Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Gildan ActiveWare Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's opening remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your touchstone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. Please be advised that today's conference is being recorded. I would like to hand the call over to Sophie Argyrio, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our earnings results for the fourth quarter and full year of 2021. The company's management, discussion and analysis, and consolidated financial statements are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission tomorrow, the 24th of February, and will be available on our website. Joining me on the call this morning are Glenn Schimandy, President and Chief Executive Officer of Gildan, 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 a Q&A session will follow afterwards. I would like to remind you that certain statements included in this conference call may constitute forward-looking statement 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 Canadian Securities Regulatory Authority's that may affect the company's future results. And now I will turn it over to you, Rod.

Thank you, Sophie. Good morning and thanks for joining us today. This time last year when we reported our fourth quarter results, we expressed confidence that we were entering 2021 as a fundamentally stronger company. We now believe our results and accomplishments for this year are strong evidence of that. We finished the year with record top and bottom line performance in the fourth quarter, leading to record sales, earnings, and free cash flow for the full year. Simply put, thanks to the strong efforts, expertise, and focus of our whole team, we navigated through a still challenging environment in 2021 to deliver on the core objective of our back-to-basics strategy, which was to remove complexity from our business so we can better leverage our world-class vertically integrated manufacturing system to better support our customers. By delivering on this objective, we were able to capitalize on improving demand during 2021 at margin levels much stronger than pre-pandemic levels. We also delivered on our capital deployment priorities. And as you saw from today's earnings announcement, we are now moving forward with the Gildan Sustainable Growth Strategy with well-defined initiatives to enable us to deliver strong performance over the next three years, which I will cover after I take you through the details of the quarter. So let's get started. During the fourth quarter, we generated record net sales of $784 million, up 14% from last year, with activewear sales of $627 million, up 17%, and hosiery and underwear sales of $157 million, up 3%. The overall sales increase was primarily due to higher sales volumes and net selling prices in activewear, partly offset by product mix due to the timing of fleece sales compared to last year. Higher active wear sales volumes were driven primarily by higher year-over-year point of sales and, to a lesser extent, by the impact of some distributor restocking in the North American imprintables channel, although I would emphasize that inventory levels in the channel continue to remain well below 2019 pre-pandemic levels. If we look at sales relative to pre-pandemic levels, total net sales were up 19% above the fourth quarter in 2019. driven by higher unit sales volumes, net selling prices, and stronger mix in activewear, partly offset by lower stock sales. Volume growth in activewear reflected the continuing positive trend of higher POS in the North American imprintable channel, higher sales of activewear through retail channels, combined with the positive impact of the non-recurrence of distributor inventory destocking that occurred in the fourth quarter of 2019. Where we continue to see a lag in demand versus pre-pandemic levels, was in international sales, given the impact of the Omicron variant and lockdowns in various regions. Moving on to our gross margin, where performance remains strong. We generated gross margin of 29.2% in the quarter, up 670 basis points. On an adjusted basis, gross margin of 30.6% was up 480 basis points compared to last year. The strong improvement over 2020 was driven by higher net selling prices, and manufacturing efficiency stemming from our Back to Basics initiatives. The positive impact of these factors more than offset inflationary pressure on raw materials and other manufacturing costs, and the mixed impact from the timing of flea sales compared to the prior year. Relative to 2019, we saw a strong improvement in adjusted gross margin in the quarter, up 500 basis points. The increase was due to higher net selling prices, favorable product mix, and Back to Basics efficiencies, which more than offset higher raw material and manufacturing costs. Fourth quarter SG&A expenses came in at $80 million, $9 million above the fourth quarter last year, due mainly to higher volume-driven distribution expenses and higher variable compensation. As a percentage of sales, SG&A expenses were 10.3%, which was slightly better than last year. Compared to the fourth quarter of 2019, SG&A expenses as a percentage of sales improved by 130 basis points. Strong sales and gross margin performance, together with our continued focus on SG&A, translated into operating income in the quarter of $177 million, or 22.6% of sales, a significant increase from $79 million, or 11.4% of sales last year. The increase in operating margin included the net benefit of a $32 million impairment reversal related to our hosiery cash generating unit for which we had recorded an impairment charge last year and which now has been reversed to the full extent possible given the significantly improved economic environment and outlook for this category. On an adjusted basis, which excludes this benefit, operating income of $160 million was up $55 million over last year An adjusted operating margin of 20.4% in the quarter was up 510 basis points from 15.3% in 2020. Consequently, we generated record net earnings of 174 million and EPS of 89 cents per diluted share in the quarter, up from net earnings of 67 million and 34 cents in 2020. Adjusted net earnings and adjusted EPS in the quarter totaled 149 million and 76 cents up from 90 million and 45 cents last year. With another record quarter this year, we also set a new full year record with EPS of $3.07 per diluted share and adjusted EPS of $2.72 per share, up 64% over 2019. Moving on to free cash flow. The 116 million we generated in the fourth quarter brought our full year free cash flow to 594 million. also a record level and up from $358 million last year. The increase reflected strong earnings, improved working capital management, and the timing of insurance collections related to the 2020 hurricanes, partly offset by higher capital expenditures. At year-end, our net debt position stood at $530 million, down from $577 million at the end of 2020, and our leverage ratio was 0.7 times adjusted EBITDA, below our target range of one to two times. During 2021, we were pleased to be able to reinstate dividend payments and share repurchases. And in aggregate, we returned more than $335 million of capital to shareholders during the year. This morning, we were also pleased to announce a 10% increase in our quarterly dividend. And with our current share repurchase program now almost complete, our debt leveraged below our target range, and strong confidence in our ability to generate free cash flow, Today, we also announced that we are increasing our share repurchase plan from 5% to 10% of our float. So overall, we accomplished a great deal in 2021. But more importantly, as we look back to the launch of our back-to-basics strategy, we delivered what we envisioned from this plan. We simplified and focused our business, allowing us to deliver adjusted operating margin expansion of close to 500 basis points. And our RONA, which is return on net assets, improved by more than 800 basis points during the 2018 to 21 period. It also put us in a position to continue to expand our capacity in Central America and the Caribbean and resume our expansion plans in Bangladesh, where we are now rapidly moving forward with the construction of the first of two large-scale textile and sewing facilities. In addition, our clear focus allowed us to push forward with reinforcing our vertically integrated supply chain model through broadening our existing yarn capabilities with the acquisition of Frontier Yarns in December. We are very pleased with this acquisition, which is now allowing us to further internalize yarn production and support our textile expansion plans in Central America and the Caribbean. So today, thanks to Back to Basics, we stand as a less complex, more focused, and competitively advantaged organization, stronger than we have ever been, and well positioned for sustainable growth. This leads me to the last area I'd like to cover in our opening remarks. During the fourth quarter, we completed a comprehensive strategic planning process to define the underlying initiatives that will support our next phase of growth under what we call the Gildan Sustainable Growth Strategy. While back to basics will always remain at our core, under the Gildan Sustainable Growth Strategy, our efforts now turn to building on our strong foundation to drive organic top and bottom line growth. through three key pillars, capacity expansion, innovation, and ESG. Under this revised strategy, we believe that by leveraging our competitive advantage as a low-cost, vertically integrated manufacturer and executing on projected capacity expansion plans, delivering superior quality, value-driven, and innovative products to our customers, and through our leading ESG practices, we can drive strong organic revenue growth, profitability, and effective asset utilization to deliver compelling shareholder value creation. To this end, we announced in our press release today that under the Gildan Sustainable Growth Strategy, our outlook over the next three years, based on everything we are seeing today and assuming a continued global recovery, reflects net sales growth at a compound annual growth rate in the 7% to 10% range, while maintaining operating margins in the 18% to 20% range. Further, to support our long-term growth and vertical integration, we're expecting investments in capital expenditures as a percentage of sales to be in the range of 6% to 8% over this period. Finally, at the same time as we're investing in our business, we're also planning to continue to return capital to shareholders through dividend growth and through continued share repurchases in line with our one to two times leverage framework and valuation considerations. So overall, a complete plan to grow our business and to deliver strong shareholder value and ESG performance, which we plan to provide more detail on at our Virtual Investor Day, now scheduled for March 29th. So let me close here with how I started my remarks. Last year, when we reported our year-end results, we expressed our confidence that we were entering the new year as a fundamentally stronger company. Today, we reiterate that sentiment with even greater conviction. And with that, I will now turn it back over to you, Sophie.

Thank you, Rod. Before moving to the Q&A session, I ask that you limit the number of questions to two. And, of course, we'll circle back for a second round of questions if time permits. I'll now turn the call over back to the operator to start the question and answer session. Michelle, go ahead.

As a reminder, to ask a question, please press star then 1. If your question hasn't answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Paul LaJuice with Citi. Your line is open.

Hey, thanks, guys. I'm curious on the 7% to 10% sales category over the next three years, how much of that do you think will be sort of consistent growth in that range versus maybe more lumpy based on when additional capacity comes in? And also, we'd love to know how much of that 7 to 10 you think of as being unit increases versus pricing. And then second, if you could just talk about the pricing environment and active wear just generally and how you look at your price gaps versus the competition and the rest of the market right now. Thanks.

Okay, Paul, thanks for the question. So if you look at the CAGR, the 7 to 10% over the next decade, Three years. As we look year on year, I think we see good growth, right, as we go through each of the years. We have capacity coming on in Central America, effectively, which will support this year and next year. We have the capacity coming on in Bangladesh, which we're working to bring online, basically, at the end of this year, beginning of next year, which will support 24. So we have a good cadence of capacity rolling out to support, I would say, good growth as we move through the years. This year we will see, I would say, strong growth overall because we will have volume growth, and to a certain extent we have a bit of price coming through. But I would say, you know, our whole plan is to expand our capacity and effectively be able to use that in the marketplace in a market where we do see strong demand for our products over the next number of years. If you do look at the breakdown between unit volume and price, Really, it's volume that's driving the plan over the three years. That's what we're really focused on. And I think you know that effectively, competitively, we think that if you look at the way we run our business model, we really are focused on volume. We're really focused on share versus price. And if you look at overall, our activewear business is very, very strong over this period. We're seeing across all of the different areas that we sell in the marketplace, in the If you look at the printable side, you look at the retail side, really in all areas, active wear growth is very, very strong through the forecast period.

And regarding the pricing in the market, two things I think are really important. One, we did not raise price to cover the total inflation because we're leveraging our low-cost manufacturing, which has been the backbone to our success is making sure that we're leveraging our cost structure. The price that we did take was really a function of reducing the amount of promotional spending that we do. So we have quite a lot of typically promotional spending incorporated in our pricing strategy. So by reducing that, that's what really is allowing us to get more price offsets. We did take some price increases, but the bulk of all the price we're taking in 2022 was by reducing promotional spending. You know, we continue to widen the gap versus the competition. I think there's a bigger gap where our products are being sold today. That's why we're so bullish in our unit volume and leveraging our low-cost manufacturing. And the bulk of our core T-shirts are just north of $2 still, even after all the inflation. So when you look at where we're competitively priced, we think that we're poised to continue to take significant market share, and that's why we're so bullish in the next three years.

Great. Thank you. Good luck, guys. Thank you.

Our next question comes from with National Bank. Your line is open.

Hi. Thanks for taking my questions. I'm wondering if you could provide us with insights on trends quarter to date and maybe the impact of Omicron. and how that's led into the restocking situation for the dealers.

Okay, well, let me just first of all clarify the restocking because that's a little bit of a misnomer because, you know, we did have a little bit of restocking, but the truth is that none of that inventory is actually in our distributors' warehouses because when we look at the inventory in the channels, including, you know, once we bill it, it's in the channel as far as we're concerned. And today, the lead time is to get product into the channel has taken a lot longer because of freight disruption and labor restraints in our customers. So our actual inventory in the four walls of our distributors is probably lower on a year-to-year basis, but the actual channel has a little bit more inventory supporting, you know, coming to them basically because product is selling relatively quick. And POS is very strong. I mean, so, you know, those two combinations basically, you know, our distributors are selling as fast as they've received the product.

Okay, and quarter-to-day trends and the impact of Omicron, maybe?

The quarter-to-day trends, yeah, the trends are remaining pretty strong. You know, we did have Omicron. You know, it's probably made somewhat of a little effect. It affected more, to be honest with you, our manufacturing. You know, there can be a lot of people out both in the U.S. and Central America, but I think that's behind us right now. It was probably about a month in January, just after Christmas, that somewhat a wave, but I would say where we stand today is pretty much behind us, except for international, which is still lagging North American.

Okay. And in the past, there was thoughts on this online market and how this online market, which grew substantially during COVID, if that didn't fade away substantially, it may suggest market size expansion. Just wondering if you can give us some updates on on the online market and what you're seeing there?

Well, look, what we said in our last call is that we believe that the market has grown substantially since 2019. We continue to believe that, and our POS is very strong. So that whole online aspect of the market continues to excel, and really what we're starting to see now is the benefit of social gatherings and our basic product coming back to the market. you know, as we see the POS even on our basic started to really grow, the combination of these two things has really put us in a good position to significantly increase our POS as we move into 2022 and 2024.

Thank you. Our next question comes from Mark Petrie with CIBC. Your line is open.

Yeah, good morning. Actually, Glenn, I just want to follow up on your comment with regards to promotions and pricing for this year and going forward. You know, we've seen some industries that are sort of exiting the pandemic with higher gross margins as a result of sort of strong demand and structural or semi-permanent shifts away from promotional spending. I'm just curious if you think that's something that will sort of structurally remain in the industry for the foreseeable future or in your business, maybe not the industry, but your business.

Well, look, as long as business remains robust, obviously, you know, you're going to yield the best return you can for your shareholders, which is what we're doing. You know, a lot of the promotional, lack of promotional spending is really offsetting the higher cost of raw materials. So, you know, and that's how we send our pricing so we wouldn't have to really adjust our pricing in the future. So we have a net good price list and then, you know, it was based on you know, what we thought would be a certain price of cotton, and then as cotton moves up, basically, we would reduce the amount of promotional spending, and then if cotton was to move down again, we would just increase the amount of promotional spending if needed. Now, that's also a function of depending on how strong demand is in the market, or do we get margin expansion. But I think we're in a very good position to adapt to, you know, raw material, because that's really the only thing that fluctuates in our cost of goods sold. In fact, Our manufacturing costs are going down this year. I mean, we're leveraging our back-to-basics. We're producing more volume in the four walls. All the things that we've done to simplify our business is actually improving our cost structure, which is offsetting a lot of the labor cost inflationary areas. But raw material is the one that we really don't control, and you can see what raw material is selling at. So I think we're in a good position. So if raw material does come down, we'll just promote it a little bit more. And if it's where it is now, we're very happy with our business strategy.

Okay, thanks. And just to follow up, I guess, on that, do you think this shift in approach with regards to navigating the volatility or ups and downs in cotton pricing potentially reduces the risk of revaluations and volatility in distributor ordering patterns as cotton moves up and down?

Correct. I mean, that's why when we set our pricing, we set it in a at a range where we have that flexibility, really. So the answer is that, you know, we don't foresee any devaluations if cotton, you know, comes back down to normalized levels.

And just to add to that, Mark, I would say as we've given our, you know, our outlook and we've reflected what we're thinking, you know, that does reflect, obviously, that over three years there could be a change ultimately in underlying commodity prices. But we've reflected that overall in our in our view, given the way we're running the business and the things that Glenn said.

Understood. And I just want to sneak in one more. Just regarding the EBIT margin range of 18% to 20%, what sort of pushes you up or down in that range in any given period? Is it sort of sales leverage over time, and we think that margin can increase over the three-year period, or do you expect it to be pretty stable and it's more just about short-term factors like you know, mix or raw material costs that could affect you in any given year?

I would say it's mix and raw material costs that could affect us over any year. I mean, the timing of those events, I would say.

Yeah, it's things that will move, you know, within the quarters effectively. I mean, you know, a good example of that is if you look at the comp that we have this quarter, for example, coming into Q1 versus last year, we had a sort of big benefit from a cotton quarter. assistance payment that we received, $18 million. That's 250 basis points. So, you know, you have things moving through your numbers as you go quarter to quarter mark. But I think given the model that we're running, you know, we've been very clear about our ability to effectively run in this range. And so I would say we feel good about delivering on that over the three, consistently over the three-year period.

Understood. Appreciate it and all the best.

Our next question comes from Luke Hannon with Canaccord Genuity. Your line is open.

Yeah, thanks. Good morning. Glenn, I just had one for you under the Back to Basics program. You guys have made a lot of progress under that, and clearly it's being reflected in your financial results now. But how do you ensure that you avoid becoming overly complex from a SKU perspective going forward while also making sure that you're innovative enough to meet your customers' needs?

Well, that's the secret sauce that I think is, you know, we've rationalized our brand, so we have three brands going forward, which we think we can cover the market with, and that's down from five. So that's a good example of skew rationalization and focus, right? And that allows us to run with less working capital to support better service and everything else to go with it. I think we have it dialed in, and, you know, when you have less skews, you can provide better quality. And what our key to success has been is always to improve our quality, which we're doing right now. We have a lot of new innovation that's happening right now to, you know, to improve our products, the printability of them, and softness, I mean, whatever we think. So, you know, we're focused, and that's the key, but back to basics. You're focused on what you have to do to make it the best. and not to be all over the place. So we're really continuing to, I think, leverage our strategy, and we're going to stay tight on what we do, and we're pretty comfortable in our unit growth projections and our outlook over the next three years.

Okay, thanks. And for my follow-up, we did see inventory tick up. both sequentially and year over year. And I'm curious to know how much of that was higher volumes versus higher costs, and then what are your expectations near term as far as building inventory? I know the distributors are chasing inventory right now, so I'm just curious to know what that's going to look like in terms of your own books.

Yeah, if you look at inventory, I mean, there was a bit of a build, and you would expect that, right? If you look at what's going on from a from a cost perspective overall. I mean, a bit of unit volume, but we're running tight on inventory as we run through the various quarters. As we get through this year, as we bring on capacity, as we effectively bring on yarn production, really, as it comes up, we'll have the opportunity to build our inventories a bit. But I think you can assume inventories are staying tight as we run through 2022. into 23. And that's, you know, inventory is everywhere maybe is the way to think about it.

Okay. Appreciate the call. Thank you very much.

Our next question comes from Stephen McLeod with BMO Capital Markets. Your line is open.

Thank you. Good morning, guys. Just wondering if you could give a little bit of color on what you're seeing in the activewear segment as it relates to some of the end markets You know, particularly some of the markets have sort of lagged, like corporate, travel, stuff like that. Wondering if you can give an update on how those markets have trended in Q4 and on a year-to-date basis.

Well, I think that they're starting to pick up. I mean, you know, other than the wave of Omicron that happened towards the end of the last year, beginning of the year, I mean, things were somewhat picking up. I mean, there was a lot of trade shows canceled in early January that, you know, would have probably affected business, but overall, we're very bullish on the outlook and then we think this is all behind us right now. And for us, I mean, that's really the key because, you know, we've seen a, you know, a large, you know, growth in the market and the market's grown and the pieces have grown are still doing very well. And then, you know, once we get back that promotional, you know, corporate promotionals and tourism and all the other things to go with it and social gatherings, which have come back, but they're not back fully, I think that's going to be a big part of our success. And one of the other areas that we've seen, you know, significant growth is our fleece category, which is, you know, lifestyle change and people wearing more sweatshirts. And that's also been a big driver of our overall revenues as during 2021. So, you know, we're feeling very comfortable with our outlook. Activewear is growing. And it's not just in the – Obviously, we're seeing a lot of nearshoring coming back for people servicing retailers. Our global lifestyle customers are looking to grow with us. So, we're poised, I think, in every one of the areas that we really service, except for international, which is probably the only one that's a little bit, at this point, disappointing. But I think it will take care of itself once it's become sort of a badge. Everything's running on full cylinders.

That's great. Thank you. And then I just wanted to pick up a little bit on the innovation comment. You know, you sort of cited it as a key pillar of your sustainable growth strategy. You know, can you just talk a little bit about sort of what that means in terms of the product that you're offering considering innovation? You know, you've also embarked, have embarked on a strategy to reduce the SKU count.

Right. So, you know, our innovation is going to be is that for every product that we sell, we're going to sell the best product in the market by definition. I think that's the way to look at it. So, if you look at a competitive product in the market, we're going to make sure that our products are better quality and features than anything else being sold. So, we have different categories. You know, we have our basics, we have our fashion, we've got et cetera. So, our fleece, So we're going to continue to, you know, to reinvest in our low-cost manufacturing, basically, to support what we think is innovation. And also, innovation is also involved in our manufacturing processes, which will allow us to continue reducing costs, really, because that's also been a key pillar in terms of what we're doing. And that's, you know, new ways. And that's also embedded in our ESG strategy in terms of consumption of, you know, obviously, you know, we consume less water, we'll consume less energy. So that's also part of it. our innovation strategy. So innovation is not just about product, but it's also about our whole footprint of our manufacturing.

Okay, that's very helpful. Okay, thank you. Look forward to the investor day.

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

Great. Thank you so much. I want to ask about the share buybacks. You know, bought back a lot of stock in 4Q. It looks like you've bought back quite a bit of stock already here in Q1. Raised the amount of shares you can buy back. What's the plan going forward for, you know, the rest of this quarter and this year?

Yeah. So, Jay, we talked about the strong pre-cash flow generation that we've had as a business and the strong balance sheet that we have. And We've been very clear that when we look at our balance sheet, we do want to run in that one to two times leverage range. So effectively, as we go forward, we'll look at managing our share buyback program in line with our framework, as we have done for many, many years now, really, when you look at it. So I think as you go forward, we see all the opportunity, our leverage is low as we finish the year at 0.7 times below the low end of that range. And we did make good progress in the program that we put in place. We started mid-year last year. And so now we're really upping that program. And that's what I would say you can consider as our program for 2022. Again, we expect to execute on that program, given where our balance sheet is and what our free cash flow generation is. And then as we go forward into 2023 and 2024, We'll obviously continue to manage that in line with what we see. But given our free cash flow generation, we feel like we're in a very good position to invest in organic growth, which is the driver of the business, which is really everything that we do, while at the same time, though, keeping a strong eye on return of capital. So I think we feel good about all of that.

Got it. Okay, thank you. And if I can ask one more, if you could just elaborate a little bit about how, you know, Port congestion is impacting the business. Obviously, you know, the company probably doesn't use a whole lot of West Coast ports for, you know, delivering goods. But can you just explain, you know, that dynamic and elaborate on, you know, what you're seeing there and if it's been an issue at all?

Well, we have a small portion of our business, obviously, that comes from Asia, but we don't necessarily use West Coast ports. But it's, you know, freight costs have gone up and we've seen quite a bit of inflation from what we do bring in from Asia. But the bulk of our production is, you know, is really almost domesticated, which is, you know, yarn coming from the United States goes to Central America and comes back. So we haven't seen any real issues except for, you know, lack of truckers, you know, things like that, which is basically trucking in the United States is very tight. It's, you know, I mentioned earlier that the our lead time to our customers. I mean, although our inventory and channel has gone up a bit, but now that inventory is, in fact, our inventory in our distributors' four walls has actually gone down. So, you know, that's a good indication of, you know, the types of, you know, freight issues, let's say, for example, that are happening right now. And the labor market still remains very tight in the United States, which is also the other factor. So But overall, I think, look, we're managing our costs. I think we're in relatively good shape. We don't rely on outside factors. We're vertically integrated, obviously, and we're able to manage our supply chain.

Got it. Okay. Thank you so much.

Our next question comes from Brian Morrison with TD Securities. Your line is open.

Thanks very much. Good morning. Glenn, you mentioned that the average price of a shirt was now $2. I just want to clarify, where is the price level relative to the pandemic, pre-pandemic? Are we significantly above? Are we in line? Where do we compare?

Well, our pricing on our, like our basic pricing, let's say, for example, T's have gone from, they were in the, you know, high single dollar, let's say they were $1.75 or something, $1.90, you know, they're just north of $2 a day. So, you know, pricing has gone up. But it hasn't gone up significantly, really. I mean, if you look at the end-user price, you know, that could be absorbed. Our price increases could be absorbed quite easily in the market. And fashion T-shirts have moved up a little bit, too, on our side. But, I mean, our competitors have taken a lot more price than we have, and our gap relative to us in the competition has grown substantially relative to pre-pandemic levels. So for us, I think we're in a pretty good position leveraging our low-cost manufacturing We could take more price if we wanted to, I would say, but, you know, what we're going to do is we're going to continue to focus on unit volume growth and bringing on, you know, a wave of capacity, really. And, you know, as we, you know, leverage the acquisition of Frontier and we move into the back half of this year, we're going to have a substantial increase in our volumes really as we move into, what, 23. So we're pretty excited about our positioning.

Okay. And then changing gears, when I look at your 7% to 10% growth outlook, Has this got phase one of Bangladesh and the equipment transfer to Honduras? Are they both operating at 100%? And do you see any outsized growth from any of your key verticals through this forecast, whether it be private label or fashion basics?

Well, the forecast I think we have right now is based on the capacity that we communicated to you before, which is the Bangladesh one and then the repurposing of all of the equipment we had in Central America. that we said we're bringing on, you know, approximately a billion dollars in revenue. This is what we stated in the previous call. So that capacity is being in place. The capacity that's in Central America is in place today. And, you know, Bangladesh is going to be complete sometime towards the end of this year and will start in the beginning of Q1 next year. So that's all in place, I think, and going. And what we refer to as our CapEx, which is, you know, the six to... that CapEx is really going to support the next big incremental growth. So some of that CapEx will be, you know, bring on obviously Bangladesh, but it will be supporting really the next wave of our capacity expansion, at the same time allowing us to continue driving our vertical integration, not just in North America, but as well as in Bangladesh. You know, our goal right now is to continue. I mean, we've got the line of sight on the next, you know, three years and the question is, you know, what happens after that? And that's the bulk of our spend is basically going to be supporting additional capacity expansion and vertical integration.

Okay. Can I squeeze one more into just in terms of yarn supply since the acquisition of Frontier? Sure. you did have some, well, the industry in general had some notable labor shortages and was impacting production across the board. Are you still seeing this since the acquisition of Frontier for the industry? And if so, is it leading to market share gains?

Well, I think that the, you know, the thing is, is that there's, you know, capacity is tight, right? So there's, and that's just not in North America, that's globally. I mean, I think that the, you know, Business is tight, but during the pandemic, a lot of facilities closed down, not just in North America, but I think globally. So the global tightness of raw material is there for sure. We acquired Frontier, we're just phasing out of our sales that they had, which will happen sometime by Q2. And then as we enter into Q3, Q4, we'll have all that volume available to us to continue you know, wrapping up our capacity, basically, to support incremental revenues in the back half of the year and as we move into 2023. So, you know, things are still tight for us, but, I mean, we are producing more today than we did this time last year, obviously, because our plants are producing better. But, you know, we're in a position, I think, that we'll have to see continued growth and optimizing our manufacturing. And we're also looking at, you know, continuing increasing our capacity as we speak. So, All that combined, we feel very comfortable with the availability of our yarn, and I think of our growth as we move into the back half of this year into 2023.

Thanks very much.

Our next question comes from Sabat Khan with RBC Capital Markets. Your line is open.

All right, great. Thanks, and good morning. Just, I guess, a bit of a high-level question on the industry outlook. You know, you've addressed the TAM in the past at somewhere between kind of call it $4.5 to $6 billion. And then with the additional demand that, you know, we've seen through the pandemic, and I think you called out that work-from-home demand is still there. Now, do you have an updated view on what the TAM looks like today? And, you know, presumably it's gotten significantly larger given top-line growth rate that you're targeting is, you know, above kind of historical levels. Just want some color on that.

Right. Well, what we said in previous calls in that pre-pandemic, we thought that the market size was about $6.5 billion, and we think that that market has grown substantially since then. We've done a lot of research, and that's something that we're going to call out in our investor day is really to bring more insight into the size of the market. We've done a lot of market research, which confirmed that the market has grown substantially. So we'll discuss that in our investor day.

Okay, great. And then as we look, I guess, in terms of the kind of the fashion basics side, and historically I think the number you quoted in the past was something like a 25% market share. And I guess within the margin guide that you're providing over the next year is on the top line. You know, what role is fashion basics going to play in both the top line and on the margin side? And maybe, you know, any goals you have for market share capture on that side of the business?

Well, look, I mean, there's two things. you know, fundamental, huge areas of growth. Obviously, one is fashion and the other is fleece, which is our fleece business is growing substantially as we speak. The capacity that we're bringing on in Bangladesh, which is two large, state-of-the-art facilities, will be geared and dedicated to 100% making fashion T-shirts. So we have a huge wave of capacity coming on, which will be at the low side of the cost curve, basically. So that's our commitment to grow our fashion basics. And then as we look at the growth of our fleece production, we're reorienting our existing facilities here in Central America to basically take on the demand and capabilities of supporting incremental fleece. So I think we're in a pretty good position to capture the two large drivers of what we think is industry demand. Our basics, our typical basics, I mean, they'll grow at a slow clip, but we've got quite a large market share there, so we don't really see a big growth in the basic category. It's really going to be a function of, you know, our fashion basics and our fleece that will drive the pipeline growth over the next three years.

Okay. And then I guess just on the inventory among the distributors that you noted in the press release being below pre-pandemic levels, you know, do you foresee a bit more of a restocking event or sort of is this, you know, just-in-time type of replenishment something you expect will continue? And what should we expect over the course of 22?

Well, we think that definitely for the, you know, short foreseeable future, I mean, inventories are going to remain tight. You know, so that's a fact. I mean, what I said is that although we've got more inventory, what we call the channel, but that a lot of that inventory is not actually physically in our distributors' four walls right now. So their four-wall inventory is probably half of what it was in 19. So, you know, inventory is relatively tight. You know, there will be some probably ultimately catch-up just because we think that, A, number one, the market's growing and inventories are relatively low, which, you know, has affected service a little bit. But, I mean, the point is that it's almost a good problem. But there will definitely be a small catch-up towards the end of the year probably.

Great. Thank you.

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

Hi, good morning. This is Peter McGoldrick on for Jim. Thanks for taking my question. I was curious on the Frontier Yarns acquisition. Could you help us better understand the income statement influence across line items and how this contributes to the new multi-year outlook?

So if you look at Frontier Yarns and the acquisitions, as Glenn said, we're very pleased about it and really excited drives our capability on a go-forward basis from a yarn perspective. Effectively, it just gets rolled into our asset base. It's manufacturing assets that effectively show on our balance sheet. We pick up some inventory. Actually, there was an inventory question earlier in the call, and you'll see some of the increases is related to Frontier. And then as we go forward, effectively, we still have some third-party sales that will come from Frontier through the first half of the year. But generally, that will be reflected in our cost of goods. It's not going to go into our revenue line. So, you know, I would say Frontier, what we really have to think about from a Frontier perspective is its ability to provide us with the yarn, to provide us with the ability to support our textile facilities, and ultimately... We're picking Frontier to drive volume, and also we are improving Frontier to reduce cost as we go forward so that we can drive that volume but also maintain the margin profile that we want.

And also to support the growth in our fleece category, for example. I mean, there's technology that we use that they have a large footprint in, which is MVS, which makes low-pill, no-pill fleece, which is not readily available. So we're expanding that. We're doing what we can, and it's also going to help us to integrate our other facilities as well, because now we operate nine large textile plants, so we consume almost half of the domestic cotton in the United States, and allow us to basically leverage our existing facilities by streamlining them even further and leveraging our back-to-basics. If we had three SKUs a yard in a plant, well, we've probably got one SKU, because we'll just move some of the SKUs to their plants. Overall, and also there's room for a little bit of investment in some of the things that they were doing in terms of automation. But overall, look at that. Their plants will yield very good returns to us. It will help us to grow our top line, basically, and support everything that we need to continue growing and hit our objectives over the next three years.

Okay, thank you. And then just switching to more near-term oriented, I was curious on the gross margin outlook within the context of the cost increases rolling through and price positioning, how this progresses directionally, and then how does that fit in within the new multi-year outlook for 18% to 20% given your achievement of 30% gross margin in 2021?

Yeah, I mean, if you look at the growth margin as we go forward, as we look at where we were and, you know, what the various impacts are, I mean, what we're really running the business on is our operating margin, right? I think that's maybe the first place to start. And we've been very clear about what we can deliver with respect to the 18 to 20. I think when you look at that 18 to 20, then you look at growth margin and you look at SG&A, our SG&A performance has been very good. and you can see that now we're running down sort of 10, 10.5% levels. And then obviously you back up from there to what we expect from a gross margin perspective. So there will be some pressure on gross margin as we move through the year. If we look at effectively what's happening with raw materials, what's happening with inflation, if you look at the amount of price that we're taking, I mean, if you look in 2022, for example, the amount of price that is unfolding for us probably in the sort of mid- to single-digit range, or sorry, high single-digit range. And we are seeing inflation and cotton prices coming through that effectively are reasonably significant. So I would say you would expect some gross margin pressure as we move forward. from that high level that we finished in 2021. And so you will see some pressure as we move through the year, but then that'll be offset with some SG&A leverage. And again, I think we feel very confident about our ability to deliver margins inside the 18 to 20% range we've given you.

Thank you.

Our next question comes from Patricia Baker with Scotiabank. Your line is open.

Thank you, and good morning. Most of my questions have been asked and answered, but just wondering if you could talk a little bit about what you're seeing in retail in Q4 and maybe going forward.

Well, retail is, you know, continuing to be strong. You know, there's been a little bit of, you know, I would say slowdown from stimulus checks. I mean, it may probably be the only thing I would say is in retail where, you know, it was very robust. People were spending money – But, you know, we saw Walmart's earnings report. I mean, they did very well. I mean, so overall, retail is continuing to do well.

Okay. And then just on the softness in international, and, you know, I fully understand that Omicron had an impact there. Just curious, but before the onset of Omicron, were you starting to see any slight improvements in that market, or was it, you know, pretty much where it had been in Q3 and Q2? Sure.

it was growing at a rate of, you know, double digits basically every year up until COVID, right? So let's just start there. And then once COVID hit, it basically was similar to the US and then it really never recovered. So it's, you know, down, you know, 25, you know, percent depending on which market it is relative to, you know, 19 levels still. Probably China being a little bit worse because of, you know, more stricter lockdown than Europe. But, Still both of them down.

Yeah, if you look at the numbers, Patricia, they, you know, as Glenn said, I mean, it has been down pretty significantly. There was a little bit of improvement in Q3, but not much. It was still down pretty heavily. And effectively then when the Q4 came along and the Omicron, we saw sort of a reversion back to where it had been. So it really, there has been a big, very divergent, I would say, between what we're seeing in the U.S. and what we're seeing internationally. Okay. The U.S. has been, you know, obviously has recovered progressively strong, getting stronger, and international, really, we just haven't seen that uptick yet.

So just looking at your three-year plan, have you assumed that sometime in that three-year period international gets back to where it was, or do you think it's kind of a permanent lower base?

No, I think it's going to come back. But, look, you've got to remember international is still a low base to start with, right? So, you know, it's not – as relevant. And so we think it's going to come back and you know, the fundamentals of our core business and international markets is really evolves around travel tourism, you know, I think is this is pretty much what drives a lot of those markets. So when that happens, I think the markets will 100% bounce back. No, we think, you know, shorter term in the US right now, I think we have, obviously, we're very bullish about the outlook for the North American market because it's not only, you know, what we're relying on, the consumer spending and consumer demand side of it, but it's also the onshoring and people, you know, trying to get closer to the market and just in time, et cetera, et cetera. So, which is, you know, related around our retail customers and as well as our GLB customers. So, I think we're in relatively good shape, but I think Europe will come back eventually as the Omicron subsides.

Excellent. Thank you for that. Our next question comes from Chris Lee with Desjardins. Your line is open.

Hi. Good morning, everyone. Glenn, I was wondering if you can share with us roughly what percentage of your active wear sales are fleas and fashion basics, and what does that mean in terms of your market share in the expanded TAMM?

I don't think we really give that information out, Chris, but I would say that, look, at fleece and fashion basics are the two fastest growing categories. I mean, obviously basics are, we have, you know, we've always had a large share of basics, so it's not growing at the same clip because, you know, we had, I think at one time, 85% share of the basic category. So, but, you know, our fashion basic and our fleece are both big growth drivers. And in fleece, there's not a lot of competition, right? I mean, you need to be a vertically integrated manufacturer and probably have a pretty good capital structure to be able to support fleece. So there's really nobody in our industry that really has the capabilities of substantially growing it like we are. So I think we're in a good position. We're capitalizing on a large portion of the market growth, and we see a big growth in front of us.

Okay, no, that's helpful. And then my other question is, in the past, you've mentioned that if the distributor inventory were to recover back to pre-pandemic level, that would translate, I think, to roughly 150 to 200 million of incremental revenue. Is that still a fair assessment?

Well, that will happen, I think, eventually over time. I mean, for two reasons. One is that inventories are so low today that they have to continue to replenish and bring product back into their channels. But the second thing is I think the market is growing. So you need more units to support a growth of the market. So for both of those reasons, I would say 100% that inventory eventually will come back into market. The question is when. I mean, you know, I don't think it will be fully happened this year. I mean, maybe next year that could be something that could happen.

Okay, great. Thanks and good luck.

Thank you.

There are no further questions. I'd like to turn the call back over to Sophie Argyrio for closing remarks.

Thank you, Michelle. Once again, we would like to thank you for your participation today, and we look forward to speaking to you soon. I would also like to remind you that, as Rod mentioned, we will be holding our virtual Investor Day on Tuesday, March 29th, and in the coming days, we'll be issuing a press release to provide you with the details for the registration of the event. So once again, thank you, and have a wonderful day. Thank you.

This concludes the program.

You may now disconnect.