Gildan Activewear Inc (GIL) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Gildan Activewear Second Quarter 2006 Results Conference Call. As a reminder, this call is being recorded. Our speakers today are President and Chief Executive Officer, Mr. Glenn Chamandy; and Executive Vice President, Chief Financial and Administrative Officer, Mr. Laurence Sellyn.

Before turning the meeting to management, please be advised that certain statements included in this conference may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and Canadian Securities legislation and regulations.

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 authorities; as well as the risk section of Company’s 2005 MD&A for a discussion of the various factors that may affect the Company’s future results.

I would now like to turn the call over to Mr. Glenn Chamandy. Please go ahead, sir.

Thank you. Good morning and welcome to Gildan’s second quarter conference call. I will make a few brief comments before turning over to Laurence, who will review details of our second quarter results and the forecast for the balance of 2006.

We achieved 38% EPS growth in the second quarter, which was ahead of our previous guidance, even though no upside was realized on our pricing assumptions. Selling prices declined by 1.5%, as we had reflected in our original guidance.

The pricing environment has continued to be irrational, although the fundamental factors would indicate more pricing stability. Inventories in the channel are in balance, and some major competitors have announced the closure of domestic capacity. Cotton prices in the second half of the year are expected to be higher than the first half of the year. Also, our largest distributor, which is not included in S.T.A.R.S. database, has been consolidating warehouses and reducing inventory, while Gildan sales through this distributor are increasing.

We are maintaining our second half guidance, in spite of assuming a further 1.5% reduction in pricing compared to the second quarter of this year, which will be offset by more favorable product mix and greater manufacturing efficiencies. Obviously our EPS is highly impacted by this pricing assumption, and there is considerable upside if more favorable pricing occurs.

We are committed to a business model of driving down our cost structure and achieving EPS growth objectives, even in a deflationary pricing environment. Our goal is to reduce costs by over $50 million U.S. over the next 24 months through four major initiatives.

One, we will ramp up the Dominican Republic facility to similar volumes and cost structures as Rio Nance by the end of fiscal 2006, and ultimately achieve our optimum capacity and cost structure in 2007. It is important to note that our current results reflect negative manufacturing efficiencies for the Dominican facility at this stage of the ramp-up curve. By the end of fiscal 2006, our cost structure is expected to be reduced by approximately $3 a dozen from today’s levels, with further improvement to be realized in 2007.

Second, we will ramp up our new Honduras fleece factory in fiscal 2007, which will result in savings of approximately $7.50 a dozen. We have, in this quarter, achieved over 30% share in fleece entirely based on our Canadian textile cost structure. Similar savings are expected to be achieved through beginning to produce sport shirts offshore as well.

Third, we will continue to rationalize our Canadian textile facilities, which are being downsized, to focus on small runs and specialty products. Our Canadian production run rate at the beginning of 2006 was 12 million dozen on an annualized basis, which will be reduced to 6 million dozen by the end of this fiscal year and at which point the Canadian textiles will represent 15% of our total dozens.

Fourth, we will aggressively continue to ramp-up our in-house sewing to support our new textile capacity and replace high-cost contractors.

We are beginning to install equipment to start production of our new, state-of-the-art sock facility in Honduras, and we are continuing to progress well with our potential acquisition of a U.S. domestic sock manufacturer in order to ramp-up our new facility in 2007.

Our overall retail strategy is progressing well, with continued penetration of small, regional retailers. Until now, we have been successfully selling our Activewear products. I am pleased to announce that we have now been awarded our first ever underwear program by a regional chain, which has approximately 70 stores.

Finally, I would like to welcome Bill Anderson as our newest board member. He is a highly regarded figure in the Canadian business community. Bill was Chairman and CEO of BCI and previously CFO of BCE. Bill is a former partner of KPMG, and will act as another member of our audit committee with a high level of financial expertise and an impeccable reputation for ethics and integrity. Welcome, Bill.

Now, I would like to ask Laurence to review our second quarter details and the balance of the year outlook.

Good morning. This morning we reported EPS for our second quarter of $0.51 per share, compared with our guidance of $0.45 per share, and up 37.8% from the second quarter of last year, before taking account of the special charge last year for the closure of our Canadian yarn-spinning facilities.

As Glenn said, selling prices in the quarter were down by approximately 1.5% from last year, in line with the pricing assumption in our prior guidance, which at the time we had thought might be conservative.

Our higher than projected EPS was due to lower than projected SG&A expenses, favorable manufacturing efficiencies, and more favorable product mix. EPS also included a $0.02 per share impact from the successful outcome of litigation that goes back to cotton purchases in 2001.

Compared to the second quarter of fiscal 2005, the increase in EPS of 37.8% was due to continuing growth in unit sales volumes and higher gross margins, partially offset by higher SG&A and depreciation expenses.

Sales for the second quarter at $183.8 million were up 11.2% from the strong sales performance in the second quarter a year ago. Unit sales volumes increased by 13.9%, due to continuing market share penetration and 5.9% growth in overall industry shipments for the S.T.A.R.S. distributors.

Our share in t-shirts in the S.T.A.R.S. database increased by 3.3%. Our share of sweatshirts, which continues, as Glenn said, to be entirely produced from fabric from our Canadian textile facilities, increased to over 30% and we maintained our leading share in sport shirts, in spite of not fully participating in heavy promotional activity in the quarter.

Gross margins were 33.4% compared to 30.1% in the second quarter of fiscal 2005. The increase in gross margins was due to lower cotton costs, which contributed approximately 420 basis points to the margin improvement; the reversal of the litigation reserve, which contributed 60 basis points; and manufacturing efficiencies, which contributed approximately 230 basis points to the gross margin improvement.

These positive variances were partially offset by lower selling prices which reduced margins by approximately 180 basis points; higher energy and transportation costs, which reduced margins by approximately 100 basis points; and inefficiencies related to the start-up of the new Dominican Republic textile facility and new sewing plants, which negatively impacted gross margins by approximately 100 basis points.

Further to Glenn’s point, we are anticipating significant cost reductions -- over $3 a dozen U.S. -- as we ramp up the DR facility to full capacity and maximum efficiency over the next 12 months, with the bulk of this cost improvement being realized by the end of this fiscal year.

Selling, general and administrative expenses in the second quarter were $20.7 million U.S., or 11.3% of sales, compared to $18.3 million, or 11.1% of sales in the second quarter of last year.

The increase in selling, general and administrative expenses was due to higher volume-related distribution expenses, the continuing costs of building our organization and infrastructure, including the costs of supporting our entry into the retail market, and the costs of SOX 404 compliance, as well as the impacts of the stronger Canadian dollar; partially offset by an adjustment to the reserve for doubtful accounts to reverse provisions no longer required for specific accounts receivable exposures.

The increase of $1.2 million in depreciation expense was due to the recent investments in capacity expansion projects. In particular, for the Dominican Republic textile facility and the expansion of the U.S. distribution center to add capacity and facilitate our entry into retail.

Due to the higher than projected EPS for the second quarter, we have raised our full year EPS guidance correspondingly from $1.90 per share to approximately $1.96 per share, which represents an increase of 26% over fiscal 2005, before taking account of the special charge last year.

Our EPS forecast for the second half of the year is unchanged, in spite of assuming a 2% reduction in pricing compared with the second half of last year. Our prior forecasts had reflected a 1.5% year-over-year reduction in selling prices in the second half of the year.

The impact of lower selling prices compared to our earlier guidance, as well as lower unit sales volumes, is expected to be offset by the benefit of the more favorable product mix and by increased manufacturing efficiencies as we continue to ramp up the DR facility and our new sewing operations.

The more favorable product mix and lower unit sales are inter-related, as we are projecting a higher proportion of sweatshirts and color t-shirts than in our previous forecast, which utilized more textile capacity than white t-shirts.

In the current irrational pricing environment, and in light of Gildan’s current capacity constraints, we are balancing the various elements, unit volumes, mix, price and cost to achieve our EPS growth objectives. As Glenn mentioned, we believe that industry fundamentals support more favorable pricing than we have assumed in our guidance for the second half of the year.

The quarterly breakdown of our projected EPS in the second half of the year is for projected EPS of approximately $0.63 in the third quarter, up 10% from the record EPS in the third quarter of last year; and EPS of approximately $0.56 per share in the fourth quarter, up approximately 19% from the fourth quarter of last year.

Capital expenditures for the full year are still expected to total close to $90 million for the full fiscal year, primarily to complete the first phase of the Dominican Republic textile facility, and for the Rio Nance fleece and sock facilities.

In addition, we expect to complete our evaluation of the acquisition of a sock company, and to be able to finance this acquisition, as well as our ongoing capital expenditure program, and an expense-able repayment of our U.S. senior notes out of cash balances.

That completes the formal part of our presentation. Glen and I are now happy to answer questions.

(Operator Instructions) Your first question comes from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Thank you. Good morning. Just wondering on the fact that you beat guidance by about $0.06 -- and that’s despite a 1.5% drop in selling prices that you originally thought was conservative, was it -- I missed part of the breakdown you gave out, Laurence. Was it mainly better efficiencies, or what’s behind that?

Well, I gave you a breakdown versus last year and a breakdown versus the guidance. Relative to the guidance, which is what you’re asking, it was a little bit of different things -- $0.01 for mix, $0.01 for cotton, $0.01 for efficiencies, $0.01 for SG&A, and then the impact of the Montgomery litigation that was resolved.

All right. Okay, that’s fine. In terms of the drop we saw in your sport shirts market share, is that essentially because it excludes some of your main customers? Or you also alluded to the fact that you weren’t participating in some price discounts, so maybe you could give us some more color on that.

Well as I said, it was because we did not aggressively participate in heavy promotional discounting in sport shirts in the quarter.

Okay. One final one, just with the new rules of origins that are coming through with CAFTA allowing you to use yarn from member countries as opposed to U.S. yarn, do you feel there is probably potential for you guys to switch yarn production to more favorable regions and maybe get more efficiencies that way?

In CAFTA, you still need to use regional yarn. You can use fiber from other countries but the yarn needs to either be produced in the United States or a CAFTA country. Was that your question?

Right.

The answer to that is that the economics really do not make sense at this point in time, because of the yarn that we manufacture today is not very labor-intensive. It’s capital and uses a high degree of electricity, which is quite expensive in Honduras, so there is really not a payback to move facilities and develop a yarn production in Central America at this point. All the cotton comes from the United States as well.

Okay, just one final, the underwear program that you were just awarded, can you give us an idea of the magnitude, I guess, of the order or maybe the timing of shipments as well?

It is going to ship between, probably the July - August period. Obviously it is a small retail chain with 70 stores, but I think the point here is that our whole process -- and really when you look at our retail strategy, what we set out is to build a better product with a better price and allowing our retailers to make more money with Gildan. It takes a little bit of time to develop and to sell to the retailers, but bar none, all of our retailers that we have talked to feel very comfortable with the plan that Gildan has set forth. This is just going to be a snowballing effect. As we start shipping our first program, we believe this is going to lead to many programs as we go forward into Spring.

We have quite a few retailers right now for Spring that are looking that were on the fence for Fall, but they are definitely looking for Spring to buy all of our products, including the Gildan socks and underwear. So in the August conference call, we will let you know who the retailer is, and the magnitude of the order.

Your next question comes from the line of Candice Williams with Raymond James. Please proceed.

Thank you. I was wondering if you could help me in terms of the inventory growth. For a breakdown, how much of that is to support retail and how much of it is to support wholesale growth?

You know, we do not have a lot of inventory currently right now to support retail because we use the same inventory for both, because we are selling the Activewear type products. We have built up a small portion of underwear to service the orders that we have going forward, but it is not that material to the overall inventory figure.

In terms of volume, your guidance is at a target of 20% volume growth, but that hasn’t been the case in this first half. Going forward into the second half, that requires a 24%, 25% volume increase. Do you think that’s reasonable?

What we have indicated in our guidance, Candice, is 15% volume growth in the second half of the year, not 20%; and that is because we are allocating our capacity to higher value products which utilize more textile capacities, such as sweatshirts and color t-shirts, so we have a favorable mix impact. What we are doing is managing, in this environment, our bottom line EPS growth to achieve our EPS objective.

I think I asked the question in the wrong way. In terms of actual kilos or amount of fabric though, it doesn’t really change the throughput?

Yes, in other words, it does change the throughput because when you are making white fabric, for example, you can produce a lot more in a specific machine. So we are utilizing 100% of our capacity right now, but because we are providing a higher value garment, which is color t-shirts and fleece, it takes longer to produce in a machine, so therefore it reduces the amount of kilos you are producing and ultimately reduces the amount of dozens you are producing.

Okay, thanks.

Just to make one last point on that, is that also during this year, as part of our margin improvement is that we have actually reduced the amount of textiles that we are producing in Canada, relative to the beginning of the year. As we ramp up the Dominican Republic, there is going to be a big switch, as I said earlier, that our Canadian dozens are going to go down from 12 million dozen on an annualized basis to 6 million dozen on an annualized basis by the end of the fiscal year, and only represent 15% of our overall production. So that also plays in part of our capacity, which is enhancing our margins.

So that would also explain then, I would guess, the drop in t-shirt market share from the first quarter to the second quarter?

I would say that the first quarter is not really representative of the whole year because it is basically only 15% of the unit volume within the year. I think that the share we had in the first quarter, which was roughly just over 40%, we will be in that level by the end of this quarter as well.

Okay. Thank you.

Your next question comes from the line of Kevin Berry with Wellington. Please proceed.

Good morning. Just two questions. Can you just be clear? It sounds like the pricing environment is relatively about the same as it has been, but in the release it says for the second half, it will be down about 2%. I think on the call, I think Laurence, you said down 1.5%. I just want to be clear on that.

The second question is, could you comment on the potential impact of the Russell/Fruit transaction?

As far as your first question, Kevin, what we said in the release was that selling prices will be down 2% compared with the second half of last year, but sequentially down 1.5% from the second quarter of this year. That is the explanation of these two numbers.

As far as the impact of the Russell/Fruit merger, you know, for competitive reasons we prefer not to really discuss that, other than to say we do not see any negative implications for the implementation of our strategic plan.

Thank you.

Your next question comes from the line of Sara O’Brien with RBC Capital Markets. Please proceed.

Sara O’Brien: Hi, guys. Glenn, I just wonder if you could comment on the irrational pricing in the market right now? What you think is driving it currently, and if prices stabilize, what impact would that have on your EPS guidance for the year?

Laurence will answer the impact and EPS I’ll answer -- we’ll go reverse the questions, okay?

Okay, so every 1% change in pricing would impact EPS by about $0.08 per share. So if pricing stayed at the same level as the second quarter, that would add about $0.12 a year to EPS -- not that we’re holding that out as a likely scenario, but that is what the impact would be.

Sara O’Brien: Okay, sorry, $0.12 for the remainder of the year or for the full year?

For the second half of the year.

Sara O’Brien: Okay, great.

As far as the pricing is concerned, it is difficult for us to comment on each one of these competitors. Some of them just filed their 10-K and they are losing lots of money, which you can question why would somebody be rational when they’re losing money? Certain competitors are scrambling to make EPS or make top line growth, so there are different factors of why people are irrational in their pricing, or just strictly losing market share, or trying to keep facilities up and running.

At the end of the day, we believe that the supply and demand is in balance, domestic capacity is definitely being reduce, not just from one particular announcement that was made a few months ago, but I think in general; and the price of cotton is definitely up in the back half. Those factors one would think would bring more pricing stability to the market.

We can only sit and wait, really, and we can just give you guidance based on what we feel comfortable with in a worst-case scenario.

Sara O’Brien: Fair enough. Just moving to gross margins, you are talking about cotton costing higher toward the back half of the year. Do you think Gildan and competitors are in the same boat, basically the hedging gain has sort of run out year over year in the back half of the year, so you get closer to where you were last year, or slightly above?

Everybody has to have a higher cotton cost year over year in the back half because of the fact that cotton was very low last year.

[Higher] cotton cost sequentially.

Sequentially, yes.

Compared with last year, our cotton costs in the second half will be slightly lower than last year.

Sara O’Brien: Okay, perfect. One last clarification, the $3 savings per dozen, is that just for the DR facility, or is that all offshore or consolidated?

That $3 a dozen is the difference between what our Canadian cost structure is versus our offshore cost structure. The DR today is running negative relative to our cost structure. Up until now, in the last two quarters in terms of our financial performance.

Sara O’Brien: Versus Canada, it’s running negative?

Negative versus Canada.

Sara O’Brien: Okay.

As we get towards the end of the year, our fiscal year September 30th, the dozens we are producing there will be equal to the cost structure of our Rio Nance facility, and because of the size and scope of this building, of the facility, it actually will be lower in the long-term as we bring the thing to full ramp-up in 2007.

Sara O’Brien: Okay.

So as we grow, so as we go into 2007, where we’re going to start feeling the effect of additional cost reductions.

Sara O’Brien: Great, thanks. I’ll circle back.

Your next question comes from the line of Monica Logani with Foresight Research. Please proceed.

Thank you. Just looking at the industry growth rates for the quarter, they seemed quite high compared to not even just last quarter but even last year. Is this due to the lower pricing? Is that what is driving this? Or are there some other factors that are affecting that?

If you look back the last eight years, industry has grown at around 7% each year, on an average for the last eight years, so this industry continues to have lots of growth opportunity, and partly the fact is that the pricing is irrational today, somewhat, but t-shirt pricing in general over the last 10-year period has come down where t-shirts are a vehicle, they are used as promotional vehicles, the pricing of them. There are no imports in the market because of the competitiveness of the industry itself.

So we believe that there is still a lot of growth opportunity even going forward. We have only projected though, in our forecast, of roughly about 2% to 3% industry growth, so if it continues to grow, again, that will be upside in the long term for us.

What about golf shirts specifically? That was very high. It was negative last year. What is causing that?

Well, the golf shirt industry has gone full circle, and a lot of the products that were what we saw as negative market share was really when the dotcom’s, it was a lot of the higher end products. Today what is driving the market, when Gildan got into the golf shirt market, we basically went after the more volume-priced products. That has actually rejuvenated the category, and we believe there is still a lot of upside in golf shirts as we become more competitive in this area, and unit volumes will continue to grow in the future.

So we can maybe expect to see kind of low single-digit type of growth rates for golf shirts going forward?

I would say so.

Okay. Then on the pricing, down 2% year over year, is that a worst-case scenario, or could it be worse?

Pricing is not within our control and we can’t predict the future, but that assumption we hope is a conservative scenario.

Okay, and just one more question on the inventory. Just looking at your churns, year over year they have slowed, and I was just wondering if you could provide some color as to why that is. Is that a retail thing or is that caused by something else?

Well, you know, we are going into a very large quarter this quarter, so our inventories at the end of Q3 will pretty well be in line, based on our capacity, our run-rate currently and what is going to be absorbed out of inventory.

Secondly, the inventories need to go up a little bit year over year because we are selling more product in Europe, which takes up more inventory. We have more SKU’s in our line, which take up more inventory, and as well as now we are in the retail arena, for which we have allocated some inventory. So we needed roughly about 1 million to 1.2 million in terms of dozens this year just to suffice the amount of inventory required to actually operate the Company. The balance will be sold through into the marketplace, so we’ll get a net increase of roughly about $15 million of finished goods inventory, I would say.

So it’s really a factor of your growth, just getting bigger, providing different types of products, increased products?

Correct.

Okay. Thank you.

Your next question comes from the line of Doug Cooper with Paradigm Capital. Please proceed.

Hi, guys. Just quickly, what was unit volume in the quarter?

Unit volume in the quarter was 9.5 million dozens.

9.5 million. And the average cotton price in the quarter was?

That we don’t give out, Doug, for competitive reasons. It’s very sensitive from a competitive point of view.

Okay. I think everything else has been answered. Thank you very much.

Your next question comes from the line of Martin Goulet with National Bank Financial. Please proceed.

Good morning. The first question relates to the warehouse rationalization of your largest distributor. It did not seem to impact you, so do you think that you can benefit once their situation is resolved?

We have pretty good momentum with that distributor right now. We did have some impact in terms of dozens being shipped. The sell-through through that distributor was greater than the amount of dozens we’ve sold that distributor over the period, so we are definitely bringing inventories down at their level, but yet sales are continuing to grow. Ultimately, we believe that there will be some positive outcome in the future.

Second question relates to the strength of the Canadian dollar, although you are phasing out your Canadian textile production, but assuming the currency, in a worst case scenario, goes to par, what would be the impact on the cost of goods sold and the SG&A versus what it was, let’s say a year ago? Would that maybe expedite maybe a further reduction in Canadian textile capacity?

Well as far as the SG&A, the impact of the stronger Canadian dollar in the quarter was about $500,000 year over year, so you can extrapolate from that. As far as the cost in sales, I mean, it is difficult to give out a number for you, because it depends on what our production level is, which has been coming down. That would be something that would be part of continuing to evaluate the cost effectiveness of the Canadian production as we go forward.

Thank you very much.

(Operator Instructions) Your next question comes from the line of Claude Proulx with BMO Nesbitt. Please proceed.

Thank you. Just one quick question. In talking about the SG&A, Laurence, you mentioned reversal of doubtful accounts. I remember vaguely that you took some reserve a few quarters ago. Can you quantify it please?

Well, the net impact was about $0.01 in our EPS in this quarter.

Okay. Thank you. That is all.

Your next question is a follow-up from the line of Sara O'Brien with RBC Capital Markets. Please proceed.

Sara O’Brien: Just some clarification on the unit volumes. I guess, Laurence, you talked about unit volumes being -- let’s say they are a little bit lower than some of the Street estimates because of product mix. How does that shift going forward? I mean, are you at a point in fleece where you are kind of maxing out the market share and then you are going to drive into more t-shirts? How do you expect the pricing to work in product mix going forward with these volumes?

That comment really related to the second half of the year, where we are projecting a higher proportion of fleece and color t-shirts. You know, our requirement to maximize the allocation of our capacity will be relieved as we continue to ramp up the capacity in the DR and reduce the cost structure of the DR, so we won’t be in the situation of allocating our capacity to optimize product mix.

Sara O’Brien: Can I infer then that your unit volumes should actually pick up into ’07, but maybe the product mix would be slightly negative because you will be into more plain whites versus color and fleece?

One thing for sure is that all this color product that we are selling and all our fleece, we have huge momentum both in the fleece category right now, as well as the industry -- we are driving a lot of this color business in the market, and the actual color percentages are going up, so we believe that we are going to continue to sell more color, we’ll have more capacity, but really where the opportunity for us is going to be is to capitalize on the white mix, which is not equal to the percentage of market share that we have today currently.

The incremental capacity that we are adding will be very low-cost capacity in the DR, that will allow attractive margins, even on white basic t-shirts.

Sara O’Brien: Okay, but is it fair to say though that there will be a bit of unit volume catch-up in ’07 from what it is in ’06?

What we are projecting in terms production or sales, we are projecting to --

We are not really ready to provide any guidance on sales for ’07 at the moment, other than to say that with the ramp-up of the DR and the new capacity coming on-stream, our capacity constraints should be alleviated.

The point I was going to make was that our year-end production is going to be in excess of 40 million dozens by September 30th. So we are going to have sufficient capacity as we go forward to reach the demand for next year.

Sara O’Brien: Okay, good. Just on the inventories, you are at about 150 days. I know it’s typical for it to grow with your growing sales, but is that about a level that we should expect to continue? I know there is some seasonality to it, but are inventories particularly high now? Are you comfortable with the level?

Looking at inventory, looking at days in inventory, looking at that on a going forward basis, we are way less than 150 days, Sara. It is more like 110, which is lower than it was at the comparable time last year.

Part of our inventory builds right now is we have a little excess related to the DR build-up as well, which is going to work itself out over the next couple of months.

Sara O’Brien: Okay, great. Just a question, you talked about growing with your main distributor despite the consolidation in the warehousing. Would this represent a greater proportion of your overall business now, or is it still around the 30% level?

It is still around the 30% level.

Sara O’Brien: Okay, great. Thank you very much.

Your next question comes from the line of Philippe Habeichi with Genuity Capital Markets. Please proceed.

Just before you ask your question, Philippe, I just want to clarify in response to the previous question, that the days sales I gave were for total inventory. If you look at finished goods inventory, it would be about two-thirds of that.

Okay, go ahead, Philippe, sorry.

Thank you. I am just wondering, what kind of beneficial mix impact should we take into consideration in the second half of the year?

Do you mean in terms of impact on EPS?

EPS if you can, or gross margin in terms of basis points.

Well, in terms of EPS relative to our previous guidance, the more favorable mix would be about $0.04 positive impact.

Okay. Thank you.

Your next question comes from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Thank you. Just wondering if you could give us an update on the potential sock acquisition and your progress there in evaluating alternatives?

Another question relating to that is that assuming you do find an attractive acquisition by mid-year, how quickly can you realistically ramp up the sock facility output, meaning incorporate the additional capacity that you would be acquiring?

Well, it is very realistic in terms of our approach in terms of acquiring a sock company. We hope it will be complete in the next couple of months, which will coincide with the build-up of our facility, which is going to commence production -- the equipment is being installed now and will commence production around early July. The type of capacity or the size of company we are looking at would fill up this facility, so it will be a function of how fast can we fill it up in terms of training the people and getting it up and running.

We believe that by ’07 we would have a lion’s share of the production in-house in our new facility. It might take a little bit longer than that, but the bulk of it we should be able to do by ’07, definitely into the first quarter of ’08, we’ll be complete.

Great, thank you. A question that I guess always circles back, relates to your SG&A spend to support your retail entry. Do you still feel that you can maintain the similar SG&A percentage as the potential sales going forward?

Yes, definitely.

Great, thank you. That’s it for me.

(Operator Instructions).

Okay, if there are no more calls, I would like to thank everybody and we will see you next quarter. Thanks.

Thank you for your participation in today’s conference. This concludes the presentation. You may all disconnect and have a good day.