Q2 2022 Gildan Activewear Inc Earnings Call
Theres lots of labor inflation, and the only area that I think we've seen a little bit of deflation is a little bit on the freight side from particularly goods coming from Asia.
But other than that I mean look inflation still an obstacle.
Cotton is.
Pretty much going sideways now at the same levels in which we fixed our prices so.
I don't see there's going to be much movement, there as we move into the future, but we'll see how that goes.
Thank you for that color.
Your next question comes from the line of Stephen Macleod from BMO capital markets. Please ask your question.
Thank you and good morning.
Just wanted to circle around on just the top line.
You know accident in Q1, you had indicated you saw some deceleration sort of into that mid single digit range and then and then you put up a very strong topline just wondering where you saw outperformance relative to your expectation when when we had the Q1 call.
Yeah.
But we're continuing to see strong momentum and are obviously on our wholesale distributor channel I mean, like what Rod said, particularly in fleece.
And the fashion T shirt segment, our ring spun T shirts, I mean, those are the areas which are.
Really driving market share and we're gaining share in those categories. So those are really the ones that are sort of leading the pack.
And we're getting a recovery of of our basics basically as events continue to open up and et cetera. So.
Channel is resilient, it's all about the experience and it's doing well and we're taking share within the channel.
Great. Thank you.
And then just turning to the national accounts business.
Remind us how big that business is as it relates to your sales into that market.
But we really don't break that down but.
Look it's an area that obviously is a.
Ben.
Big help to our recovery in terms of the overall sales in the U S market.
But.
Look I think we think it's short term in terms of the decline is still a small part of our business overall.
But it actually is.
Growth driver for us as we move forward.
Okay. That's great. Thank you.
Your next question comes from the line of Jay sole of UBS. Please ask your question.
Great. Thank you so much but I'm just wondering if you can elaborate a little bit on the levels of inventory at the distributor level.
Obviously, the last couple of quarters its been well below normal have you seen that sort of adjust now or how do you how do you see it.
Well there is.
Probably been maybe even a slight pickup, but I would say that the weeks of supply because it's always a on a go forward basis. So the weeks of supply that we had at the end of Q1 is similar that we have in end of Q2. So we have typically.
Sales to cover the following quarter in the channel So that's a normal.
Level of inventory and still below 19 levels.
Got it Okay, and then maybe just on buybacks.
Okay.
As the company continues to buy back shares how are you thinking about the rest of the year just terms of in terms of priority for free cash and just sort of capacity too.
Maybe buyback more stock now that the authorization has increased.
Yes.
If you look at our existing program read it expired just theres just expiring now so.
We did I think we did a great job on the existing program effectively repurchased 885% or eight 5% of our stock over the last year.
Didn't get it all done and we do want to.
Continue with return of capital is a key part of our overall capital allocation frame.
<unk> framework and so thats why with the we've announced a new program effectively $9 2 million shares.
And we will continue to effectively work away against that New program now as we go forward. If you look at our free cash flow.
For the most part our free cash flow is available for dividends.
It's available for for M&A, but in this environment, we don't see that really well.
We're focusing on our own operations and we're doing a great job. There. So I think that lead free cash flow available to support.
Buybacks as we go forward. So I think youll see very definitely will continue as we have been doing over the last year.
Got it okay. Thank you so much.
Your next question comes from the line of Luke Hannan of Canaccord Genuity. Please ask your question.
Thanks, Good morning, everyone Glenn.
Go ahead, if I remember correctly I think you had said on the.
Our previous earnings call that the view would be that restocking is more likely to play out.
23 is that still your view and if so is that more likely to occur in the first half of the year or in the second based on what Youre seeing today.
I think that with.
The way the market is today I would say that it's hard for us to say because obviously.
Okay.
Our objective is to keep a good balance of inventory and channel.
So we may never ever get up to those levels of <unk> 19 to be perfectly honest with you I mean, if not necessarily.
And advantage for anybody.
Working capital for our customers and so our objective is that as part of our back to basic strategy.
The reduction of our Skus and the ability for us to.
Surface basically I think that we would like to see the levels of inventory sort of stay where they are today.
I think thats sort of a really I would say our long term plan. Because then we can create.
Better value for our customers basically.
Get better return on their capital.
And we'll be able to react to the market and service it.
Grid much better so.
I don't foresee it really coming back and saying Hey, we want to get our inventory back in the channel because you know maybe 19 it could have been.
On the high side and then as we moved into cohort is on the low side I think we are.
We're probably going to have a very good balance of it.
Okay understood.
And then my follow up recognizing that it's very very early here, but you are currently pacing well ahead of the three year guidance that you had outlined at the Investor day and it sounds like the distributors are still fairly clean on inventories. So the outlook for the balance of the year on balance even with the softer retail environment is still fairly optimistic.
Nick.
I guess I'm not asking thats, when we might see an upward revision of guidance, but again clearly the implication would be if this is a strong year that.
The implication for 2023, and 2020 forward that they would be on balance weaker which might not necessarily be the case. So when we when might we see a revision of any kind to that guidance.
Well the next not try in the last guidance. So I think we just we just basically gave though to improve it.
Been free.
Short time ago. So I think look at I think we're continuing to.
Drive against it I think is an aggressive target at seven to 10 on a CAGR basis and.
We are on track and I think thats. The good news I think at the end of the day I mean is that we don't know what the future will be I mean, thats why we gave a range.
But were on track basically to achieve it and we're comfortable with within the range in the period that we communicated to us. So once we get to the point, where we actually achieve that.
When we set the bar maybe as we go forward and look for bringing on obviously in the capabilities of us to our sales growth is a function of capacity. So as we can.
Look at bringing on capacity, which we've done I think and are continuing to.
To wrap up between Central America than we have Bangladesh and then we have a second plant in Bangladesh, where we can.
Obviously continue to build.
It's not just we have the ability to we obviously increased our guidance and so what we'll do is I think we're good for now and then once we achieve it we will look at the resetting the target.
Understood. Thank you very much.
Yeah.
Yes.
Your next question comes from the line of Jim Duffy from Stifel. Please ask your question.
Hi, Good morning, guys. This is Peter Mcgoldrick on for Jim Thanks for taking our question.
I just wanted to focus on a little bit on the near term trajectory to get some guardrails around the demand picture in the activewear business can you explain any.
How are you planning on order levels into the North America <unk> market.
Youre thinking of pricing.
That embedded.
And.
If you see any.
Changes in the demand picture.
The travel and tourism or any other feedback that you had mentioned in the principal's market.
No. What we said was look at I mean, we have a good order position.
<unk> is pretty much firm.
And.
The area I think that we've seen softness like I said earlier was limited in the national accounts.
A space, where basically big retailers are cutting back inventory that needs to be worked through as they bring inventories in line and that should come back so.
All in all we haven't we still see positive.
Tailwind.
The experienced people traveling.
Rock concerts camps jog runs I mean, all of the things that.
Somewhat covert related are still positively coming back. So that's all that's all in the positive direction retail and obviously it is the one area where.
The consumer basically is stop spending and.
I think that will work itself is avid as well as we go forward.
Okay. Thanks, I guess just drilling in on on that last point.
Recognizing the increased challenges at retail.
Can you give us insight into the discussions you're having with those customers or your.
Your expectation for the timing of that is this a one time reset to inventory or are you expecting.
Lower.
Demand picture going forward on a sustained basis.
Well first of all this tough function of break we don't set inventory, we have programs and when they get replenished in the replenishment of those programs is running below by 8% basically in retail.
Our national account business that sort of a.
Our business, which is basically.
Said earlier it was just a timing issue until they open the dollars come back in and they'll start to supply more product, that's not assets or our customer's customer and obviously that's doing that so.
But look at we're not really focusing on the existing programs that we have but we're also at the same time looking for new opportunities new programs and additional capacity coming on.
We've been very tight on production. So we haven't really had much to sell so as we take advantage of customers looking to nearshore more product retailers looking to for for better value, which is what <unk> is all about is the value proposition.
We're going to continue to grow the business, let's focus on the existing core business, we have but I think that as we move into the 'twenty. Three 'twenty. Four is also going to be looking for new opportunities and leveraging our supply chain.
Okay. Thank you very much.
Okay.
Your next question comes from the line of Brian Martin of guilty. Please ask your question.
Good morning.
Couple of questions, Ron and Glenn just following up really on.
With activewear in the back half of the year as your message here that you expect unit volumes to be positive, it's pretty creative pricing year over year will be strong is that the message.
Yeah.
Well look at.
We feel good about.
On the activewear business, there's definitely strengthened in North America, there's weakness as we talked about the national account. There is weakness in international. So you have got to balance all of that and look at the pluses and minuses, but overall, we feel good about the business.
Okay, I guess ship.
Shifting tunes here in following up on the Bangladesh commentary does the slowing global economy have anything to do with your commentary that Bangladesh, maybe a Q2 event and what kind of flexibility do you have on the timing of the startup of that facility.
No we haven't changed really I mean look at other than originally it was going to be.
Sorry.
It's going to originally it was going to be.
Q1, but just the timing of equipment in it.
Definitely not.
Yes.
Capacity issue, we need to build all the capacity we can get from there so.
By the time of the plant starts it will start actually in Q1, but it's going to.
No.
Miniscule really as it starts up.
We won't see the effects really until Q2, and then by the time that product hits.
Our supply chain and really it makes an impact on our sales there will be a 24 story so.
So we're pushing as hard as we can on Bangladesh.
But like anything else, we're working through all of the supply chain and other things to bring onto capacity by saying that we have a lot of capacity that's coming on still in Central America.
We're in a good position as we leverage the frontier.
Acquisition to continue increasing the capacity and that was really.
Our achilles' heels that we couldnt have increased high capacity until we had the yarn available.
To support it so that all of that is in place now than we have.
Eliminated.
Most of all of the outside sales by July It was a couple.
Small programs, we're finishing this month, but in general.
<unk> will be used to support our growth as we move into 'twenty three so.
Capacity is not an issue I can tell you that I mean for sure.
And we're well on way too will be able to support our sales targets.
So does yarn in the industry remained tight and should that enable you to gain more market share now that you are 100% sourced with frontier.
Should help us for sure and it's still tight so I think that those are two big positives for us.
Okay and last question Rod last couple of quarters, you've had this note in your financials in your MD&A that you plan to exit that Lady in Shapewear under the brand name business.
Can you update us with the process. This year the magnitude of the sales and the time initiative to take to play out to play out.
Yeah.
Yes that was part of our overall back to basics initiatives, Brian that we've been looking at that I mean, we've been working away on it and I would expect that.
Something will unfold here in the not too distant future, it's very small it's very minor.
So no material part of our business so effectively as with all of these things we work away at a constant land.
Thank you.
Again, it's just part of all of the back to basic initiatives, which.
We got a lot of impact from back to basics, but it's ongoing.
<unk> basic never finishes for us and.
I think we will get something done here now in the not too distant future.
We're talking transaction rather than wind down correct.
Well again, it's very small scale.
Secondly, yes, it probably will be something on the small side.
Okay.
Thank you very much.
Okay.
Yeah.
Your next question comes from the line of Mark Petrie of CIBC. Please ask your question.
Yes. Good morning, Thanks for all the comments so far I just had a follow up question with regards to the pricing environment.
The volatility in cotton, specifically and I understand the comments, but could you provide a little bit of context, just with regards to how material the promotional.
Ponant is to the pricing picture overall and is the expectation that some of those promotions will be coming back into the picture.
As demand potentially slows and.
As I said.
Clearly, it's playing out cotton prices are coming back.
Alright, so look at.
First of all pricing is pretty firm in the channel right now so there is hope.
Really promotional activity to say I would say that and generally everybody who's in our industry has significantly high cost cost inventory.
If you look at the cycle of buying Cotton for example, when you buy your July cotton, which is a five month period and if you look at where the prices were in July .
There are substantially higher than they currently are now so some may not have high prices, but some more but I would say in general people have high cost inventory either between the freight the labor the cotton all of the various things. So it's keeping pricing higher if anything I think that people will cut back on production.
Perfectly honest with you I think that will get in Nashville.
<unk> for.
The work to work through.
They are high cost inventory.
And as far as we're concerned, but we never raised prices to the levels of the really peak cotton.
That's why our our GAAP, obviously is quite significant in the market in terms of our competitive advantage.
And we raised prices to reflect the current cotton prices I think that are there in the market today, So and there is still inflation like I said earlier labor is definitely a factor energy is definitely a factor and the only area other than.
Raw.
<unk> is a freight in and on the raw material side polyester is actually continuing to go up because it's also oil based so.
All of these puts and takes I mean inflation hasn't really subside.
Personally don't think is going to.
There might be a little bit more of an impact globally on demand, but I don't think inflation is going to be stopped anytime soon personally that's just my feeling so.
I think we're well positioned.
As far as everything we have in.
We'll see where it goes and we control what we control and.
We're controlling our SG&A I mean, which was below 10% this quarter and our target is longer term is to keep it there so.
We'll see where it goes and I think we're in relatively good shape to hit our targets on our operating margins.
Okay understood I appreciate all the comments all the best.
Yes.
Yeah.
And your next question comes from the line of Chris Lee of discharging. Please ask your question.
Hi, good morning, everyone.
Based on everything we said so far on the various <unk>.
<unk> dynamics in Activewear is it fair to say that your Pls for North American Activewear overall for both wholesale and retail combined.
Was it still positive in June or July or has it sort of people that negative.
Given the pullback in in retail.
Well, what what pulled down our Pos in June and July was really our national account business.
We are to serve business moderated somewhat in Q1 like we called out.
And.
But right now I would say that thats, the national accounts, and obviously the retail side of the business which is.
It's been a little bit of a drag let's say for example.
In the last six weeks or so.
And obviously international Hasnt been performing either but it's actually.
That's one area that we're starting to see a little bit of a pickup of output because you don't worry that we have.
If I had that pretty.
Sharp declines in our international business, so, but all over I think puts and takes I think that in the national account side of it but I think it's temporary because I think it's just a question of bringing inventories in line at retail it's not a fundamental change.
Change in direction, because a lot of this national account business is actually.
We haven't purchased directly from the retail stores themselves. Each retail store manager has an open to buy and T shirts, it's up it's a business within the business at the retail level, especially for discrete printed side of it so.
It's all going to come back we think in.
We're still cautiously optimistic, but we're cautiously optimistic I think is the key.
Okay, that's helpful and suffice to say whatever the pls rate.
<unk> seen way now.
Is it fair to say, maybe we're kind of starting to hit the bottom and like you said maybe 10%.
<unk> adjusted again, it will start to gradually pick up thing I'll be kind of close to that bottom or do you think.
Look we don't know.
Things are.
Our customers are very bullish about the business, which is a positive thing and so.
We've done all of our research that we can do in the market.
But we don't know, we don't know right I mean.
We are in a global environment that says on completely on stapler stop reading the news that we'll be in good shape really because I can tell you one thing the job market is tight as ever so.
The job market is not a reflection of the overall outlook I would say in terms of what we're seeing and reading so.
I think look we'll see what happens.
Okay. That's helpful and maybe one for Rob just in terms of the maybe the margin outlook for the second half and obviously I don't think its going to be our strongest first half given some of the cycling of the price increases in some of the other pressure, but can you give us a sense of what you expected adjusted EBIT margin to be in the second half.
We expect to be kind of in the 18%.
To 20% range that fleet.
Long term targets.
That's right Chris.
Definitely as we move into that the second half and then we will see.
As we entered the third quarter. So we have price effectively there to offset some inflation, but as we move further into the hassle.
We see.
The inflation coming through so I would expect to see some moderation from current levels from an overall.
Margin perspective, but we'll stay well within our range.
Okay, Okay, Thanks, and all the best.
Thank you.
There are no further questions at this time I would like to turn the call back over to Safi Algeria.
Thank you Catherine.
Once again, we'd like to thank everyone for joining us this morning, and we look forward to speaking to you soon.
Have a good day everyone.
Okay.
This concludes today's conference call you may now disconnect.
Okay.
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