Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Gildan Act-Aware Earnings Conference Call. At this time, all participants are in a listen-only mode. After this presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over To Sophie Aguirre, please go ahead.

Thank you, Denetia. Good afternoon, everyone, and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the first quarter of 2020. We also issued our interim shareholder report containing management, discussion and analysis, and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission. and are available on the company's corporate website. On the call today, we have Glenn Shimandi, our President and Chief Executive Officer, and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rod will take you through the results for the quarter and our business outlook, and a Q&A session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and with the Canadian Securities Regulatory Authority. And with that, I'll turn the call over to Rod. Rod, go ahead.

Thank you, Sophie, and good afternoon to all, and thank you for joining the call. We hope everyone is staying safe and keeping as well as possible during this unprecedented time. Before we get to the results for the quarter, let's start with an update on the COVID-19-related actions the company has taken since March 23rd when we last talked with you. From the outset, as the whole situation has developed, our first priority has been and remains the health and welfare of our employees, customers, suppliers, and other partners, as we ensure the continuity of our business. In this regard, we are very pleased that our production of face masks and isolation gowns is now underway. We are currently sewing masks in some of our facilities in Central America to support local government requirements, as well as on behalf of a cooperative consortium of North American apparel and textile companies. supplying non-medical masks to the healthcare sector. We're also producing non-medical masks and isolation gowns for various retailers to be distributed to healthcare organizations. In total, we have current plans to produce over 150 million masks and gowns under this effort, and we'll continue to provide as much supply of product as we can as we move through the pandemic. In order to support production of masks and gowns, we have limited manufacturing activity currently underway, operating with stringent safety processes and protocols in place. Far and away, the majority of our manufacturing capacity around the world remains idle after we extended the shutdown of our operations following mid-April to respect government directives and to manage our inventory levels given the significant downturn in demand caused by the pandemic. Our distribution centers, which have strong inventory levels, mostly remain open to service with appropriate safety measures in place for our employees, but at much reduced operating levels. In parallel with this reduced operating activity, we have moved quickly and decisively to control all costs, defer non-critical capital investments, and to manage our working capital. In this regard, on March 30th, we implemented a number of workforce measures. The Gildan Board of Directors, Glenn, myself, and the rest of the executive team agreed to forego 50% of our salaries, and we have implemented pay reductions ranging from 20% to 35% across all senior management levels. Further, much of our salaried workforce is now operating on a four-day work week. Finally, given the uncertain duration of this crisis and the related economic impacts, we have moved forward with major additional actions to strengthen our balance sheet and liquidity positions. In our March update, we indicated that after drawing down the remaining available portion of our revolving long-term bank credit facility, we stood with just over $500 million of cash and over $50 million of available credit lines. On April 6th, we secured an additional $400 million of long-term debt, providing us with liquidity of over $950 million, and we are currently operating with just over $650 million of cash on hand and $300 million of available credit lines. Further, in addition to suspending our share repurchases, which we did in early March, today we announced that we will be suspending our quarterly dividends starting with the first quarter. While returning capital to shareholders is a key priority for Gildan, and we remain fully committed to doing so when the environment normalizes, we have taken these actions to ensure that we are extremely well positioned to move through this evolving, challenging, and highly uncertain environment. Now moving on to our first quarter results. We generated $459 million in sales, down 26.4% over the prior year quarter, mainly due to lower sales volumes. Although our initial expectations called for lower volumes in the first quarter, the overall volume declines in the quarter were meaningfully higher than we anticipated, given significantly weaker demand in March. During the first two months of the quarter, our sales performance in North America for imprintables was relatively untracked It fell off considerably in March, typically the biggest sales month of the first quarter, as the spread of the pandemic started to heighten in North America. Further, our retail sales were also impacted, although less severely in the mass and online channels. Overall, these year-over-year volume declines in the quarter were partly offset by positive product mix and slightly higher net selling prices due to lower discounting. Activeware sales of approximately $373 million fell 24.5% during the quarter, driven in imprintables by double-digit volume declines in both North America and international, as well as due to a $6 million sales return allowance related to our SKU rationalization initiative. In retail, activeware sales were down due to store closures and lower demand caused by the pandemic, although the decline was less severe than we saw in imprintables. In the hosiery and underwear category, we generated 86.5 million in sales in the first quarter, down 34% compared to last year, as the downturn in demand related to store closures drove lower sales. In addition, as we highlighted in February when we reported our 2019 fourth quarter results, the decline in hosiery this quarter also reflected the impact from the exit of a sock program in mass and the year-over-year impact of the initial rollout of a new private brand sock program which launched in the first quarter last year. In underwear, overall sales were down due to the current challenging demand environment and the year-over-year impact of fully exiting a branded underwear program in mass at the end of the first quarter of 2019, partly offset by increased sales of private brand men's underwear in the mass channel. Gross margin in the first quarter was 23.2%. An adjusted gross margin was 24.6%. after excluding an $8 million charge related to discontinued and printable SKUs. Although adjusted gross margin was down 120 basis points over the first quarter of 2019, it is important to highlight that the year-over-year variance included 340 basis points of negative variance related to manufacturing idling and other COVID-19-related costs. Without these costs, adjusted gross margin would have been 28%. 220 basis points above the prior year level. Accordingly, COVID-19 costs more than offset favorable product mix related to our underwear business, lower raw material costs, and most notably, the benefit of an improving cost structure for manufacturing optimization initiatives under our back-to-basics strategy. Moving on to SG&A expenses. For the first quarter, SG&A expenses totaled $74 million, down $19 million over last year, primarily resulting from reductions in compensation expenses, lower volume-driven distribution expenses, and from tightly managing all our costs, including eliminating all discretionary expenses as we move through the back part of the quarter. Now let me highlight certain impairment charges taken in the quarter in light of the impact of the COVID-19 situation. During the first quarter, although we did not incur any significant customer-specific accounts receivable write-offs, we increased our allowance for expected credit losses to reflect heightened credit risk in this environment. As you would expect, some of our customers are working to navigate through this challenging period and have requested extended payment terms on their account balances as they closely manage their operations and working capital positions. While we are working with these customers and fully expect payment, we are nonetheless required to assign an element of risk to these receivables and adjust our allowance for credit losses accordingly. In addition, this quarter we recorded an impairment charge of $94 million relating to goodwill and intangible assets acquired in previous SOC and hosiery business acquisitions after conducting an impairment review of our hosiery cash generating unit. While the longer-term outlook for this part of our business remains unchanged, and we believe that we are well-positioned from a competitive perspective, the impairment was triggered by the broad impact of COVID-19 on market valuations, including for Gildan. Finally, in the first quarter, we recorded $10 million of anticipated restructuring and acquisition-related costs, largely associated with the relocation of our Mexican operations and costs related to the completion of the exit of our ship-to-the-piece activities. Adding up all these elements, our operating loss in the quarter totaled $92 million compared to operating income of $33 million in the prior year, Before reflecting charges associated with restructuring and acquisition-related costs to goodwill and intangible asset impairment and discontinued imprintable SQs, we generated adjusted operating income of $20 million in the quarter compared to $43 million in 2019. The net loss for the quarter was $0.50 per share, while adjusted EPS was $0.06, down from $0.16 last year, reflecting the sales and operating margin decline including $0.08 of manufacturing idling and COVID-related costs. Turning to free cash flow, we consumed $235 million of free cash flow in the first quarter of 2020, compared to $128 million consumed last year for this period. The change was mainly due to the decrease in earnings in the quarter and higher working capital from increased finished goods inventory due to a planned inventory build in the first part of the quarter. Our capital expenditures in the first quarter were approximately $26 million, primarily for textile and yarn operations. We expect lower levels of capital spending going forward as we defer non-critical capital expenditures in the near term. Finally, under our 2019 share repurchase program, we bought back just over 843,000 shares in the first two months of 2020 for a total cost of $23.2 million. At quarter end, we had net debt of just over $1.1 billion, and a net debt leverage ratio of 2.2 times trailing 12 months adjusted EBITDA. Now, a few words on the outlook. Visibility regarding the duration and extent of the impact of the pandemic remains extremely low, and as you are already aware, on March 23rd, we withdrew our quarterly and annual guidance. However, to provide further context, we thought it would be helpful to update you on the demand trends we have seen thus far in April. In the Imprintables channel, when we last talked during the third week of March, POS was down approximately 50%, and we expected further weakness. This played out at the end of March, and in April, we have seen POS trending down 75% versus prior year levels. Turning to our international Imprintables channels, POS in Europe is tracking at similar levels as North America, while Asia is slightly better, with POS down 65% from last year's levels. POS in retail channels has also decelerated in April, as more and more retailers closed their doors in response to shelter-in-place and non-essential business closure directives. Overall, POS in the retail channel is down 45% in April. In this regard, our branded and licensed sock business and our global lifestyle private brand business has experienced weaker levels of POS, given a high exposure to department, sporting, and specialty store channels, as well as large sporting-related events. On the other hand, we are very encouraged by the strong performance of our private brand underwear business in mass stores and our e-commerce sales, particularly as online retailers are starting to include our basic apparel product categories as priority shipments along with essentials. At this juncture, it is unclear how these trends will evolve as different actions are enacted in various jurisdictions to adjust to the ongoing phases of the pandemic. However, Given what we have seen thus far in April, and given broader economic expectations, we do expect a significant decline in POS and shipments for the second quarter of 2020. Accordingly, this sales outlook, combined with the impact of fixed cost absorption while our manufacturing facilities remain idle, will likely lead to a significant earnings loss in the second quarter of 2020. In closing, despite this outlook, the actions we have taken positions Guilden well to navigate through this challenging environment. As I highlighted earlier, our primary focus is the health and well-being of our people and the continuity and long-term success of the business. We are very proud of how our whole organization has adapted to deal with the current environment, including responding to help alleviate global PPE shortages. We have taken the steps to reduce our fixed costs, and expect to continue to lower our expenses as we move forward and adjust to a weak demand outlook, which could extend through the remainder of the year. We have good inventory levels in all product categories to service our customers, and we have strong liquidity overall. Further, our back-to-basics strategy, which we have been implementing over the last two years to simplify and lower our cost structure, has put us in a better position to deal with these events. We have successfully navigated through challenging environments in the past, but we are confident that our strong business model, financial position, and resilience will allow us to emerge successfully from this global crisis positioned well for the long term. With that, thank you, and I'll turn the call back over to Sophie.

Thank you, Rod. That concludes our formal remarks. Before moving to the Q&A session, I ask that you limit the number of questions to two, and we will circle back for a second round of questions if time permits. And I'll turn the call over back to the operator for the question and answer session. Demetria, go ahead. Thank you.

As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Paul Ledjus with Citi Research. You may proceed.

the information. Curious about your expectations for cash burn in 2Q relative to Q1. Just given now that you've had more time to make adjustments to inventory and CapEx as well as SG&A. And then I just want to circle back on the financial health of your largest customers on the printware side. What are the conversations that you are having with with those folks? What sort of terms are you extending? And what are they communicating to you about future orders? Thanks. Rod, do you want to deal with this?

Yes, I will. Okay, thanks, Paul, for the question. So on cash burn, when we spoke to you in mid-March, we said that we were expected to get our cash burn down to the $35-$40 million range as we moved through the end of April and into May. And I could say that we're very much on track for that, right? So it's As we move through the first part of the first quarter and through the remaining part of the second quarter, our cash burn will be at that level, $35 to $40 million. We've done a lot. We've implemented a lot of actions as we went through with the opening remarks of the call, and all of that is allowing us to effectively drive our cash burn to where we expected it would be. If you look at the financial health of our customers, our customers are obviously, like everybody else, working through the overall situation. They've taken actions to effectively manage their overall operating positions to effectively ensure that they can both service their customers while adjusting their cost structures to deal with the reduced level of demand that we're seeing across the various states, particularly the states where you have shelter-in-place mandates. So I would say all of our customers are effectively, they're operating. In some cases, they may have reduced some of their warehouses in order to reduce costs. They're adjusting to the demand footprint that's out there. And as they move through this, as you might expect, they're effectively selling down out of their inventory and as effectively demand increases, they may be coming to us and effectively sourcing supply from us as required in order to support the sales. But obviously given inventory that was in the channel and the level of sales that we're seeing, obviously our shipments are very low now because effectively distributor inventory is for the most part taking care of demand.

Understood. Thank you very much. Good luck.

Thank you.

And our next question comes from Brian Morrison with TD Securities. You may proceed.

I have to believe in this environment that several competitors must be much more negatively impacted or greater than yourself. I'm curious how you view the landscape from an ability to gain market share perspective and maybe even the potential for M&A despite your cash conservation measures ongoing right now.

Well, look, it's hard to say how our competitors will weather this storm. I think what's important, it's really early days right now because there's really not a lot of business activity happening as we speak. And, you know, as we move towards the end of this year, I think we'll see a lot of, you know, materialization happen in terms of how the market will shape out and, you know, the competitive landscapes and how people are able to, you know, bring their capacity back on, et cetera, et cetera. So there's definitely going to be a, I think, somewhat of a shakeup in the industry in the sense where, you know, things obviously are changing. And the question is also is going to be is how long will it take to get demand back to the levels that it was before. So I think what we're doing is we're putting ourselves in a pretty good position to weather the storm with the additional liquidity that we have. both from a go-forward position on an organic basis, as well as we have the liquidity in the event of there are opportunistic acquisitions available to us as the market unfolds in the future.

Okay. And then, Rod, one quick one, just in terms of your prior cost saving initiatives to get to your 30 and 12. I realize that those are not achievable at this point in time, but in terms of facility consolidation, specifically in Mexico, also maybe Canada and Honduras, Are the facility consolidations, are they proceeding? Are they complete? Are they on pause? Where do they stand right now?

Well, all the facilities in Mexico have now fully been closed down. We've been moving equipment basically at the end of Q4. And during Q1, we've been moving equipment throughout our system. There was some operations still being performed in Mexico that were completely discontinued towards the end of or middle of March. And then the balance of that equipment will be repurposed as we go forward. And look, regarding our, you know, our sure expectations of both on SG&A and margins, look, there's nothing has changed in our business. We're continuing to execute our back to basic strategy from all aspects. And truthfully, as this is going to make us even better and stronger, because we're able to expedite and manage our SG&A. So we're planning on making sure that we continue to focus on SG&A as a percentage of sales. We don't anticipate as we go forward into 2021 that we will be fully recovered. We think we'll be moving forward in the right direction. So we're going to make sure that our SG&A is right-sized as we move into 2021. And, you know, all the things that we're doing in terms of leveraging our core competency and our back-to-basics strategy and manufacturing will continue to improve our margins as we go forward. Thank you.

And our next question comes from Heather Belsky with Bank of America. You may proceed.

Both tied to the recovery, or the eventual recovery, I guess first, When we do get there, can you help us think through how manufacturing re-ramps up? How does that process work? Do you ramp up your facilities as demand comes in, or do you have to ramp up the full facility and other factors we should be thinking about? And then the second question is, you know, just to follow up on your customers, you know, This situation is very different given the shelter in place, but curious what you saw back in 08-09 and maybe what we can glean from that for this time around. Thanks.

Okay, well, I'll start off with the 08-09 because it's an easier question to answer, to be honest with you, in a certain sense of that. 08-09 wasn't a customer demand issue. It was very short-lived in terms of the negative POS, but it was a banking crisis. It wasn't a consumer confidence capabilities. It wasn't the vent. stop having events. We're in a completely different situation than we were in 08-09 because consumers were still going to baseball games and football and hockey and whatever and traveling. There was a short-term impact financially which drove through the system but it didn't affect the consumer where here we really have a consumer. Social distancing has really been the major driver where gatherings, jog runs, schools, you know, I mean, almost every single event or venue that we potentially sell product to. So that, I think, is a big difference. So look, as the social distancing requirements change and things open up, I mean, people are going to the beach now. I mean, stores are opening up. You know, we're going to have gradual restaurants. We'll have a gradual increase, I think, and a more gradual increase versus, you know, We had a quarter maybe, I think, or two quarters down POS, which I think our POS was not more than negative 25, I think, back then, if I remember right. But, you know, overall, you know, I think this will be a little bit slower pickup because until the sports events and the rock concerts and everything else really comes back, it will take some time. As far as our wrap-up is concerned, our number one focus is definitely to – is to make sure that we, first of all, utilize all of our existing inventory. And what our plan is to is to ramp up our plans probably a little bit on a stagnated basis, bring on capacity as we need it, and somewhat draw down a little bit on our inventory. We ended up Q1 with about just under $1.2 billion of inventory. We want to see that number come down and generate some cash flow from that during – the course of this year, again, to continue to improve our liquidity situation and put us in a better position as we enter into 2021. Great.

Thank you so much.

And our next question comes from Luke Cannon with Cannon Corriginuity. You may proceed.

Thanks. Actually, I wanted to follow up on that last point about inventory. Glenn, you mentioned you had $1.2 billion as of the end of the quarter. And I get that that's going to be enough to satisfy demand across all channels. But I'm curious about the fashion basics part of it. Is that subject to any sort of seasonality? And do you envision, you know, needing to get promotional to be able to move some of that inventory out?

Well, look, I mean, you know, fashion basics is a rinse-bun t-shirt that, you know, so it's really... It's not a product. It's still a fashion basics. Basically, the word basics, when everything we make is pretty basic and doesn't really have a lifespan as long as it's in our catalog. So, you know, there's no need to, you know, liquidate inventory because it's going to go obsolete. You know, definitely I would say that, you know, we're in a position now that potentially, you know, we'll see how the market perceives as it goes out. But, you know, our inventory is in good shape. Um, and, um, look at the end of the day, um, you know, we're going to leverage our competitive advantage to make sure that, um, you know, we continue to drive our sales and, uh, drive market share as we exit. I would say this whole, um, event as we move in and once the doors open up and products start selling. So we have, we have an advantage, I think, because look, we are a low cost producer. Um, and, um, you know, we will leverage whatever we need to do to continue to, you know, to, um, take advantage of the opportunity and, uh, and sell and drive market share as we go forward. Okay, understood.

And then a second one for me, as far as Bangladesh, I know that right now the CapEx that's being spent is just sort of laying the foundation for the facility there. Do you envision, I think it was late 2021 is when you expected production from that facility. Is that still the same timeframe that you're thinking or is there a chance of any slippage there?

Well, our, our project was to really support sales for 2022. So it was going to come on at the end of 21 to support 22. Um, we're in the process of, you know, we were going to reduce our capital investment. The good news is, like I mentioned in the last call is that we're sort of at a stage where we're doing foundation work at the, at the facility. So over the next couple of months, um, you know, which is not a heights two to 3 million of, uh, of capital to be spent. Um, we'll put in the foundation, um, avoid the rainy season. And then, The option of timing of the plant will be on our side depending on what kind of capital we want to spend and what the market conditions are as we go forward. Things are changing so fast. We just opened up recently and we're starting to see POS is ticking a little bit more positively than some of our assumptions. The market's opened up quicker. and things go better, then, you know, we'll look at it one way, and if things go the other way and there's a relapse and things get closed down, you know, we'll have to evaluate our options in terms of how we manage our whole manufacturing supply chain.

Okay. Appreciate it, Kelly.

And our next question comes from Shabahat Khan with RBC Capital Market. You may proceed.

Okay. Thanks, and good afternoon. Just wanted to get, I guess, you know, obviously the visibility is very low on the demand side and just on the broader market, but just want to understand what kind of scenario you contemplated when you decided to sort of suspend the dividend. You know, what do you sort of expect happens over the next few quarters in terms of cash usage? You know, you also took out some additional debt. Just want to understand kind of what kind of decreases you might be planning for. Are we thinking you lose half of your sales this year, potentially more? Kind of what's the ballpark that arranges that?

Rod, do you want to take this one, please?

Yeah, so when we looked at the various scenarios and the go-forward basis, I mean, it really is hard to have good visibility, right, how things are going to unfold as we move forward through Q2 and into Q3 and Q4. Obviously, we have the facts from what we're seeing in April, and we've obviously taken that information and we've projected forward ultimately try and get a sense of what the year would look like. Now, we don't know whether it's going to be a V, whether it's going to be a U, exactly how it's going to play out. But I think what we need to do is plan for the worst and hope for the best. So I think as we have looked forward, we've looked at effectively what our cash burn is when we've got our manufacturing idled, as we said earlier. We have cash burn of $35 to $40 million today. and we've projected that effectively as we go forward, if sales stay down, then effectively we will consume that cash, that we will have to manage obviously our overall receivables and tables in a way that makes sense also to effectively minimize outflows. And then obviously we've got to get ready for the ramp back. But, you know, we don't really know exactly how long that's going to take and what it looks like. So I think what we've done is that we've made sure that we've effectively really solidified our overall financial flexibility, our balance sheet. We've got lots of capability, let's say, to effectively do what we need to do to weather the storm and then be very, very well positioned as we come out of this. So I would say, again, obviously we've suspended guidance. And I think it's very difficult to give you a view, but you can just effectively, I think, tell from how we're set up that we are making sure that we're prepared for scenarios which are negative as we continue to move forward. And obviously, April has been very, very negative. But nonetheless, if things pick up, if we do really see the economy moving faster, people responding better, that we're well positioned to respond to them.

Thanks. And just to follow up on that, in terms of cash availability and liquidity and so forth, if sales continue to deteriorate at these levels for a few more months, the balance sheet could get stretched. Have you been having discussions with your syndicate regarding covenant flexibility and so forth? Or is that something you expect to deal with maybe later in the year? on the back of the dividend cuts, just wanted to get an idea of what those discussions might be.

Look, if you look at where we are effectively with respect to our covenants, I mean, we're in compliance with our covenants currently, and we expect our covenants to be manageable as we go forward, right? Given the actions that we've taken, given all of these actions that are underway, again, that gives us lots of flexibility. But we'll continue to monitor the situation as we go forward. We'll see how it unfolds. I think, again, we don't have a crystal ball. We don't know how it's going to play out. And if we do get into a very, very negative situation where we do have to have discussions in the covenants, we do very definitely think that effectively we would be able to obtain the flexibility that we need going forward. But right now we don't see that. And so I would say we're very comfortable with how things stand today. as we currently sit here today.

Thank you for the call.

And our next question comes from Vishal Shidhar with National Bank. You may proceed.

Hi. Thanks for taking my question. Regarding the shutdowns, obviously you have some fairly large programs with fairly significant retailers. and just wondering if they're understanding or appreciative of the situation that you're in, and maybe you're unable to meet shipping commitments like you have in the past. Is there potential for some increased charges from them if you can't meet your commitments that you had to adhere to in the past, or is it just everyone understands it's a different scenario?

Well, we have enough inventory to support demand with our major retail customers, so we're in very good inventory position, which is something that we've built up going into the season because of the anticipated high growth of sales in particularly our big, large, massive retailer. So I think we're pretty comfortable. I mean, sales haven't totally met our expectations, so we're in a really good inventory position. And we have a lot of, you know, product that – If we need to bring it to market, we don't think it would be an obstacle for us to get the market to continue supporting even as we go into the end of the second quarter and the beginning of the third quarter. That's not an issue for us right now.

Okay. That's helpful. Thank you. On the sock and hosiery business, and I know this current macro period is probably not the best one to reflect on the business, but Even looking back over the last few years, the business really hasn't performed as well as some might have anticipated. So just wondering how Gildan thinks of that stock and hosiery business. Is it still core for you guys? Is this a discussion for a different day? And should we still think of Gildan trying to build out that retail product portfolio and expand into adjacent categories?

Well, look, I think that it's still a big, significant part. I mean, before... This whole situation, we sort of anticipated that our sock business was plateauing. That's what we guided to in the beginning of the year. Unfortunately, half of our sock business is mass, and the other half is somewhat geared to department and specialty stores, between our Golto brand, our Under Armour license, et cetera. So those stores are just closed. I mean, that's really what was part of the... the issue here and we've lost POS and therefore, you know, that was the byproduct of the write-down. So, it's not that that business has really gone away. I mean, the problem is that, you know, those stores were just not able to function. So, we feel very comfortable with our stock business as it is and I think we have a pretty good base of programs today and like we said in our guidance, it's somewhat stable. It will come back because, I mean, those are, you know, those are I think programs that will continue to resonate with consumers as we go forward. And look, I mean, we're going to continue to focus on socks, underwear, and activewear products in our back-to-basics strategy, both with our existing brands that we do have, but also to leverage our private label opportunity with our customers. So, you know, we're pretty excited still about the opportunity for us to continue growing the business. And, you know, you've got to sort of take it's sort of negative when your sales and POSs are down, but on the flip side, there's going to be a big change in sourcing in the future. Our buyers are running to Asia as a source product. From a private label perspective, I think we have a lot of opportunity to leverage our low-cost manufacturing in this hemisphere as things change. Today, 40% of the global apparel is made in China. We don't see that materializing in the future. And so, you know, there's a lot of opportunity for us, let's say, for example, to continue to grow our business and back to basic strategy and focusing on the big shift from retail into private label. I think all three categories are going to be growth categories as we go forward into the future.

Thanks. And our next question comes from David Schwartz with Morningstar. You may proceed.

Thanks for taking my question. So in the socks and hosiery segment specifically, I understand, of course, that the store closures have impacted that greatly. But at the stores that are still open, can you talk about what the POS trends have been compared to, like, the baseline for what you'd expect at this time of the year?

Well, the POS trends were doing really well. And then I think towards the end, third, second week of March, like toward the back half of March, you know, when essentials became such a big push, a lot of the both mass and online retailers basically stopped receiving product and focused on all the essentials and everything else. But, you know, we've seen it tick back up to normal levels and POS in those markets today. And I think we're tracking pretty much on plan in March where we are now in April, basically, it sort of picked back up again as they started bringing products back in and replenishing their doors. I mean, the big wave is over. Everybody's got toilet paper, right? So I think that that's really what's happened. And I think our POS is sort of back on track with those retailers.

Now, as manufacturing someday starts up again and you get back to normal, production levels. Can you talk about how the lower commodity prices may benefit the business?

Well, I mean, the prices are, I mean, cotton is our largest commodity. I mean, it's down, you know, it's not down significantly. It's down, you know, 10 cents a pound from, you know, what it was before the crisis started, really. So, but at the end of the day, look at it. I mean, the deflation is, is probably going to be potentially a factor with oil and all the other things. But I think that's all short-lived. I mean, there's going to be another side of the coin is that how are people going to bring capacity back on? So short-term, there's going to be a lot of capacity because people have inventory and didn't sell anything. But then, I mean, how do you social distance in the factory? Do you have all your capacity? How are you going to deal with all these things? So social distancing until it goes away is actually – you know, maybe put a brakes on, I think in terms of, you know, the, the, the capacity. So there's all puts and takes in terms of raw materials and the capability of people bringing back capacity online after they've been shut down. So I don't know how it's going to play out, but I would say that, look, we're in a very good position from all sides. We have good inventory. We have a low cost model. We've made a plan now to bring our facilities back, including social distancing and, the capabilities of how we run our factories. I mean, we've got 54,000 employees, um, that we have to bring back to work and, you know, we have 5,000 sewing operators in the facility. So, you know, that's our strength basically is having to deal with these things. And that's why we're the, you know, the global low cost manufacturer. So in all cases, I think we're going to be in a very good position and we're going to leverage that competency to, you know, to gain market share as we go forward, um, and, uh, make sure that, uh, um, you know, we get our fair share of, uh, our business as we materialize and we get out of the – and business starts to open up again.

Thanks, and good luck in this difficult time. Thank you.

And our next question comes from Steven McLeod with BMO Capital Markets. You may proceed.

You gave some good color around the gross profit impact in the quarter, gross margin impact of 340 basis points. Is there any way, like, is any of that just related to the initial shock of the manufacturing shutdown, or is that something you would expect to accelerate as you roll into potentially, well, Q2 and then potentially into Q3? Rod?

Well, I mean, if you look at the impact, right, the 340 basis points, I mean, effectively, The lion's share of that was driven by labor and manufacturing shutdowns, what we call period costs. There were some contract costs associated with that. There were some other costs, I would say, that are driven by the COVID-19 situation. And so, ultimately, as we move forward, we will see those costs effectively unfold, right? Don't forget that effectively we shut down or we started to shut down effectively in March. We had two weeks of shutdown. And then as we move into April and then we go into May, we'll have those full monthly costs that we will see effectively being incurred. And so that's all wrapped into the $35 to $40 million of cash burn that we bear as our facilities are idled. I mean, if you look at it overall, you have your cash costs, and then on top of that, obviously, we have depreciation, right, that effectively will be impacting us. We have probably around $13 million of depreciation. So all in all, as our operations sit idle, effectively, your total cost is around $50 million a month, right, effectively with the combination of non-cash and cash. And so we just expect to see that as we go forward until we start to ramp back up, and that's what you saw really in the back end of the first quarter in that 340 basis points.

Okay, that's really helpful. Thank you. And then just a question, maybe more forward-looking, and maybe it's too soon to answer, but as you see things begin to recover in the imprintable space, you know, down the road, whether it's three to six months or whatever the case may be, Do you see the possibility for any change in mix? Do you think that with customers and consumers potentially having their own balance sheets being damaged, do you see maybe a shift back to basics, away from fashion basics as you see a recovery taking hold in printable space?

I think that the space is well balanced. Where the I would say that the opportunity typically in sometimes in markets is price elasticity. You know, if pricing is a little bit more aggressive, I mean, you can create demand from promotional products and other avenues that wouldn't, you know, because instead of merchandising something with a pen, you do it with a T-shirt and a giveaway or, you know, dog food or a case of beer, you get a T-shirt. I mean, so there's all kinds of gimmicks that people could use which would typically has been more of the basic category. So I would say that in balance, um, I don't think there'll be a huge shift. I mean, I think the shift still is a continued shift to, you know, fashion products. Um, um, they're still growing in the market. I mean, if you know that that may change, but up until this, this situation, the COVID started, I mean, it was still continuing to grow. Um, and you know, we'll see what happens, but I think that I don't see a big change in, uh, And if you look at our POS from a negative perspective, it's pretty well negatively across the board. I mean, there's not one thing that's doing well. It's sort of just right across the board, pretty closely aligned.

Okay, that's it for me. Thank you very much, and I commend you on your service to the healthcare sector while your manufacturing plants are down. Thank you.

And our next question comes from Chris Lee. with the Jardins, you may proceed.

Good afternoon. Did I hear you correctly that the POS in certain parts of your imprintable business is a little bit less negative than your internal expectations?

No, what I said was that the last couple of days, two or three days, it was better than our expectations, so I wouldn't hold your breath on that one, sorry. But, you know, it's basically... You know, we've been tracking at the 75 negative level, and, you know, the last couple of days it's improved some. So, you know, we don't know exactly because markets are opening up. I mean, you know, but at the end of the day, look, when people get out of the house, they're going to start spending. You know, beaches have opened up. So these are types of things where, you know, venues start taking place again. You know, will CPOS improve? So the quicker that the social distancing eases, I think the POS would pick up. So we've taken a pretty conservative approach, we think, because the approach we've taken in terms of the way we see things going into Q2 is pretty much what we saw in April. So if things get better, then obviously that would be great news for us.

Okay, and then maybe a follow-up on that is, I mean, you've been doing this a long time, and based on your experience, I mean, do you think 75% down is, kind of the trough? I'm trying to understand, do you think there's something structurally within the imprintable market where you kind of reach really the bottom and maybe stay there for a little bit, but can you get worse than 75% innovation over the next few months?

I would say that 75% is the bottom because everything is closed down and it's at 75%, right? Unfortunately, I think we hit the bottom, right? So, Which is the good news because that's what I'm a little bit, you know, from the optimistic side, you know, we've plateaued off this bottom and we've, you know, we're trading less than that level today over the last couple of days. So hopefully the bottom has been hit and, you know, we're moving forward. So I think that that's pretty much the bottom. It was the bottom in China. It's been the bottom in Europe. So it's typically been the bottom so far everywhere we've been.

Yeah, and I wanted to check on China. I think last time you gave sort of a data point where it was down 75 in February and down 35-ish in March. Do you have an update on how that market is performing in April?

Well, it's still down around 50%, so it's not – in that week that we gave, it started coming back, and it still hasn't totally bounced back. I mean, look, China has – even though the markets are opened up, I mean, it's still not – Business as usual, they're much more strict there. Social distancing is still a major factor. People haven't gone out to restaurants. Car dealerships are still not doing well. Although they started their factories, it doesn't mean that they started to socialize. So it hasn't come back like we anticipated, to be honest with you. But I think it's a different environment. And it's also not comparing... the maturity of a North American market, you know what I mean, in terms of the lifestyle and everything else.

Okay, that's right. And then maybe just a quick one for Rod. I just want to confirm what you said earlier. Just from a modeling perspective, looking at the income statement for Q2, did I hear you correctly that if I look at my cost of good sales and SG expenses, all in is running about $50 million per month, so about $150 million for the quarter? Yeah.

Yeah, I mean, basically, that's, I would say, a fair estimate. If you look at, again, what our cost structure is and where we are, we're going to try and improve upon that, Chris, right as we go forward. But that's what I said, and that's what you should think about as sort of the base drag, let's say, that we see as we've got everything idled and we're just feeding sales out of inventory.

Okay, great. And best wishes to everyone. Thank you. Thank you.

And our next question comes from Mark Petrie with CIBC. You may proceed.

Yeah, thanks. I was just curious if you've seen any trends in your e-commerce business that might have surprised you or might affect how you think about that business going forward or how you kind of want to approach it.

No, I think, look, our e-commerce business is doing very well. You know, we projected to have a significant increase this year. It slowed down a little bit, like I said, at the end of March, but it's picked back up and it's really where we need it to be. We have all of our products currently being sold online, including American Apparel today, our Comfort Colors brand. So everything we have, Gil has underwear. So everything we have is, I think, performing well. And, you know, I think we're well positioned to continue to grow.

Okay, thanks. And then, Glenn, you touched on this earlier, and maybe it's just way too early to ask something like this, but I was curious about how your capacity would be affected by social distancing in your plants if that was a reality that you guys needed to operate under.

Well, it is a reality for sure, right? So, you know, we've already worked out plans to – to reconfigure our sewing lines. Cause that's really where the big issue is, is in sewing and textiles. It's not, um, not a big issue at all, really. Um, so we already have a plan and, and during the time that we've started to develop the mask and the gowns, these plants are already geared up to develop a, a format of social distancing, um, which we are going to roll out to the rest of our facility. So we have to configure all of our lines and put in all of the, um, restrictions and testing and et cetera. You know, one of the things of being a global manufacturer is that, you know, we have a good indication of some of this happening because of our business in China. You know, we've done things like, you know, we bought covert test kits, for example, from Korea back in March. So we can test all of employees and have that capability and, Um, we've got abundant of NASA we're producing for them. Uh, we've now geared up to have additional transportation, uh, it's because we can't put so many people in the buses, uh, you know, working at different types of shifts so we can, um, um, adapt to the, uh, the space that we require. So all these types of things that, you know, we've already put in place to, um, an anticipation of coming online and it's all being piloted right now during the, uh, developed with the masks and gowns, and I think we're in pretty good shape to restart when we need to with the social distancing in mind.

Hello?

Yes. Hello? Ladies and gentlemen, this concludes our Q&A portion of today's conference. I would now like to turn the call back over to Sophie Argyrio for closing remarks.

Okay, thank you, Dimitri. Before ending the conference call today, I'd like to remind you that we will be holding our annual shareholders meeting tomorrow morning at 10 a.m., Eastern Time, that is, and it's going to be in virtual format. So with that, I'd like to thank everyone for joining us again today, and we look forward to speaking to you very soon.

Have a good evening. Goodbye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.