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Edited Transcript of GIL.TO earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 Gildan Activewear Inc Earnings Call

MONTREAL Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Gildan Activewear Inc earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn J. Chamandy

Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director

* Rhodri J. Harries

Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer

* Sophie Argiriou

Gildan Activewear Inc. - VP of Investor Communications

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Conference Call Participants

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* Brian Morrison

TD Securities Equity Research - Research Analyst

* Daniel Biolsi

Hedgeye Risk Management, LLC - Director

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* Keith Howlett

Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Robert Pickels

Whitney & Company - Senior VP

* Sabahat Khan

RBC Capital Markets, Research Division - Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

* Tracy Jill Kogan

Citigroup Inc, Research Division - VP

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Gildan Activewear Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Sophie Argiriou. Please go ahead.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [2]

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Thank you, Michelle. Good morning to everyone, and thank you for joining us. Earlier this morning, we issued our press release announcing our results for the third quarter of 2019. We also issued our interim shareholder report containing management's 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.

I'm joined here today by Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Momentarily, Rhod will take you through the results for the quarter and our business outlook for the year, and a Q&A session will follow.

Before we begin, I would like to remind you 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 the Canadian securities regulatory authorities.

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

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [3]

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Thanks, Sophie. Good morning, and thank you for joining us. This morning, we reported Q3 results in line with the preliminary results announced on October 17. Sales of $740 million for the quarter were down 2% compared to last year, reflecting a slight increase in activewear sales of 1.1% offset by a decline in the hosiery and underwear category of 15.1%. The decline in this category on a year-over-year basis was mainly driven by lower sock sales in mass and other retail channels. However, our sales in retail overall were largely as expected as activewear sales came in stronger than expected, offsetting lower-than-expected sales -- sock sales to retailers.

The area of softness in our business relative to the expectations we communicated to you at the end of the second quarter was in the imprintable channel in activewear. As we indicated 2 weeks ago, during the third quarter, we saw a significantly weaker POS than expected for imprintables in North America, and the softness in international markets that we called out in the first half of the year did not improve as the quarter -- in the quarter as planned.

In the U.S., POS trends in the first half of the year unfolded in line with anticipated trends, and we expected strengthening in the second half given our normal promotional programs. We were projecting low single-digit POS growth in North American imprintable channels for the third quarter, and instead, we saw a high single-digit decline in POS. Accordingly, our sales expectations of mid-single-digit growth for the third quarter did not materialize and contributed to lower-than-anticipated net earnings, with adjusted EPS for the third quarter of $0.53, down 7% over the prior year quarter. Given the sales weakness in imprintables during the third quarter, which we continue to see in the fourth quarter, we lowered our sales and earnings outlook, which we communicated to you on October 17.

Although the current softness in imprintable sales is restraining growth this year, we do not attribute it to any structural change to our business or competitive positioning as a leading supplier of basic replenishment apparel driven by our large scale, low-cost vertically integrated manufacturing system. We believe the slowdown in POS for imprintables is temporary and driven by broader macro elements which we will navigate through while we continue to drive the growth areas of our business, including growing as a supplier of private brands.

Further, we continue to execute on our supply chain initiatives to drive increased operational efficiency across our manufacturing system, and we remain committed to achieving our margin objectives. In this regard, we've been working over the last 12 months on a long list of initiatives, including the consolidation of textile production from the former AKH facility to our new state-of-the-art Rio Nance VI facility, consolidation of sock manufacturing capacity into one facility and closure of sheer hosiery operations as well as shedding some of our higher-cost sewing plants.

In addition, at the end of October, we took the decision to move forward with plans to close textile and sewing operations in Mexico and relocate the equipment of these facilities to our lower-cost operations in Central America and the Caribbean Basin, which I will touch on later in my comments. Of course, it's not only about optimization, and we are very definitely working on capacity growth. Specifically, we are working on a number of initiatives across our system, including our largest initiative which involves major capacity expansion plan for a large-scale textile and sewing operations in Bangladesh while our plans remain unchanged and on track.

We're also evaluating additional opportunities to reduce costs and enhance our ability to execute on our strategic growth drivers. We're currently assessing the full phaseout of our direct ship-to-the-piece business in imprintables. We built this business through various acquisitions, and it is a fragmented, smaller-volume business which does not fit with our high-volume, large-scale imprintables franchise. Moving fully out of this business would allow us to reduce complexity, put more emphasis on our distributors, simplify our product line and reduce costs.

Moving to the details of our third quarter results. The sales decline in the quarter was mainly due to lower sales volumes, which more than offset the benefit of a richer product mix and slightly higher net selling prices. Activewear sales totaled $619 million, up approximately $7 million over the prior year quarter, reflecting double-digit growth in activewear sales to global lifestyle brands as well as higher fleece and fashion basic sales in North America. Despite slowing POS in these categories, fleece and fashion basics POS remained positive for the quarter. Increased sales of these products was largely offset by a decline in basics driven by negative POS in North American imprintables, which was more unfavorable than we planned, as well as continued softness in Europe and Asia.

The sales decline in the hosiery and underwear category is mainly due to lower sock sales in mass and other channels, including the impact of exited sock programs and weaker overall industry demand in the sock category, which, according to NPD's retail tracking service, was down more than 4% on a unit basis for the quarter. Our sales in underwear were essentially flat compared to last year despite overall industry demand in this category down approximately 5% on a unit basis in the September quarter as private label share growth from space gains in mass were offset by the nonrecurrence of the initial set of a private label program launched in the third quarter last year in the club channel.

Gross margin pressure persisted in the third quarter consistent with what we previously communicated as we consumed the last of our higher-cost year-over-year cotton before we see these costs flatten out in the fourth quarter. Accordingly, gross margin of 27.4% was down 160 basis points over the prior year quarter due to inflationary pressure on our manufacturing costs, including the impact of raw materials as well as the impact of foreign exchange. These factors were partly offset by more favorable product mix and slightly higher net selling prices in the quarter.

SG&A expenses for the third quarter were $79 million, down $9 million over prior year quarter, which translated to SG&A as a percentage of sales of 10.7%, 100 basis points better than last year, mitigating some of the pressure on gross margin. Therefore, operating income in the quarter came in at approximately $118 million compared to $128 million last year. And before reflecting anticipated restructuring and acquisition-related costs, adjusted operating income totaled $122 million or 16.5% of sales, down 80 basis points from last year's level. Summing up, our adjusted net earnings for the September quarter totaled $108 million or $0.53 per diluted share, down 7% compared to $0.57 in 2018.

In the third quarter, we generated just over $87 million of free cash flow after $40 million of capital investment for expenditures related to manufacturing capacity expansion and higher working capital requirements. We ended the third quarter of 2019 with net debt of approximately $934 million and a net debt leverage ratio of 1.7x net debt to trailing 12 months adjusted EBITDA, in line with our target leverage range.

Now before I turn to the full year outlook, I want to expand on some recent plans we have decided to move forward with related to our global manufacturing system, which I touched on earlier. Given everything we see and the flexibility we have across our large manufacturing system, we've decided to close our sewing and textile facilities in Mexico and move the equipment to our existing facilities in Central America and the Caribbean Basin. Although this means temporary shuttering of capacity as we transition the production to Central America and the Caribbean Basin, we believe it is a good time to do so in light of the current sales softness we are seeing in our imprintable business. We estimate that this capacity can be relocated and operational within 3 to 6 months.

As you would expect, we're always evaluating our cost structure in the various geographies where we operate. After considering the benefits offered by our large-scale infrastructure in Central America and the Caribbean Basin, we expect the relocation of this capacity to these regions will enhance our overall manufacturing cost structure while allowing us to continue to achieve our long-term capacity objectives. We look forward to providing a comprehensive overview of our global manufacturing plants at our upcoming investor conference in Honduras in November and showing investors and analysts our operations and industry-leading infrastructure in Central America, including our new Rio Nance VI facility, which has been ramping up nicely.

Moving on to the outlook. Today, we reconfirmed the updated sales and adjusted diluted EPS guidance we provided on October 17. We expect sales for the full year to be down low single digits compared to 2018. For activewear, we're projecting a low single-digit decline in sales. And for the hosiery and underwear category, we are taking a more conservative view and now project flat to a low single-digit decline versus our prior mid-single-digit growth projection.

Let me emphasize that we are very pleased with how our private label underwear programs are unfolding. However, we are being more cautious in our assumptions for replenishment orders in socks and underwear given the current overall industry POS data from NPD.

Gross margin for the full year is now projected to be lower than 2018 versus our prior year expectation of year-over-year flat gross margin due in part to revised product mix assumptions in relation to the updated sales projection. However, we do expect gross margin expansion as we move into 2020 as increases in raw material costs subside and benefits flow through from all of our manufacturing initiatives.

SG&A expenses are expected to come in lower than last year and are expected to improve as a percentage of sales over 2018. Estimated after-tax restructuring and acquisition-related costs for 2019 are now projected to be approximately $45 million, $15 million higher than previously projected after incorporating estimated costs related to the relocation of the Mexican operations to Central America and the Caribbean Basin.

Adjusted operating margin for 2019 is expected to be lower than 2018. GAAP diluted EPS for 2019, including the updated restructuring cost projection, is now projected to be $1.43 to $1.48, and adjusted diluted EPS is expected to be in the range of $1.65 to $1.70 in line with the updated adjusted EPS range we announced on October 17. Adjusted EBITDA for the full year is projected to be in the range of $545 million to $555 million, and free cash flow for 2019 is expected to be $200 million to $250 million.

Lastly, I just want to point out that our guidance for 2019 does not include potential additional GAAP charges that could arise in relation to the full phaseout of our direct ship-to-the-piece business. We estimate such charges could range between $35 million to $45 million in the fourth quarter. However, should we incur these charges, we would not expect they will be included in adjusted non-GAAP measures.

Finally, I would like to reemphasize our view on our business in line with my comments from the beginning of the call. While we are disappointed by the recent demand weakness, which is impacting results in 2019 and which is further being exacerbated by distributor inventory destocking, we believe our overall business model which has been built on the strength of our large-scale vertically integrated manufacturing system remains intact. As we navigate through the current sales volatility, we are continuing to focus on further optimization of our manufacturing operations and tight control on SG&A to drive the profitability objectives we have communicated and to continue to enhance our competitive positioning.

Further, we will continue our efforts to drive growth in fashion basics, international markets and to grow as a supplier of private brands. In this respect, we are encouraged with the discussions we're having with our retail customers and expect to grow in that area next year. We have a strong balance sheet and expect to continue to generate strong free cash flow, and we will continue to allocate capital where we think we can achieve strong returns and deliver value to our shareholders over the long term.

Thank you, and I will now turn the call back to Sophie.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [4]

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Thank you, Rhod. That concludes our formal remarks, and we'll be starting the Q&A session. (Operator Instructions)

I'll now turn the call over back to the operator for the question-and-answer session. Michelle?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sabahat Khan of RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [2]

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Just a first one on the demand weakness that you're talking about. Can you maybe talk about your line of sight as we head into kind of late this year and early next year into some of that demand coming back? What would drive that? And also as the demand is weakened, what kind of competitive intensity or has that changed at all? Have competitors taken pricing? If you can maybe talk about the industry environment and how the competitive environment's changed amidst that.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [3]

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Okay. It's Glenn. Well, in terms of the demand, it's hard to tell because we don't have control of the overall environment. But typically, when we see demand softness, it never persisted for more than 2 to 3 quarters. So that's typically -- historically, I think when we've seen a downturn in POS, that's sort of the length of time that we've seen it last for. We never really comped negative POS on an annualized basis.

As far as the pricing in the market, I mean there is slight promotional pricing today, but I would say that it's pretty normalized and there hasn't been aggressive pricing. On the flip side of -- in terms of the overall cost structure, although we see raw materials coming down on a year-over-year basis, there's still a lot of other inflationary areas putting pressure on cost structure in terms of labor, dyes, chemicals, transportation. So I think things are in balance. There is a little bit more promotional activity, but nothing significant.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [4]

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Okay. And then on this direct to kind of screen printer business that you're thinking about potentially exiting, I'm assuming this $35 million to $45 million charge is maybe a write-down of that business, but can you maybe give some color on the magnitude of the sales or EBITDA contribution of that business? And also kind of the thought process behind why you're looking to exit that channel, what it means for brands like Comfort Colors. Would you kind of exit those brands as well? Just maybe some thought process and what this means for those brands.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [5]

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Okay. So I'll answer the commercial side, and Rhod will answer the financial side. When we've acquired these businesses, obviously the acquisitions of Comfort Colors and et cetera, so what we -- we acquired these businesses -- and this restructuring will be real -- as a function of the acquisitions themselves mainly. And these businesses really had 2 types of revenue. One is where they sold products directly to small screen printers, and the second is where they support the distributors on low-volume selling products that basically they dropship. As we go forward, we're going to consolidate this and take the best-selling products and have our distributors commit and service the end user of these products, and then we're going to exit the dropship and the sales to the smaller distributors.

This is a very highly fragmented business. There's not a lot of revenue. There's a lot of complexity. And it'll also allow us to reduce the product lines that we're offering and supporting as we go forward. So all in all, our focus is to continue to leverage our distribution channel -- our distributor customers and alleviate any complexity and -- out of the system.

And Rhod?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [6]

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Regarding the sales in this business, currently, it's in the range of $50 million to $65 million on an annual basis. As we go forward, as Glenn said, we expect a lot of that to be picked up by our distributors. And if you look at the current profitability of the business, probably a little bit below where our current distributor business is. So overall, we don't really see a big impact as we move into 2020.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [7]

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Sorry, just a quick follow-up there. I guess if you're exiting this sort of channel, I think there's a certain element or certain part of the overall U.S. printwear market that is direct to screen printer and maybe with some of the larger ones. Should we assume that that's a channel that you probably don't want to pursue then going forward even with maybe some of the larger guys?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [8]

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Well, some of the larger printers don't buy necessarily from our distributors because they're serving mass-market retailers. So as long as we will continue to service them, we're just getting out of the fragmented portion of piece picking, basically, which is really the expertise of our distributors. And again, we bought this business through the acquisition. So this is not consistent with the -- I would say, with Gildan strategy and skill set and core competency as we're really a high scale, high volume, large manufacturer of basic apparel. And we're going to support our distributors with, I think, the core products that will generate the large bulk of all the volume, and anything that's fragmented, we're going to eliminate.

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Operator [9]

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Our next question comes from Heather Balsky of Bank of America Merrill Lynch.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [10]

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I was hoping you could address the long-term algorithm that you've presented on your past calls, especially given some of the uncertainty right now in the printwear channel. How do you think about your 30% margin -- gross margin target as well as your SG&A goal?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [11]

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Yes. So if you look at our long-term algorithm, I mean really, again, we've said the fundamentals of the business haven't changed, right? The things that we're focusing on, the things that we're driving, all of the changes that we're making in our manufacturing system to continue to improve, to continue to focus on our key growth drivers remains intact. So if we look at focus on achieving the 30% gross margin, we're still very much driving that, right? And we still think, for the most part, we're on the same timetable as we communicated before.

And the same thing from an SG&A perspective. I mean we're driving towards a 12% or slightly better if we can get there from an SG&A standpoint, and we're making very good progress on that. You can see that in our numbers, and we continue to expect to do so. So all of that remains unchanged, Heather.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [12]

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And do you need the mid-single-digit sales growth? Is that still in sort of your plan? Or are you thinking you can get there if sales are a little bit softer in 2020?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [13]

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So we'll -- obviously, we'll update you on our guidance as we move into 2020. But I can say that given all of the plans that we're focusing on and the things that we control, we feel good about achieving those targets.

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Operator [14]

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Our next question comes from Paul Lejuez of Citigroup.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [15]

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It's Tracy Kogan filling in for Paul. I was wondering if you guys could talk about the differences in performance between the basics -- fashion basics and fleece in 3Q. And what do you attribute the differences in performance to? I think they all weakened, but maybe fleece and fashion basics performed much better. And I was wondering how you see the performance of these businesses as we head into 2020.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [16]

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Okay. Well, fleece and our fashion basics businesses were both up. They just weren't up as much as we anticipated. And our basic business was down, and it was down a little bit more than we anticipated. So I would say that everything was sort of in line with our expectations, except more down than we anticipated in all segments, let's say for example, is a very good way of looking at it, if that answers your question.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [17]

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And how do you see those businesses as you move into 2020? And maybe do you sort of focus more on some of the businesses that are performing better like fashion basics?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [18]

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Well, look, I mean at the end of the day, we -- our objective is to continue to drive share in our markets. We're -- we've got a very good plan in terms of our products and our positioning. We're continuing to add new products into fashion product segment, which we'll highlight as we move into 2020.

So look, we're pretty optimistic. We don't think it's really a function of our positioning today more than the economic backdrop of weaker demand. So overall, we think that we're positioned well. We've made a major stride into the fashion basics business. We think we're a leader in that channel already with all the brands that we do have, and we'll continue to invest more in our products, and we feel very comfortable with our positioning. And we're going to continue to stay focused. We're -- make sure that we continue to drive our margin expectations, our sales expectations and our SG&A expectations to support the overall growth of the company.

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Operator [19]

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Our next question comes from Patricia Baker of Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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I just want to come back to the overall macro and the discussion around the soft demand. Now you indicated that when you've seen soft demand in the past, it typically only lasts 2 to 3 quarters. Can you talk about what you look for in the market and what are the initial indications too that you see that the market is turning? So what are you very focused on to determine the end of that softness?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [21]

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Well, look, there's -- for us, a lot of the softness could come from, for example, the corporate promotional products segment, where people are buying product and using it for advertising. And those products are typically in the basic segment, to be honest with you, because of the price points. Those things can be delayed, and people could change their buying habits. I mean giving free T-shirts out at the baseball game, for example. I mean -- so this -- you can end up -- it's used as promotional types of products, which are promotions that can be delayed. Typically, corporations look to cut costs in weaker environments. And so those costs get cut and then eventually they get realized as people need to promote and move forward.

So it's hard for us to say, to be perfectly honest with you. But I think what we've done is we've we built a lineup -- we think we have the brands to support growth in the future. Even during the Great Recession, I mean we didn't see more than a couple of quarters of negative POS and then things bounced back. We don't think where the economy is in that type of dire straits at all. So we're pretty optimistic still about how we move forward in light of the overall economic conditions.

And look, it's not just a printwear thing. We're seeing the same things in both socks and underwear, which are pretty consistent, basic type products that have never really seen unit volume downturn. So I think it's underlining overall economy is just not there. And I think that with the government stimulus, and hopefully, we'll get some of these things behind us, and business will improve into 2020.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Okay. That's helpful. And then my second question is just on the closure of the Mexican capacity and transfer to the Caribbean Basin and Central America. You said that that would take 6 months for you to do that. When will we first start to see that impact the business? And am I assuming that you've taken into your guidance in Q4 some of the lower sales that you would anticipate from closing down that capacity?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [23]

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Well, we've anticipated where we thought -- we think our sales are. If you -- we're projecting still to have higher ending inventories in Q4 relative to Q3 based on our sales assumptions. So we have enough inventory to support the market. The transition to -- Mexico to Central America will happen relatively quickly. It's going to be really 2 phases. We've also built up additional capacity that will help to expedite that in Central America with the equipment that we're going to move there. And then part of the equipment will also be moving to the Dominican Republic. So it's going to come in 2 phases. But I would tell you that the capacity that we're currently running in Mexico, which represents probably about 8% to 9% of our overall capacity, will be absorbed pretty quickly as we move into 2020.

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Operator [24]

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Our next question comes from Vishal Shreedhar of National Bank.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [25]

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Just on the destocking from the distributors, I was a bit surprised by the level of destocking. Was that anticipated by you when you saw the POS starting to decline? Or is that more of a question that these distributors expect the prices to go down on the T-shirts or apparel?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [26]

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Well, I think that the -- it's a function of the weaker POS and the environment, and distributors are being more cautious with their inventory. And business has been pretty strong over the last 24 months. And just in terms of their exposure, they're bringing down their inventories. So when business is good, inventories get normal high. And then when business is a little bit weak, they get normal low. I mean that's sort of the way you look at it, and that's the position we are in now.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [27]

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Okay. So it doesn't have to do with them thinking that prices potentially come down, looking at just the cotton trends over the last year or so?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [28]

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I think it's a function of the overall weaker environment.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [29]

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Got it. In terms of the Mexican capacity, is it -- could you just remind us in terms of the size of that business or that capacity that was there?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [30]

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It's around 8%, 9% of our overall capacity today.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [31]

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Okay. Okay. So in the past, the plan was to build out that facility, but now management says, given the current downturn, they have enough capacity in the pipes and you'll reinstitute that capacity in Caribbean Basin. But net-net, it will still be down relative to where you thought a year ago. Is that fair to say?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [32]

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No.

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [33]

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No.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [34]

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What we're going to do is -- first of all, we've been optimizing capacity. Rio Nance VI has started. We're expanding other parts of our operation, which we'll show you in Honduras in a couple of weeks. So what will end up happening is that installed capacity -- once we transfer all the assets from Mexico, we'll actually have an increase in capacity than what our current run rate is. So we'll move part of the equipment to Central America relatively quickly, which will maintain the -- and absorb the 8% to 9% that we're currently running. And then when we move the balance of the capacity to Dominican Republic, we'll get a net increase in capacity from where we stand today.

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [35]

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Just to add, Vishal. Sorry, just to add to that. Obviously, if we move over, we get a much better cost structure, right, as we consolidate that capacity, which will drive gross margin improvement.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [36]

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And just lastly here, when you said -- Rhod, when you said you were feeling good about achieving the targets, you were talking about the SG&A and the gross margin rate. Did that also refer to the mid-single-digit growth? Or is it just the SG&A and the gross margin rate?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [37]

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I was focusing on the margin and the SG&A. Obviously, we'll give guidance on growth as we give our -- we update for 2020. But again, I think we feel good about all of our key growth drivers and the tailwinds we're seeing.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [38]

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And just -- maybe just one point. Look, I mean we have 2 sides of the coin here. The printwear business is -- right now is a little bit weak, but our retail business is doing very strong and very well. We're excited about our whole positioning in our private brand segment. We've seen great sell-through of our products. We're anticipating additional shelf space in underwear as we move into 2020. We're looking to actually even grow our sock category as we move into 2020 and our activewear category.

So all the things that we've done as a company is really to focus on our core competency, which is focusing on leveraging our low-cost manufacturing in both segments of our business. So this is just a realignment that'll -- in the printwear to support continued growth as we move forward. But we're really looking forward to continued growth in our branded as we push into that market as we move into 2020.

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Operator [39]

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Our next question comes from Stephen MacLeod of BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [40]

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I just wanted to talk about the retail channel. You cited some incremental sort of caution around the Q4 expectation. Can you talk a little bit about what you're seeing in the underwear and hosiery segments and where that weakness is coming from? Is it specific to channels? Or is it fairly broad-based? And what you think is really driving that weakness.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [41]

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It was -- look, let's just say that printwear business is broad-based, and it's basically unit volume is down in both segments. So it's just a lack of consumer spending in the category really to be perfectly honest with you. So look at -- as far as we're concerned, we're positioned, we think, pretty good. I mean we're growing our share within a weak market in the underwear category. And in socks, we're not doing as well, but mostly because we got out of some mass business from last year.

So look, we are positioned, we think, in a good position to continue growing in all segments as we move into 2020, like I said earlier, because we're going to be obtaining new shelf opportunities in underwear and new programs both in socks and activewear as we move into 2020. So regardless of really the environments, we think that we're going to have a good growth here in retail as we move into 2020.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [42]

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Okay. And you did cite in your prepared remarks just some conversations you're having with retailers. I assume these are always ongoing. But is it fair to say that based on those conversations, you are sort of optimistic for additional private label programs as you roll into 2020 and beyond?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [43]

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We are very optimistic about gaining shelf space in underwear in 2020 and picking up new programs both in socks and activewear as we move into 2020.

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Operator [44]

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Our next question comes from Brian Morrison of TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [45]

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Glenn, in the printwear pricing environment, I want to know why you think your approach will differ this time than it did back in 2014 in a declining cotton environment. And what pricing is baked into printwear assumptions to be able to expand your gross margin and get SG&A leverage in 2020?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [46]

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Well, first of all, the big difference, I guess, in the -- compared to 2014 is that we have a much larger share of the basic business in the printwear market. So it is what it is at this point because of where we are in market. So unfortunately, if we see a little bit of negative POS, I mean it will come back. So there's nothing gained by pricing and losing share in that segment.

In the fashion part of the market, we still have a lot of room to gain share. But we're very competitively priced today in the market relative to the other high-cost competitors. So we've been taking share. We have a price advantage. We have a cost advantage. So we're well positioned. I mean -- so there's no sense for us to react to that.

I can't tell you today what the pricing environment will be next year. We will when we give you guidance. But overall, we think we're well positioned to continue taking share. Hopefully, the basics will stabilize as the market stabilizes, and we're going to continue to grow in the fashion segment and continue to grow also in the fleece segment as we move into 2020.

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Brian Morrison, TD Securities Equity Research - Research Analyst [47]

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So if things haven't structurally changed, Rhod, how do you approach the buyback, assuming that you've got the capacity on your balance sheet?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP, CFO & Chief Administrative Officer [48]

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If you look at the buybacks -- I mean if you look at the third quarter, our leverage was a little bit higher, right, as we moved through the quarter. But as we go -- move into Q4, we'll see that leverage come down. So we've got good flexibility under our program that we announced at the beginning of the year. We announced a 5% buyback program, about 10.7 million shares. Thus far, we bought back about 3.5 million shares. So you can expect that we're going to take advantage of that as we move through the remainder of the year and into early 2020.

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Operator [49]

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Our next question comes from Derek Dley of Canaccord.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [50]

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Just on the private label program, can you comment just on what you've seen there? I mean are you guys gaining shelf space within the retailers that you're currently servicing? And how do you sort of think about that business heading into 2020?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [51]

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Well, we think -- look, it's a structural change in the environment, and retailers are committed to driving their private label, which is a great opportunity for us. So as they continue to look at ways to expand on their private labels, we're basically there to support them. And we're pretty optimistic about our positioning as we move into 2020 and like I said earlier, in all 3 categories, both underwear, socks and activewear.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [52]

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And within private label, correct me if I'm wrong, but I think it's predominantly a North American business today. Is there any plans to take that international in the near term?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [53]

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There's opportunity to go international. But look, we have a lot of opportunity here domestically first. I think we're going to stay focused as we move forward in the next 12 to 24 months, but there's definitely an opportunity. And really, what we would need is we would need to [Bangladesh] capacity to be able to support that type of growth. So I think we're focusing on our North American customers, leveraging our capacity in Central America, and we're aggressively pursuing our expansion in Bangladesh, which we'll discuss in a couple of weeks with our investors in Honduras, but that would give us the opportunity to support any incremental private label opportunities in Europe and beyond.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [54]

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Okay. And then you mentioned the screen print market was slowing everywhere really, North America and internationally. Were any -- can you just kind of give a little bit more color on some of the international markets? Were some weaker or stronger than others?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [55]

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Well, our 2 largest markets are really China and Europe -- U.K., so those markets basically were soft. I mean just there's no recovery, right? So we all know what's happening in China and what's happening in the U.K. And we anticipated a bounce back, but it didn't happen. So hopefully, those things will work itself out as we move into next year.

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Operator [56]

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Our next question comes from Omar Saad of Evercore ISI.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [57]

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As you think about building -- continue to building capacity over time, can you talk about what gives you confidence given now that you're seeing this bit of demand softness? Is it really the expectation that demand bounces back within a few quarters? Or are there other things you can do on the capacity front should demand not bounce back or get materially worse from here? I just want to know what your flexibility is in the supply chain.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [58]

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Our flexibility is that, look, we're not depending and waiting for demand to bounce back in our printwear business. But what we're doing is we're driving aggressively the opportunity we have in private label. If printwear does bounce back, we'll have ample capacity to support that business. But we're taking the initiatives now to grow our top line through all those various opportunities we have in our major customers in the private brands area where, like I said, there's continued shelf space in the underwear, sock and activewear. And it's also as well as we're going to be expanding in our e-commerce as we move into 2020.

So that's a great thing about our business, is we have different areas. So maybe the U.S. printwear market is not going to grow as anticipated or because we can't tell that today, but we will have a good growth here as we move into next year with all the initiatives we have in place from a sales perspective.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [59]

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That's helpful. Can I ask for a follow-up question on the dollar program that you mentioned in the press release? I think I remember Family Dollar being a big sock program that you guys won several years ago. Why are you guys exiting that business? I think it was...

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [60]

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It was -- Dollar General is the one we exited, not Family Dollar.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [61]

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Dollar General, got it. What's going on with that?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [62]

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Well, it's just a low-volume business for us, low margin, and we just felt that it wasn't something we -- was part of our go-forward strategy.

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Operator [63]

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Our next question comes from Mark Petrie of CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [64]

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Just a couple of follow-ups. Given the slowdown in your inventory build sort of at the end of the year here, will that -- do you expect that will normalize through the course of the Mexico capacity coming offline?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [65]

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Yes, it will normalize as we move into next year. But even the inventory that we will have at the end of the year is not excessively high given the overall sales growth we've obtained over the last couple of years. So -- but it will normalize itself as we move into Q1.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [66]

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Okay. And just in terms of the slowdown in printwear, was it broad-based across your distributor customers? And was it relatively consistent across geographies? Or do you think it's been driven by a certain type of end customer or a specific part of the market?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [67]

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Look, it's difficult for us to understand all of the factors that happens in the market because obviously those end users is highly fragmented. But typically, we see that when corporate promotional products, apparel basically, gets soft, that's a big portion of the market. And -- but generally, I would say it's all markets, all products. And if you look at -- like I said earlier, fleece and fashion were up, but not just -- not up as expected, and basics were down and down more than expected. So I would say it's just broad-based, all markets. And the same thing with our international as well.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [68]

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Okay. And then I guess, in retail and mass, it looks like there's some changes underway at the shelf level. Just would be helpful to know sort of what the net effect is on your business. I mean you sort of talked about your expectations for growth in 2020, but is that underway today? And what would be your outlook in terms of the category overall of shelf space over the next kind of 12 to 18 months?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [69]

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Look, I can't say that right now because we're going to give guidance -- we'll give you guidance in February. But look, I would say that as we work with our retail partners, we're getting space allocated to us and -- as they keep driving their strategy. So we're comfortable that we will obtain additional opportunity in all segments of our business as we move forward to next year, like I said, and we're going to continue to drive top line growth as we move into 2020.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [70]

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And the changes in pack sizes there, is that just a -- or what's driving that, I guess? And what's the net impact on your profitability? Is it immaterial? Or what's behind that?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [71]

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It's immaterial.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [72]

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Okay. And just last, could you just sort of talk about your penetration or market share through e-commerce platforms versus in store? Is it pretty consistent? And do you see one as a better opportunity than another?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [73]

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Well, I mean our e-commerce business is up pretty good this year. We're expecting it to grow next year as well. We're leveraging our brands on our e-commerce platform. Our underwear's doing well in e-commerce. Our socks are doing very well. So it's a growth engine in the market, right? So we're just tagging on with the opportunity, continuing to drive our e-commerce platform.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [74]

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So consistent performance relatively between in-store and online like on a share basis?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [75]

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Yes. Our share's growing online.

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Operator [76]

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Our next question comes from Keith Howlett of Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [77]

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I had a question on American Apparel. I wondered if you could just overview how that's doing in the printwear channel versus expectations on acquisition and also how your phasing out of the ship-to-the-piece business would affect American Apparel. I think you have a direct-to-consumer component there.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [78]

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Yes. Well, look, American Apparel is still a strong brand for us. We're very excited about its positioning. We're going to put more resources behind it next year in terms of our promotional cadence to continue growing that brand. We're working on continuing to drive our e-commerce sales of American Apparel, and we have some opportunities to expand on that as we move forward, which we're going to announce in a short time from now, but we're very happy with our positioning where American Apparel is going, and we're definitely going to continue to support and grow the e-commerce side of that business as we look forward into 2020.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [79]

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And then just in terms of the sock business, there are a couple of questions. I was wondering how Gold Toe was doing. And also I was wondering whether NPD's industry numbers capture online sales as well as brick-and-mortar sales.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [80]

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Well, Gold Toe is maintaining its market share, but the market's down a bit. So it's going pretty good right now, to be honest with you, in a weak environment. And NPD is -- doesn't capture all the sales, but it's a good indicator in the way they do surveys in certain areas. So they get point-of-sale at specific retailers and they do surveys to put all the data together.

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Operator [81]

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Our next question comes from Daniel Biolsi of Hedgeye.

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Daniel Biolsi, Hedgeye Risk Management, LLC - Director [82]

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Glenn, with the tariffs causing companies to reexamine where they source from, can you speak to what you've seen in RFPs? And what's the biggest hurdle to winning that business for you?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [83]

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Sorry, will you repeat the second part of your question?

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Daniel Biolsi, Hedgeye Risk Management, LLC - Director [84]

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Sure. What's the biggest hurdle to winning the RFPs you're getting as companies look to source from different countries now with the tariffs?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [85]

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Well, look, I mean in our case, we think that look at -- China, in particular, is a large provider of apparel into the industry. They're not as large in basic t-shirts and sweatshirts and socks and so forth. So I think that -- it's very different type of product category. So -- but overall, I would say that people are nervous, and we think we're well positioned to continue to drive opportunity just because of where we're placed. I mean we're almost like a low cost -- we're a low-cost vertically integrated manufacturer.

Globally, that's almost like domestic if you really think about it because we're so close to the market. So this has played well to our whole strategy of continuing to drive our private brands market, where our customers basically see this as a win-win, is that they can rely on our cost structure, our CSR, et cetera, and still be close enough to market to replenish these products. So it's part of what's driving our sales. That's why we're pretty optimistic. That's why we're getting shelf space gains and new programs as we move forward into 2020.

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Operator [86]

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Our next question comes from Robert Pickels of Whitney & Company.

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Robert Pickels, Whitney & Company - Senior VP [87]

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Just curious about how some of these direct-to-consumer brands in the underwear and socks categories are impacting the business. I'm thinking of Bombas and Tommy John and there's a whole host of them. Is that impacting the business at all?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [88]

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No, I don't think so. Look, they're small in the overall scheme of things in terms of revenue. I mean mass retail is the largest provider of underwear in units in the United States and is still growing. Online retailers are doing good, but it's not -- it's very small relative to the overall size of the market today.

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Robert Pickels, Whitney & Company - Senior VP [89]

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And is there an opportunity to sort of leverage the strategy that those companies are delivering with their sort of new brands with an old and well-thought-of brand in Gold Toe?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [90]

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I don't understand your question.

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Robert Pickels, Whitney & Company - Senior VP [91]

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So going more direct to consumer with a really -- with a brand in socks of Gold Toe, which has a very strong reputation, but leveraging that kind of direct-to-consumer marketing effort that those companies are leveraging to gain market share in socks rather than distribute through retailers.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [92]

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Right. Well, first of all, a lot of those companies don't make any money. In fact, they lose money. So that's one thing. And the second thing is we're leveraging our online sales through our partners like Amazon. We're supporting all of our brands, right?

So when you look at how -- what the most effective way to get to market is, is there's a network of online providers like Amazon, for example, and other major retailers that are supporting our online sales. So I think that we've been able to leverage that platform, maintain lower SG&A basically and support growth in all of our brands.

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Operator [93]

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Our next question is a follow-up from Keith Howlett of Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [94]

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I was just wondering, on your Mexican plant, you -- when you bought Alstyle, the first thought was that that plant would be upgraded and might serve Latin America. I guess geographically, there's not too much difference, Central America or Mexico, but I'm just wondering what the main changes were in terms of your change of view as to whether to keep that facility operating.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [95]

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Well, the view is, is that as we look at our cost structure in the future, we feel that we can achieve a much lower cost by eliminating the facility. So that's the reason why we're doing it. And we're really allocating the equipment to existing facilities, so our costs will come down relatively quickly and support additional SG&A leverage.

And look, as far as these other markets, we can still service these markets out of Central America. So we have trade preference from Central America as well. So we're not going to lose visibility in any one of these markets at all, but we'll net-net have lower cost, consolidated our manufacturing in this hemisphere, reduce our costs and really focus our energy on expanding Bangladesh, which will be the new geographical hub that will really support the long-term growth of the company in both international markets as well as other product segments that we think will continue to grow.

So I think we're well positioned, and we're going to have our cake and eat it too with the closure of Mexico.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [96]

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And just one question on the Alstyle distributor business. Is that -- are you going to maintain that business going forward?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [97]

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We're going to continue to leverage our distributor channel, and that's what we're saying today, is that we're going to leverage our distributor channel to support the marketplace. So Alstyle will be, in the future, supported from our distributors basically to support the end users.

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Operator [98]

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

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [99]

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Thank you. I'd like to thank you all again for joining us today, and we look forward to speaking to you soon at our upcoming investor conference in Honduras on November 19. And with that, I wish you all a good day. Thanks.

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Operator [100]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.