Q1 2023 Hanesbrands Inc Earnings Call
Speaker 2: Microsoft sealed out Mediballs sells to Microsoft veterans here in
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Speaker 3: Please be advised today's conference is being recorded. I would now like to hand the conference over to your host today, TC Robelard, Vice President, Investor Relations. Please go ahead. Good day, everyone. And welcome to the Haines Brands Quarterly Investor Conference call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2023. Hopefully everyone has had a chance to review the news release we issued earlier today. The news release updated FAQ document in the replay of this call can be found in the Investor section of our Haines.com website.
Speaker 3: 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 uncertainty that may cause actual results to differ materially. These risks include those related to current macroeconomic conditions.
Speaker 3: consumer demand dynamics, the inflationary environment, cybersecurity, and our previously disclosed ransomware incident, in any ongoing impact to the COVID-19 pandemic. These risks also include those details in our various fileings with the SEC, which 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.
Speaker 3: With me on the call today are Steve Brassbees, our Chief Executive Officer, and Scott Lewis, our Chief Accounting Officer, and Interim Chief Financial Officer. For today's call, Steve and Scott will provide some brief remarks and then we'll open it up to your questions. I'll now turn the call over to Steve. Thank you, TC. Good morning, everyone, and welcome. When we enter the year, we spoke about our expectation that the global operating environment would remain challenging in 2023.
Speaker 3: And as a result, we would focus on balancing the execution of our long-term growth strategy with driving near-term performance, including a return to high 30% gross margins as we exit the year, generating $500 million of operating cash flow, and paying down debt.
Speaker 3: I'm pleased with how our team remains agile and focused on controlling the things we can control, which show progress against both our near-term and long-term goals.
Speaker 3: With respect to our near-term performance and 2023 goals, for the quarter we delivered revenue, operating profit, and earnings per share that were in line with our outlook.
Speaker 3: We successfully refinanced our 2024 maturities. We reiterated our full year guidance.
Speaker 3: And we began seeing the benefits from our initiatives to unlock working capital. Specifically, our inventory the consequentially and we generated positive operating cash flow in the first quarter, which is shortly has been a quarter that uses cash.
Speaker 3: Turning to our long-term full potential growth strategy, during the quarter, I had the privilege of spending time with our team in Australia, as well as our associates and our world-class manufacturing facilities, Vietnam, Thailand and Honduras.
Speaker 3: This gave me a chance to see firsthand how our full potential work is unfolding. In Australia, where we have a much higher mix of direct to consumer sales, I was able to walk a number of our bonds and bras and things stores.
Speaker 3: Being at Brands brought to life, the way we merchandise innovation and have the technology and automation investments in our distribution centers are generating increased efficiencies.
Speaker 3: gives me confidence that we'll be able to support our growth in our D2C model.
Speaker 4: In walking through our manufacturing facilities,
Speaker 4: I'm always energized by the scale of our operations and the opportunities it presents.
Speaker 4: I saw a number of these methods being used at our facilities, including the use of data analytics and machine learning to generate greater output on our sewing lines. We're achieving tangible results from the progress we've made to date in transforming our company, and our progress continues across a number of our full potential initiatives that should help us become a more consumer-centric, data-driven organization and make us more efficient and profitable. I remain incredibly excited about our portfolio of brands and the innovation we're delivering.
Speaker 4: In Haines, we expanded our distribution of our Haines Originals line, which is being supported by a national media and advertising campaign.
Speaker 4: Hanged Originals is a line of innovative products aimed at younger consumers and were encouraged by the initial response from both our consumers and our retail partners.
Speaker 4: We also continue the extension of our global innovation platform of absorbency products.
Speaker 4: After a successful soft launch, we expanded distribution of our bonds' toddler training underwear across channels in Australia.
Speaker 4: With respect to our technology initiatives, we continue to improve our capabilities and user experience on our websites, including a more modern payment architecture and easier site navigation.
Speaker 4: We also launched our Hanes Loyalty Program in March, which followed last November's launch of our Club Champion Global Loyalty Program. These programs are ramping nicely and should help us better optimize our marketing investments over time as consumers become more ingrained within our ecosystem.
Speaker 4: We also achieved another milestone on our journey to becoming a more data-driven organization.
Speaker 4: with a successful conversion of our champion North American business onto our new SAP platform.
Speaker 4: Our ongoing migration to a common technology spine for the global organization will enable better business analytics and planning, which in turn should lower costs, improve efficiencies, and reduce working capital.
Speaker 4: On the supply chain front, we continue to drive increased efficiencies, faster speed the market and cost savings across multiple initiatives.
Speaker 4: We continue to optimize the manufacturing footprint, which is lowering fixed overhead.
Speaker 4: We're improving speed and efficiencies within our DCs by implementing additional automation and our picking and sorting systems.
Speaker 4: We've significantly reduced our manufacturing lead times, particularly out of Asia, and we're also realizing benefits from our Skip Flow Initiative.
Speaker 4: By leveraging our global scale, we're able to bypass our distribution centers and ship products from our factories directly to our large customer's warehouses.
Speaker 4: This lowers costs for both us and our customers while also increasing delivery speed. And in terms of sustainability, we continue to build on our leadership position across our people, planet, and product pillars.
Speaker 4: including donating essential clothing to people in need, using renewable sources for nearly 50 percent of electricity needs, as well as reducing packaging weight in single-use plastics.
Speaker 4: Not only are these initiatives good for the planet, but they're good for shareholders as they lower costs and drive positive consumer connections to our brands. As you can see, we continue to make steady progress with the implementation of our full potential plant.
Speaker 4: will be becoming more data driven and consumer centric, which she drive more consistent revenue growth over time.
Speaker 4: and we're generating savings and efficiencies that positions us to exit the year at high 30% gross margin level.
Speaker 4: generating savings and efficiencies that positions us to exit the year at high 30% gross margin level. So in closing, the year is unfolding as expected.
Speaker 4: We remain focused on driving near-term profitability, generating cash, and paying down debt.
Speaker 4: And we'll continue to appropriately balance our near-term performance with the execution of our transformation growth strategy.
Speaker 4: And with that, I'll turn the call over to Scott.
Speaker 5: Thanks Steve. Overall we accomplished a lie in the first quarter.
Speaker 5: We deliver results that were above the midpoint of our guidance for revenue operating profit operating margin and earnings per share Regenerative positive operating and free cash flow and based on the commodity and freight cost that are running through our supply chain today Remanufacturing product at gross margin levels that are in line with 2021
Speaker 5: in early 2022. All this gives us confidence that we are on track for the year to deliver many, many higher margin run rates as we exit the year, generate 500 million dollars of operating cash flow and pay down debt.
Speaker 5: Where days call, catch on the highlights from the quarter, as well as provide some thoughts on our outlook for the remainder of the year.
Speaker 5: For additional details on the quarter results and our guidance, I'll point you to our news release and FAQ document.
Speaker 5: First quarter sale of the $1.4 billion decline 12% versus prior year, which includes a 200 basis point headwind from the impact of foreign exchange rates.
Speaker 5: On a cost of currency basis sells to climb 10% as we let last year's strong results.
Speaker 5: In the U.S. the decline was primarily driven by active wear with sales of our champion brand and other active wear brands down 19% as compared to prior year. While champion's performance was consistent with our outlook, sales in our other active wear brands declined more than expected in the quarter. The active wear decline was driven by the slowdown and consumer spending, which resulted in lower point of sale and higher inventory levels at retail, as well as the strategic channel cleanup work we're doing within the champion in the U.S. From the positive side, we experienced another quarter of the year over year growth in our collegiate business.
Speaker 5: Now, US Interwear Business performed well above our expectations as we saw a balance thing as shidmets with Point of Sale.
Speaker 5: We also expanded distribution of our Hanes original bond, which is aimed at attracting younger consumers as we're seeing good initial results behind the national media launch.
Speaker 5: Turning to margins, adjust the gross margin of 32.7% to climb 440 basis points compared to prior year. The decline was driven by infinite cost inflation, which was in line with our expectation, as well as lower sales volume and mix. These had went more than offset the partial quarter wrap of last year's annual price increase, lower air freight expense, and cost savings benefits. Relatives of our gross margin outlook, the difference was primarily driven by channel and product mix and the quarter.
Speaker 5: and tax expense and EPS were both in line with our outlook. Turning to our balance sheet and cash flow, in the second half of 2022, we took actions to reduce our inventory units, which in turn positioned us to unlock working capital in 2023. We began to see the benefits of these actions in the quarter as inventory declined 1% sequentially, and we generated $45 million of operating cash flow in the quarter, which is notable because we historically used cash in the first quarter.
Speaker 5: With respect to our debt, as expected, our leverage was elevated at 5.4 times on a net debt to adjusted EBITDA basis, which was below our first quarter covenant of 6.75 times.
Speaker 5: In the quarter, we successfully refinanced our 2024 maturities with a combination of a Turn-Home-D and unsecured notes. Refinancing was the first step on our path to lowering our leverage. With positive cash flow generation in the quarter, we believe we are on track to use all of our free cash flow to pay down debt this year.
Speaker 5: and now trying to got it.
Speaker 5: We reiterated our outlook for the full year, including net sales of $6.05 to $6.2 billion.
Speaker 5: Adjusted operating profit of $500 to $550 million.
Speaker 5: Adjusted earnings per share are 31 cents to 42 cents, and operating cash flows are approximately $clinical.
Speaker 5: Now it continues to reflect our need of you to the consumer demanded by them and give them the macro economic uncertainty.
Speaker 5: We continue to expect margin pressure in the first half as we sail through our higher cost inventory.
Speaker 5: As we move through the second half, particularly the fourth quarter, we expect year-to-year margin improvement as we begin selling low cost inventory and the anniversaries last year's manufacturing timeout costs.
I highlighted earlier, based on the commodity and freight costs that are running through our supply chain today, we're manufacturing products at gross margin levels that are in line with 2021 and early 2022.
This gives us visibility and confidence that we're all attracted to extra the year at meaningfully higher margin run rate.
With respect to our outlook for the second quarter, at the midpoint we expect net sales to decline 3% on a constant currency basis or approximately 5% on a reported basis.
We're just an operating profit that we are counting to arrange a $70 million to $90 million. We expect interest and other expense to be approximately $80 million dollars. Tax expense of approximately $10 million dollars and adjusted ETS to arrange between break even and a loss of 5 cents. So in closing, we delivered first-core results and louder outlook.
We began the year generating positive operating cash flow as we started the unlock working capital. And we have visibility through our product margins as low-impact costs are flowing through our facilities today.
The year is unfolding as expected and we believe we're on track to deliver our 2023 goals, including a return to high 30% gross margin levels as we exit the year generating $500 million of operating cash flow and paying down debt. And with that, I'll turn the call over to TC.
Thanks Scott. 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 the intercession operator.
As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your telephone.
Our first question comes from J-Soul with UBS.
Hello, can you hear me?
Oh, great. Thank you. So maybe just thanks for the detail on the prepare remarks. Just thinking about the guidance for fiscal 23 talking about sales being down 2%. It's possible to talk about what you're expecting by segment maybe innerwear and then maybe talk about active wear. That'd be helpful. Thank you.
Sure, Jay. Good morning and thanks for the question. So, you know, Scott mentioned in his remarks as I did, you know, we reiterated our full year guide. I mean, we don't guide by segment directly, but let me give you just a few kind of directional points, maybe that can help you.
As we look at the company, Interwear, think low single digits down for the year, we're starting to see, you know, that's a POS-driven software consumer spending. We are past the destocking phase that we've been talking about for a while in the last couple quarters, and we expect a pretty good balance between POS and shipments in the Interwear space as we go forward.
We're expecting kind of good stable performance in Europe , but we do expect some headwinds in Australia.
as we go forward to that economy. Think of Australia as trailing the US by a quarter or two in terms of impact on inflation and interest rates as well as seeing it play out. And then on the active side, probably down mid to high single digits, kind of facing the same headwinds that we're seeing in Q1.
We're going through strategic cleanup, particularly in the US. We are seeing slowing down, consumer spending, and POS trends, and there's still a lingering inventory challenge. So, directionally, that's where I think you should think about the guide for Q2 and basically for the rest of the year.
kind of innerwear, flattish, activewear down mid-single digits again with continued headwinds.
innerwear, flattish, activewear down mid single digits again with continued headwinds. You got it. That's very helpful.
If you have a follow-up, just on the active wear inventory. I mean, what do you feel like that inventory situation is going to be where you want to be?
Yeah, I mean there's clearly still challenges in the channels. It has not cleared up. As we think about balancing our business, we've got Interware, we've got Activeware. Interware is certainly balanced out faster than Activeware has and there are a lot of reasons for that. It's a different business, different channels, different competitors. So we're seeing it.
start the balance out, Jay, but I think it's going to take a little bit of time for us to work through that. And that's going to really drive by the consumer and how much they start to re-engage with the category. It has not gotten super promotional in our space, but I think it's going to take some time for that to balance out as we go forward. And we're watching it closely. I mean, you can see in our results, we're going to be able to see.
better job of today than we've done in the past. Sequentially Q1 inventory is down 1%, which I feel good about, and how the team is managing that. We continue to reduce skews. So we're gonna manage it at the macro level as a company, and then we're gonna manage it as the micro level two, category by category, business by business.
of today than we've done in the past. Sequentially, Q1 inventory is down 1%, which I feel good about and how the team is managing that. We continue to reduce use. So we're going to manage it at the macro level as a company, and then we're going to manage it as a micro level two, category by category, business by business. Got it. Okay. Thank you so much. Let's work together as a company.
Our next question comes from Ike Boruchow with Wells Fargo.
One of the first questions is one of the margins in the first quarter. So just really good job controlling the SGA, but when you kind of adjust that out, it looks like the gross margins actually came in maybe a hundred to a hundred fifty basis points below where you would plan in the first quarter.
Pee just talked to what exactly happened in Q1 that we would have driven slightly worse gross margin versus plan.
Yes sure good morning Mike I appreciate your question and enjoying the call today. So compared to our Q1 outlook really two things drove the lower gross profit rate and each are roughly equal in size. The first is lower mix of DTC sales more than we expected and that impacted gross margins but actually was a driver of the better than expected performance in SG&A.
And the other half is product and channel mix in the US interwear and active wear. And we also have some higher promotional activity in our stores in Australia as traffic is slowed. So that thing in performance overall, but Tommy could operate in March and we were pleased. As you think about, I know you asked about Q1, but as I think about Gross margins, I just...
are down 40% year over year. And you actually can see that on the balance sheet with raw materials and work in process inventory while it was down 15% from last year. So considering all of this, I see Q2 actually as an inflection point. As you would see, our gross margin rates improve over the course of the year.
Looking at the second half, again, you're going to see improvement, again, as inflation eases off over the course of the year. Q3 rates, gross margin rates will be flat up slightly. And then you're going to see a meaningful improvement in Q4, the gross margin rates. And then as you think about the back half of it, you have to keep in mind we're anniversarying it last.
And then just stick with the gross margin. Can you talk about pricing? Maybe let's just stick with interware just pricing in the first quarter and then expectations on price for the rest of the year.
We take pricing on a long-term basis and really a strategic view. I say we put the consumer at the center of
every decision that we make and our plan of our time is to grow space, grow our share, and we need to be diligent about those price gaps. So we're going to balance that as we go forward and we'll manage short-term variations. But, you know, net, all the pricing that we took last year has held.
And as you know, we didn't price the peak inflation, but it's all held and we feel good about it, but we don't see pricing in the future. Certainly in the near term. Thank you.
Our next question comes from Paul Kearney with Barclays. Hi everybody, thanks for taking my question. Just first on active wear, so we're lapping. Hello, can you hear me? Yeah, go ahead.
Thanks for taking my question. So first on active wear, how should we think about lapping the ransomware from last year and balancing that against kind of the week consumer backdrop in North America? Yeah, in turvahs.
In terms of that cyber event, there's no ongoing operational impact for any products that we're doing. It's built into our guide and our expectations for the quarter, but you should think of that as behind us, no ongoing impact on the operations of the business.
Okay, and secondly, just on the inventory, how much of the reduction was kind of a like-for-like product reduction versus the skew reductions that you've taken? Thanks.
I think it's both. So certainly the skewer reduction work that we're doing is making a big difference. And it's something that I'm very passionate about and that's something that we're going to continue to drive as we go forward. You know, skews down 45% from the peak and it seems to be really benefiting the business.
That said, we're also really working on making sure that we have the right inventory and the skews that are driving our growth. So if you look at our inventory right now, the 16% of products that account for nearly 55% of our sales, they represent 46% of our finished goods inventory right now. So.
We are leaning into the skews that matter most, and we're going to make sure that the ones that should never be out are never out and bouncing are inventory appropriately. So I'd say it's a bounce of both as you go forward because both are incredibly important to managing inventory for a company of the size and for as diverse and global as we are.
leaning into the skews that matter most, and we're gonna make sure that the ones that should never be out are never out, and balancing our inventory appropriately. So I'd say it's a balance of both as you go forward, because both are incredibly important to managing inventory for a company this size, and for as diverse and as global as we are. Thanks for passing it on.
Our next question comes from a line of Paul Desjouais with City. Hey everyone, this Brandon on for Paul can you hear me? Yeah, go ahead Brandon, I gotcha. Okay, thanks. Um
Thanks for taking our question. So I was wondering, could you talk about, you know, POS trends for Interwear throughout the quarter, you know, how did that exit and, you know, how are you looking at that going forward?
Sure. When you look at the quarter, the quarter actually started a little stronger than it ended from a POS perspective, which kind of marries up to the broader...
consumer environment that you're seeing out there. So it's challenging right now. You know, the good news is that inventory is balancing with that POS. We're getting back to, you know, the way the business I think should be should be managed over time. But the retailers are certainly being on the conservative side as they try to match with POS.
going forward. So I think we're gonna learn a lot over the second quarter as to where the consumer is. And it's kind of in line with our expectations in the quarter and then starting.
through the month of April , it's kind of following the Q1 trends and that's what we built into our guide.
So you're mass merchants and they turn back on the punishment business.
because I know that back and forth cues sounded like they shut that off. Yeah, we've never shut off on a replenishment basis. It's always about how you find balance. So what was happening is, and it's not, it's across multiple channels. This is a broad statement when I say this. Replenishment was flowing a little bit below the POS.
So there was an inventory reduction that was happening over time. Those two lines, if you think of the lines on a graph between the rate of POS and the rate of shipments, has...
Has merged and we're basically running at the right balance. So this idea of a de-stocking of inventory That's all behind us and now it's about managing the business closely We work very closely with our retail partners always finding opportunities in certain pockets whether certain stores certain Categories to rebalance inventory and they're great partners and you know, we're using a lot of different
data and analytics tools which are new to this company to find those opportunities, which should help us drive sales as we go forward. Gotcha. And in the release, you called out the Printware business as being particularly weak for the act of work. So, it's worrying if you could expand on that, you know, do you expect?
that's a rebound and if there's any particular reason that Printware would have been so weak and how big of a business is that for you in active work? Printware certainly was a challenge in the quarter and it's a bit of a consumer driven, you know, are there big events, corporate events, all those kinds of things which.
can sometimes get caught up in the broader economy and companies making reductions as we go forward. The POS, the pull out from our wholesale partners has just slowed down dramatically, so they're balancing inventory as we go forward. I don't necessarily expect a significant rebound in that business in the near term.
but it will depend upon the broader macroeconomic environment. In general, it's a relatively small business for us, but I think it's a business that's gonna be challenged and a channel that's gonna be challenged in the near term while the consumer environment remains muted.
So that's also experiencing the de-stocking, sales are trending below POS, is that what you were saying? Just so I have that clear. No, no, it's not really a de-stocking, it's a POS is down. So that business is down, so the inventory flow that we would more normally expect is just lower.
Yeah, Jim. Appreciate it. Thank you. Thank you. Thank you. Good luck. Our next question comes from Tom Negic with Wedbush Securities. Hey, good morning guys. Thanks for taking my question. I just want to follow up on ActiveWare. I know.
There's been a lot of emotional activity in the space and there's a couple of big brands out there, big competitors that had a lot of a parallel inventory that they were trying to work through. Could you just comment on what you're seeing from a competitive dynamic? Are you seeing the competitors still?
being sort of heavy-handed with discounts, has that eased up at all? Any comments on the competitive environment for champion would be helpful. Yeah, sure. Let me talk about the environment. I'll take a minute to talk about champion overall.
That's how you can just live and buy the wireless consumer environment.
So, you know, it's a very competitive space. As you said, there are a lot of big players. When you get an inventory backup of the scale that we have, people try to move it and try to move it aggressively. But it's really not unexpected when you get into this kind of situation. So I wouldn't say there's anything necessarily abnormally playing out based on the scale.
a tremendous amount of growth potential out there. You know, we obviously we have our full potential growth plan, but you know, we've got a new team in place and the work that they're doing really builds the foundation of this business both on top line and on margin, you know, well bought beyond what we're trying to do in the full potential. So we're doing a lot of work on a global basis to coordinate our offering, simplify the with a zero, pandemic, a zero, 17 percent of boys live a patient. We've got our own humanity. We'll keep going. It's traditional
There's certainly disruption short term, particularly in the US, and we have a lot of work to do in the US. But, you know, I remain confident in this brand. International business is doing well. And you know, we run those businesses historically a little bit differently. We're more disciplined in terms of channel and product segmentation around the globe than we've been domestically. So I feel good about where we're headed in this business. We do need to work through the near term inventory issue.
from Jim Duffy with Steve-O.
Good morning. Good morning. I just take my question. Good execution, guys. It does like you're seeing the ball. There's some good clarity on margins. I wanted to focus on revenue visibility and recent indications of consumer behavior. Can you maybe speak directly to differences in POS trends between mass channel and other wholesale accounts? And if you could speak to the retailer mindset as they plan to back to school and holiday, that would be helpful.
Thanks for the question, Jim. In terms of channel variation, POS is not strong across the board. There's always a little bit of variation, but I wouldn't say at this point you can say, oh, this channel is really strong and this channel is not doing markedly worse. I think it's across the board, broad-based.
consumer challenge that we're facing right now. And that's across most of the businesses, which is really playing out as we expected. And which, you know, that's why we were, you know, kind of in the guide range in Q1, and we put all that into our guide for Q2. When you think about back to school,
Obviously, it's a big time for a peril, big time for our categories. I think overall, the industry is in better year over year, but still below, I would say pre-pandemic levels for the big lift and the big burst of energy and activity for consumer base that used to come with back to school. As I said, it's getting better, it's getting back to that levels, but we're not there. When I look at our position for back to school, I think we're really well positioned. And I'm excited for this.
to win a season.
Okay, great. Another question on just inventory and inventory levels. Can you speak to the cost per unit and your view on cost per unit into year-end? How much will the cost of inventory contribute to the inventory relief that you're expecting?
Well, we're definitely going to see deflationary pressure on the inventory that we're carrying. So as Scott was talking about earlier, the costs that are running through our factories today are markedly lower than they've been. So the cost of production right now is reduced. And as we think about ending the year and gross margin flowing through the P&L, we're
we expect to see a significant improvement and get to that high 30. That should also play into the cost of inventory that we have. So obviously we're not going to sell every piece that we make, but as that inventory rolls off our balance sheet and onto our P&L, we'll get the benefit and the inventory that builds.
per unit of inventory? Yeah, I mean, I don't want to get into specific cost per unit, but as Scott talked about earlier, significant reduction in cotton, significant reduction in freight. So we're making product at a much better cost base than we are today.
and that will flow through in our margin. Understood. Thank you. Thank you. Our next question comes from Hale Holden with Barclays. Good morning. I just had one question, which is it sounds like.
how you built forward for where we see to be going on the consumer? Yeah, I mean, overall, as you said, consumer demand, you know, environmental, and sorry, and the environment global remains challenging. Inflation, macroeconomic headlines, consumer confidence, all those things that you know about. You know, we've taken a muted view for the consumer for the full year.
We saw that play out in Q1 as we expected. We expect those Q2 trends to continue off of the base where we are in Q1, which is in line with our guide. We reiterated our full year outlook. We feel like we understand where the consumer is.
where they're going if there's a dramatic shift one way or the other.
from where we are, you know, obviously we'd have to deal with that, but you know, we think we're well prepared to operate in this environment. As we've talked about, inflation is easing, managing inventory really well, costs are coming down throughout the business. We're going to deliver the cash flow that we've been talking about at historical levels.
But when we think about this business, we're doing a lot of things to make a difference right now. We continue to build core capabilities, which is fundamentally important. So we're not standing still during this time. We're moving the business forward. We've proven we can manage SG&A really well. I think our supply chain is a real key asset to have right now, and has visibility to cost so we can prepare ahead of time.
And, you know, we're a basic business, which is a good place to be during this. So, we think we can manage the consumer environment well. We've included it in our guide and, you know, we're ready to adapt as necessary.
Thanks so much, Helas. I appreciate it. Thank you. Thank you. Our next question comes from Carla Casella with JP Morgan.
Hi, it's Carla from JP Morgan. Question on gross margins. So you mentioned in first quarter that 310 basis points of freight. It sounds like that's starting to go away, but how should we take a second quarter relative to first? Are you still seeing a similar headwind or is it less headwind?
completely reversed as of early second quarter or is it really the back half? Yeah, thanks for your question and join the call today Carla. So for gross margins you're exactly right and I mentioned a little bit earlier as we think about the cadence of our gross margin rate through the year but specifically for the second quarter we're expecting that our gross margin rate will be up versus the first quarter.
is going to ease more, especially in the fourth quarter. It's going to be meaningfully less headwinds in the fourth quarter. Okay, great. And then you, I think an earlier caller was kind of asking about this as well, but on the cash flow, you're looking for $500 million of operating cash flow for the year. Have you said how much of that you expect to come from working capital release?
historically we use cash in the first quarter so I think that's a really important point and I think that reinforces our ability to generate strong cash flow and the $500 million that we have for the full-year operating cash flow. God, I say half a little over half of that's going to be working capable driven with the inventory reductions that Steve mentioned earlier that's going to allow us to generate that $500 million and
It gives me confidence we're going to return back to the historical levels of operating cash flow. And then just the final point, and we mentioned this on the last call, is on the cash flow, once you get to the the pre-cash flow, we're going to be using all that cash, pre-cash flow to pay down debt, and that's what we're focused on this year.
disconnect.