year-over-year in growth-related investments as compared to our prior outlook of $25 million. Our third quarter operating profit guidance also includes higher levels of variable compensation and a $3 million headwind from exchange rates. We expect interest and other expense of approximately $54 million. This is below our first half trend as we anticipate lower interest expense in the second half due to a cross-currency swap we put in place in July, lower borrowing rates and higher levels of cash generation in the first half.

Our third quarter guidance assumes a tax rate of approximately 14%, diluted shares outstanding of slightly less than $366 million as well as an approximately $12 million of acquisition, integration and supply chain-related charges. I'll note that our full year outlook for $55 million of charges remains unchanged. Therefore, at the midpoint, our third quarter adjusted net income guidance is approximately $195 million, and our guidance for adjusted and GAAP earnings per share range from $0.52 to $0.55 and $0.49 to $0.52, respectively.

With respect to the fourth quarter, we will provide specific guidance when we report our third quarter results. While we reconfirmed our guidance for the full year, given our strong first half results and our positive outlook for the second half, we currently anticipate full year sales to be at the midpoint of our range or higher, and operating profit to be at the midpoint of our range. So in closing, our strategies are generating revenue and cash flow growth. We delivered strong first half results and we feel good about our second half outlook.

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

T.C. Robillard -- Chief Investor Relations Officer

Thanks, Barry. That concludes our prepared remarks. We'll now begin taking your questions, and we'll continue as time allows.

I'll turn the call back over to the operator to begin the question-and-answer session. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Omar Saad with Evercore. Your line is open.

Omar Saad -- Evercore -- Analyst

Thanks for taking my question. Good morning. Nice job on the quarter. A couple of questions, guys. Could you talk a little bit about in -- within the Innerwear segment, the basics piece, and it seems like it's been a little bit softer in the last couple of quarters. And the outlook is expected to kind of, I think, remain a little bit soft going forward. Help us understand what's going on underneath? And also could you talk about the $12 million adjustment in the cost of goods line? Was that part of the original plan for the $55 million this year? And maybe address what that line item is?

Gerald W. Evans -- Chief Executive Officer

Sure, Thanks Omar.This is Gerald. Let me take the first one. Yes, we were pleased for the quarter too. Thanks for your congratulations on that. When in the case of Innerwear, Innerwear actually performed until exactly where we expected. We saw some sequential improvement from the first quarter to the second quarter. And we look at the elements of that, both basics and intimates, they too performed to our expectations. And in particular, we're very pleased with the intimates traction, a sequential improvement from quarter-to-quarter.

The innovations in the businesses, and basics in particular, where you asked, did very well, as they did in intimates. And we'll be stepping up our innovations in the second half as you said -- as you heard in our comments as well. We'll be breaking a new ad campaign behind our Underwear business and some digital campaigns as well. So we think for the year we're right on track with where we expect the Innerwear business to be, and the basics business is part of that. Certainly, we're navigating a challenging retail environment and overlapping the headwinds of bankruptcies and door closures. But we feel good about the things we're doing to put the business on track for long-term return to growth.

Barry A. Hytinen -- Chief Financial Officer

And Omar, this is Barry. Thanks for the question. On the charges I would say, yes, we're right in line with our expectations. As we noted at the beginning of the year, we anticipate about $55 million of charges for supply chain, largely for our Western Hemisphere tightening the network. And that is proceeding through the first half, right in line with what our expectation was and continues to be unchanged as it relates to the outlook.

Omar Saad -- Evercore -- Analyst

Thank you.

Operator

Our next question comes from Jim Duffy with Stifel. Your line is now open.

Peter McGoldrick -- Stifel -- Analyst

Hi this is Peter McGoldrick, on for Jim Duffy this morning. Could you talk about the vetting process of the Champion partner, the second Champion partner in China? What type of incremental sales opportunity does that give you in 2020 and then beyond?

Gerald W. Evans -- Chief Executive Officer

Sure. Thanks for that question. Just to give you a little background on our China business with Champion. We entered the market just a year ago with a retail partner, and we have about 50 stores that we expect to grow to about 100 with that partner by the end of the year. We found the opportunity to bring on a second retail partner to further accelerate our growth as we look toward 2020 and beyond, and this is a great partner. It's very experienced in operating stores in China.

In fact, they operate across various brands about 20,000 stores. So they're very experienced at what they do. That give us one -- an additional partner to enter a very large economy. We expect to further accelerate our business in -- not only through branded stores, but they'll also give us a great opportunity to accelerate our online growth. So we see Champion as one of the big growth opportunities for Champion -- China is a big growth opportunity for Champion, and we could see they're very quickly becoming our second largest market for Champion.

Operator

Our next question comes from Susan Anderson with B. Riley FBR. Your line is now open

Susan Anderson -- B. Riley FBR -- Analyst

Good morning nice top in the quarter. I guess I was trying to tie together -- maybe if you could talk about your expectations for Champion, ex-C9 growth, in the back half after, you know, 50%-plus growth in the first half and then just trying to tie together your high teens guidance. I guess, are you expecting it to be down? And then, I was curious what you're doing, I guess, to drive that target consumer to your website to purchase similar products to C9 after that goes away because it definitely seems like there's going to be a void in the marketplace. So kind of curious, from the Champion athletic side, what you're doing to capture that market share.

Barry A. Hytinen -- Chief Financial Officer

Okay. Susan, it's Barry. Thanks for the kind words about the quarter, and I'll take the first part and then I'll hand it over to Gerald. You asked about Champion excluding C9 in Activewear. Certainly in the third quarter, we continue to expect it to grow at a strong rate, let's say, you know, very high teens, which will equate to about $40 million of growth in the third quarter alone. And we have a double-digit rate growth in the fourth quarter implied as well, which would represent about $215 million of growth within the U.S. Activewear segment for the full year.

I guess I should know that the way we've done the guidance is very -- the same way we did last quarter, which is we've simply rolled forward into the full year our beat, if you will, from the second quarter and maintained our second half as we previously had it. We made no changes to our back half projection. So I'll acknowledge that, that may continue to prove conservative as it has been the first half. And Gerald?

Gerald W. Evans -- Chief Executive Officer

Yes. Let me just follow up on the second part of your question, Susan. From the standpoint of Champion and driving growth going forward, we're very focused on that. We love the energy the brand's got, we obviously exceeded our expectations in the quarter for the second quarter in a row, and we see a lot of growth avenues ahead. We think we're in the very early stages of driving growth with this brand. We see more in our current geographies and even in our current accounts. We do see the opportunity to further expand areas, like women's business, to further penetrate the Activewear side -- or the performance wear side of things, to your question.

And a lot of that, we're also driving with our brand investment. We're stepping up our brand investment, our global reach has gone up dramatically with our median and we like what we're seeing as far how that's affecting the brand. And as you heard in our comments, we've got an additional retail partner in China as well. We think there's additional opportunities in Europe and countries like Australia. We think there's a lot of geography left to develop. So we love the momentum in the brand. We're already approaching $1.8 billion by the end of the year, so well ahead of pace on our $2 billion goal. Internally, we're now working on our plans to go to that next billion.

Operator

Our next question comes from Laurent Vasilescu with Macquarie. Your line is now open.

Laurent Vasilescu -- Macquarie -- Analyst

Good morning thank you very much for taking my question. Barry, last quarter, you were very helpful by parsing out the international Champion that includes high 60% range or about $115 million on a constant currency basis for the quarter. Can you parse out those numbers for the second quarter? What are you expecting sort of third and full year? And then separately, any guardrails around clothes margin for the third quarter?

Barry A. Hytinen -- Chief Financial Officer

Okay. Good morning Lauren. Thanks for the questions. Happy to help you with that. In the second quarter, our Champion business really continued to outperform around the globe. I'll give you the full number, since you're asking about international to give you everything. The total global Champion was about $415 million in the quarter on a constant currency basis. Now that was up over 50% or nearly $145 million worth of growth. Specifically to your question, international Champion was up in the mid-40s on a percentage basis to about $190 million. That was up about $60 million on a constant currency basis. And just to save someone else a question, domestic Champion, therefore, was about $225 million in total, reflecting over 60% growth.

And in the U.S. Activewear segment, we had just over $200 million of sales. That's up over 50%, or up about $70 million in dollar growth. And then therefore, in the U.S., outside of the Activewear segment, we had about $25 million of Champion. For example, basics and underwear and socks, that's growing quite fast. Reflecting the better-than-expected performance in the second quarter and our prior outlook for the second half, as I mentioned to Susan, that's unchanged from the guidance we gave you, really, at the beginning of the year. We now expect global Champion sales, excluding C9, to be in excess of $1.8 billion in constant currency, and that would equate to a low- to mid-30s percentage growth rate, up from our growth rate we gave you in May, and certainly up considerably from the growth rate we -- at the start of the year that we projected, which was in the 20s.

So we're feeling quite good about how the team is performing with the brand. It is continuing to grow in our existing accounts, the renewed distribution comps are very good. We see incremental opportunity as we go forward, as Gerald mentioned just a moment ago in one of his answers. On the gross margin, as it relates to the full year, we continue to expect it to be up year-on-year driven by more price and mix, principally in the fourth quarter, offsetting at that point, lower commodity costs in the third quarter. We expect gross margin to be relatively consistent year-on-year, which is a conservative outlook for the sales and mix that we talked about and price benefit being offset by FX headwinds in light of where the dollar has trended.

As we saw on the second quarter, FX was more of a headwind and cost us 20 basis points of margin. I expect that will be the similar situation in the third. And we'll have commodity costs still elevated. As you probably know, we're now getting to the point where we're going over peak commodity costs. And as we move into the fourth quarter, price will -- far excess of being excess of commodity cost. So that's one of the reason why you should anticipate gross margin performance getting better in the fourth. And I appreciate the questions, Laurent.

Operator

Our next question comes from John Kernan with Cowen and Company. Your line is open.

Jared Orr -- Cowen and Company -- Analyst

Hi this is Jared Orr on for John Kernan. I was wondering if you could give any more color around the margin differential within the U.S. Activewear segment, between the 3 buckets? If I break it out between Champion, C9 and the other, it seems like the Champion is a lot higher, and you getting out of the other U.S. Activewear segment could be a big benefit going forward.

Barry A. Hytinen -- Chief Financial Officer

Jared, it's Barry. Thank you for that question. I'm happy to help you some. So if you go back even a year ago, we mentioned that Champion and C9 or -- you know, similar, but that Champion was continuing to expand on both on a gross and operating margin basis. And we anticipated C9 in light of volume would likely come in some. And frankly, the Champion margin is doing very well. It has been -- continue to expand all of last year. This year, we see continued opportunity for that to expand, and that's driven off of better mix, a broadening assortment, better price, volume leverage.

Now the operating margin basis obviously we're investing considerably, and you've heard that, and to continue to fuel the growth of the brand around the world and we'll continue to do that. But even there, we see the operating margin despite that continued growth. Our Activewear gross margins are up appreciably. Without giving you specific numbers, well over 300 basis points in the quarter on a gross basis, and you can calculate the operating margin that you see there in light of our incremental brands support is less, as we anticipated. But as we said on the prepared remarks, second quarter operating margin for Activewear was quite strong, well ahead of our expectation for a decline. It increased over 100 bps.

And you mentioned of -- for some color on the rest of Activewear. You're exactly right here that the exited programs -- and we've been forecasting this since the beginning of the year, in light of the fact that we exited those programs at the beginning of the year, they're in the comp last year. I can point you to the FAQ document, because this morning we gave you more color on those programs to give you the sales comps from prior year. And you'll see that there's a much more significant amount of sales comp in the back half as compared to the front half of the year this year.

And what that results in is because those were commodity programs, we really didn't make any money on them. And so as we remix the business for those, taking those sales out and putting in sales that are at or better than the average gross margin, and as Champion continues to inflect, we see Activewear margins being significantly higher as we move through the year. So we feel really good. And that's including the incremental brand support we're adding in the third quarter. So we feel very good about where we're trending with Activewear.

Operator

Our next question comes from Jay Sole with UBS. Your line is now open.

Jay Sole -- UBS -- Analyst

Great. Thanks so much. I've got a few questions. Barry, you know, on inventory. Inventory is up, you know, call it, 6% at the end of the quarter. Looks a little bit higher than what you're guiding to the sales for the third quarter. Is there maybe a little bit more inventory? How might that impact gross margin in the third quarter? And then secondly, it sounds like the interest expense guidance is unchanged, but at the same time these cost currency spots are of benefit. So just trying to square that circle a little bit.

And then lastly, on the brand support, what's the timing of when that starts to benefit the top line? Is that something that happens kind of immediately after you make that brand support? Or is it something you would expect to be more beneficial cumulatively into fiscal '20 and beyond? And then, if I can squeeze one last one in. SG&A dollar growth expectation for the third quarter. If you could help us with that, that would be great too.

Barry A. Hytinen -- Chief Financial Officer

Thank you. Okay, Jay. I'll take the first 3 of your one-part question, and then we'll let Gerald take one of them. So on inventory, it is a little bit higher year-on-year. I'll note that as compared to last year, it reflects the fact that we are -- we invested in the first quarter, as we talked about, to support the Champion growth. And there's a little bit of timing there for some of our fall sets in terms of getting them in. So you'll recall, in the first quarter, I mentioned that we were having trouble keeping up with demand and we were having to expedite.

So we deliberately increased our levels of inventory and brought some things in a little bit earlier to make sure that we were in a good position for the fall. We want to be servicing our customers as well as we possibly can. As it relates to gross margin, I -- implications for the third quarter, I don't see any impact. The mix continues to be good. So we feel good about the inventory. You asked about the swap and its impact on our full year interest expense. Look, we didn't change our full year numbers at all as it relates to our guidance.

Certainly, the swap helps us, I did put that into the third quarter. And we also reflected in the third quarter the fact that rates are a touch lower here -- based on yesterday, continue to come lower on our variable debt. So for the full year, we're probably going to have some incremental benefit. On the swap, we swapped EUR 300 million. We saved well over 200 bps, fixed-for-fixed, I might add. So over the next 5 years, we'll save about $8 million a year annualized. So in the back half, we'll get, not quite, $4 million of benefit. I put that in the third and you know, well, all other things equal, have that benefit in the fourth. As it relates to -- maybe Gerald would like to take the brands support.

Gerald W. Evans -- Chief Executive Officer

Sure. From the standpoint of brand support obviously we've seen the effect of the brand support. We've increased so far. We're seeing the traction in the business, Jay, and we saw the opportunity to take an increase again. And it's really going to be in -- in several places, you'll see it, it's going to go against our Champion business. We'll continue to invest in that, that growing business. As well as -- we've got investment behind our Innerwear innovations in the back-to-school period in particular. And as you know, back-to-school tends to play out a little later in the quarter, and then it traditionally has.

So that's, sort of August-September period, is when you'd see some traction begin there behind our basics and intimates innovations where we've stepped up investment behind both. And then finally, in our international markets, particularly in a market like Australia, where we're seeing good traction in our businesses, and we're investing there. That's a business that has a nice retail component and you would tend to see that trend a little stronger in the fourth quarter from the impact of the business like that. So mix across the -- of course, when you're building brand equity, you tend to see that even longer-term as you carry it into the next year. So we're excited about the investment and feel we're getting good movement in our business as a result of that investment.

Operator

Our next question comes from Michael Binetti with Credit Suisse. Your line is now open.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys thanks for all the help with the detail here today. I wanted to ask you, I guess, on the price increases relative to the commodity prices. Can you tell us a little bit from historically what you've seen as far as the response from private label on the Innerwear side, when commodity prices were lower? Obviously, if we go channel to channel for you, we see different levels and some of the retailers stepping up their efforts in private label. I'm just -- I'm wondering what you baked in, as far as how you thought about the margin toward the end of the year, if there is a response from private label? And maybe they've taken the opportunity to be a little bit sharp around prices as the commodity pressure rolls off.

Gerald W. Evans -- Chief Executive Officer

As a manufacturer, Michael, we tend to see the cost long out as we're looking at our production. And so what we saw was general labor inflation coming around the world in our manufacturing locations, where apparel's made as well as we saw some push on commodity. And as you know, late last year we were talking about pricing going in place. We put our prices in place in mid-February and have seen them stick very nicely in the market.

Now no one in the industry is immune, necessarily, from labor cost increases and commodity costs and we price to maintain our margins over time. Since we've made our pricing and we've seen others in the market move, both private label and competitors across multiple category has taken prices up as well. So we have to assume that they too have felt the impact of some of those increased costs. So we feel good about our pricing and where it is and the relationship of our price points to others in the market, we feel good about.

Operator

Our next question comes from Paul Lejuez with Citi. Your line is open

Kelly Crago -- Citi -- Analyst

This is Kelly on for Paul. I just wanted to talk a little bit more about Champion in the U.S. Could you help us understand how much of the growth in the second quarter was driven by new distribution versus growth within existing doors? And then, when you think about the third quarter, it seems like there's a big step down in growth relative to the second quarter in the U.S. Is that just toward assumption of more growth within existing doors? Is there still new distribution opportunities? Any help with that would be great. Thanks.

Barry A. Hytinen -- Chief Financial Officer

Kelly, this is Barry. Thanks for the questions. I'll take most of that. In the quarter, the vast majority of the growth is continuing to come from existing accounts and that's comps and as well as base expansion year-over-year. In those existing accounts, we certainly did, as we talked about last quarter, have some new distribution over the last 12 months and that continues to be the case. We are being very mindful about segmenting the product and being careful about levels of distribution and broadening. But we have continued to broaden the distribution, and our consumer-directed business is doing great.

So I think this broad-based growth, and I could make those similar comments about the international, too, I might add. You were asking about U.S. It's principally existing accounts driving the growth, and that's increased the consumer takeaway, which we're really pleased about. I think that shows the development of the brand. And then as it relates to the third versus the second quarter comp, and you know, I'll just echo my earlier point. At the beginning of the year, we gave investors a view as it relates to how we thought the year was going to play out.

We mentioned that we were embedding a tapering of growth rates as we moved through the year. And that has proven to be conservative in the first 2 quarters. We have not changed our back half assumptions at all as it relates to -- from what we gave in February for those sales growth rates. So it could continue to prove conservative. If you look at the global Champion comps on a constant currency basis, second to third quarter, year-on-year they're very similar. And so we feel good about where we're trending.

Operator

Our next question comes from Tiffany Kanaga with Deutsche Bank. Your line is open.

Tiffany Kanaga -- Deutsche Bank -- Analyst

Hi. Thanks for taking our questions. It's a follow-up on an earlier one. I was a bit surprised by the third quarter Innerwear guidance considering your relatively easy compare. So would you be able to break down the factors behind the ongoing 2% declines despite the contributions from the innovation that you cited and, especially, if we were to strip out the benefit from the new sock program at Dollar General?

Barry A. Hytinen -- Chief Financial Officer

Okay. Tiffany, I'll take the first part of that, thanks for the question, and I'll hand it to Gerald to talk about some of the innovation. I think I'll just reiterate that the way we planned Innerwear this year. You know at the start of the year, we suggested the full year would be down about 2%. That included a 4% assumption in the first quarter. We did better in the first quarter and we indicated that we're kind of taking the year and using roughly about 2% a quarter after the first quarter. And that was due to some of the timing of some of the sets well as pricing. And so the year is playing out for Innerwear right in line with what we expected.

I guess I should tell you that, on a year-over-year basis, we called out that bankruptcies would continue to be a challenge for us, and -- now I want to avoid commenting on in the individual customers. But to help you a little bit, in our U.S. business, year-over-year, our sales comp was impacted by 3 noteworthy bankruptcies in the second quarter, so -- versus the prior year period, that have gone bankrupt since then. And that totaled a year-on-year decline of $16 million of sales, with a vast majority of that in Innerwear. So that's a factor that we had embedded in our original guidance and our maintained guidance. And Gerald, you want to...

Gerald W. Evans -- Chief Executive Officer

Yes, I think from the standpoint of our innovations in these space, they're all tracked very well. Much of the innovation is coming in the third quarter and will develop over the fourth quarter, and we stepped up our media for that back-to-school period. We've seen great traction in the early media we put behind intimates, for example, in Maidenform and we're stepping that up behind our value brands. So we think you'll see that over time. But I would just echo what Barry said.

We're navigating a very challenging retail environment, and we said that all year from the standpoint of the bankruptcies and door closures, and we're going to continue to view that retail environment with caution until we overlap those challenges. So we're very pleased with where we are. We know we're heading toward our guidance very solidly, and we feel good about how Innerwear's performing for the long-term to return to growth.

Barry A. Hytinen -- Chief Financial Officer

Yes. And just -- operator before we move on to the next question, I want to make sure that everyone understood the point I was making there at the end to Kelly's questions about comps, second and third quarter. If you look at our global Champion growth rate at a constant currency basis in the second quarter of '18 and the third quarter of '18, they were very consistent. So we feel good about where we've guided in that framework that we outlined at the beginning of the year.

Operator

Our next question comes from Carla Casella with JP Morgan. Your line is open.

Sarah Clarke -- JPMorgan -- Analyst

Hi good morning. This is Sarah Clarke on for Carla Casella. Thank you for taking the question. I have two quick ones for you. First, can you discuss a little bit more your outlook for sourcing cost and trends in transportation and logistics cost? And along with that, any details you can share on how much of your production comes from Central America or the Caribbean, Far East or other region? And then my second question, this may play into the inventory that we were discussing earlier, but have you changed any of your terms with department stores or other retailers going into the holiday season? And are you seeing retailers change their ordering timing or patterns in back-to-school or holiday?

Gerald W. Evans -- Chief Executive Officer

Okay. Let me take some of this. From the standpoint of the cost and logistics, as we saw all that in our -- as we built our plans for the year, we feel that we've adequately captured that as well as the rising labor costs offshore in our assembly points. And the price too we've maintained our margins as we worked through the year. So we feel like our pricing in places has covered that very well as we look forward. From the standpoint of our manufacturing network.

When we built our network a number of years ago, we took a very long view on our network, and we were very thoughtful about expanding it over multiple geographies in order to offset any potential geopolitical risk or unknowns as far as the fluctuation within a different country. So we're well spread across Asia and Central America. And within Central America, we're well spread across countries like El Salvador and Honduras. While in Asia, we're well spread across Vietnam, for example, but we're also well spread in Thailand. So we feel like we've done a nice job of balancing our supply chain over time. We're very happy with how that's performing. From the last question was...

Barry A. Hytinen -- Chief Financial Officer

Was the order timing.

Gerald W. Evans -- Chief Executive Officer

From an order timing standpoint, what I would say about the third quarter in particular is that back-to-school has increasingly shifted as an event to be later in the third quarter. So we would generally expect it to be backloaded from a sell-through standpoint and a little more backloaded from a shipment standpoint. We think we've got a great offering out there for back-to-school, and we're looking forward to seeing how it plays out over the next few months.

Operator

Our next question comes from Michael Binetti with Credit Suisse. Your line is now open.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys. I jumped back in the queue there. I appreciate you taking me back. I wanted to just ask Barry. I was thinking back about the analyst day guidance from 2022. And at that time, you guys were planning to get to a 15.5% operating margin by 2022 and that implied that about 30 basis points per year on average. I think this year has guided to about 14%, so you need to be up about 50 basis points on average.

So a little faster. Obviously a few changes in the business in the world since then. But does the portfolio today have the drivers to support that 50 basis points a year? Or should we -- to get to the original 15.5% target? Or should we think more about the annual improvement that you were talking about at that time of delivering 30 basis points per year with this portfolio? Is that the more appropriate way to think about the longer-term model?

Barry A. Hytinen -- Chief Financial Officer

Hey, Mike, it's Barry. Thanks for the question, and a couple of thoughts. This year, we are clearly investing more in brand support. That's like $32 million more year-on-year, which -- I wouldn't say that we won't do that again in the future, but from a standpoint of -- even as we look out to this year and as we get to the fourth quarter, it really normalizes. And on a year-over-year basis, you'll recall last year we were investing more in brand support in the fourth quarter. So I think we're getting to a point where it's -- unless we see reason for it to further accelerate our business, then you're probably going to get to start seeing some significant leverage there.

Secondly, this year, as we talked about last year and into this year, commodities have continued to be a more significant headwind. And as I mentioned in an earlier question, we're just now getting here in the second and third quarter to comping over the peak levels of that. And as we get into the fourth quarter, our pricing well more than offsets those input cost. And as a result, and as you look at things like some of the input costs that go into our cogs, they've been coming in. And I would anticipate that, all other things equal, commodities versus pricing ought to be very favorable as we move forward.

Obviously those things can change but we feel extremely good about our pricing. And then the other thing I'd call out is, look, the Champion margin has got more room and continues to expand in excess of what we would've been anticipating at that point, recognizing of course, from an operating margin standpoint, we've been putting in those investments that I mentioned, we'll be able to lever going forward. So -- and then the international margins continue to expand. And that's driven our volume, scale, leverage and acquisition synergies.

Our latest acquisition, just to talk about it, Bras N Things, is doing very well, and it's very accretive to margin. So I view it as an opportunity to continue to expand the margins going forward. I think the underlying trends in the business are quite good. And over the next several years, we feel good about where we're trending.

Operator

And that will conclude today's question-and-answer session. I'd like to turn the call back to T.C. Robillard for closing remarks.

T.C. Robillard -- Chief Investor Relations Officer

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

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

T.C. Robillard -- Chief Investor Relations Officer

Gerald W. Evans -- Chief Executive Officer

Barry A. Hytinen -- Chief Financial Officer

Omar Saad -- Evercore -- Analyst

Peter McGoldrick -- Stifel -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Laurent Vasilescu -- Macquarie -- Analyst

Jared Orr -- Cowen and Company -- Analyst

Jay Sole -- UBS -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Kelly Crago -- Citi -- Analyst

Tiffany Kanaga -- Deutsche Bank -- Analyst

Sarah Clarke -- JPMorgan -- Analyst

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