Gildan Activewear Inc (GIL) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Gildan Activewear earnings conference call. And at this time all participants are on a listen-only mode. We will facilitate the question-and-answer session towards the end of the presentation. (Operator Instructions). I would now like to turn your presentation over to Ms. Sophie Argiriou, Director of Investor Communications, please proceed.

Thank you, Eric. Good evening, everyone, and thank you for joining us. Earlier this evening we issued our press release announcing our earnings results for the first quarter of fiscal 2009 and our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents have been filed with the Canadian securities regulatory authorities and the US securities commission and are also available on our website at www.gildan.com. We have also made available on our website as was announced on January 30th historical statement of earnings and comprehensive income recast to reflect the impact of adopting certain changes in accounting policies pursuant to recent changes in Canadian GAAP. These changes comprised of the requirement to include depreciation expense related to manufacturing activities, to cost of sales and we have also reclassified certain other items in our earnings statement.

Joining me on the call today are Glenn Charmandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Before we begin I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US 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 US Securities & Exchange Commission and Canadian Securities Regulatory Authority that may affect the Company's future results. I would now like to turn the call over to Laurence. Go ahead Laurence.

Good evening. We will review first the highlights and key points of our first quarter results which we released this evening. Then discuss the impact of the macro environment and our reasons for our decision to suspend our earnings guidance for the balance of the fiscal year. EPS for the first quarter was $0.04 per share at the high end of our guidance range for the quarter, but down significantly from $0.24 in the first quarter last year before restructuring charges.

The first quarter is seasonally the lowest sales quarter of our fiscal year. In addition to the low seasonal level of sales in the first quarter, sales were severely impacted by 12% decline in shipments from US wholesale distributors to screen printers and significant inventory stocking at the distributor level during the quarter, resulting in a total reduction of 28% in Gildan Activewear and underwear unit sales, and a very low level of sales to cover fixed overhead during the quarter. In addition, cotton costs were at their lowest level in the year in the first quarter of fiscal 2008 and are expected to be at their highest level in fiscal 2009 in the first quarter based on our cotton purchase commitments for the balance of the year. Also inventories consumed in cost of sales in the first quarter reflected energy purchases at close to the peak of the commodity cycle. Compared to last year, the reduction in EPS was primarily due to the decline in unit shipments of activewear, the higher cotton and energy costs reflected in inventories on consumed in cost of sales, lower unfavorable activewear product mix and an approximately $2 million increase in provisions for accounts receivable. These negative variances were partially offset by more favorable manufacturing efficiencies and higher net selling prices for activewear, which were approximately 2.5% higher than the first quarter of last year.

I would like to provide more details on the reduction in sales compared to the first quarter of last year. Sales of activewear and underwear declined by 31% to $116 million compared with $168 million in the first quarter of fiscal 2008. Unit sales declined by 28% compared to last year. We attribute approximately one million dozens of the decline to lower shipments from distributors to screen print and close to 1.7 million dozens to inventory reductions by distributors during the quarter. These negative factors were partially offset by an increase of 600,000 dozens attributable to higher market share in the US screen print channels compared to last year and increased sales of underwear. Our market share in T-shirts was up from 50% last year to 54.2% and our share in fleece increased from 49.1% to 51.9%. Our share in sports shirts was unchanged at 35.4%. In addition, activewear sales in the quarter were impacted by more unfavorable product mix due to lower proportion of sales of fleece and long sleeve T-shirts.

Sales of socks also decreased by approximately 17.3% compared to the first quarter of last year in spite of an extra two weeks of sales from the Prewett acquisition. The decline in sock sales was due to the rationalization of unprofitable sock product lines undertaken in fiscal 2008 and due to inventory reductions by retailers. Unit sales of Gildan socks from the Company's major retail customers to consumers were essentially unchanged compared with the previous year in spite of weak overall retail market conditions. Gross margins in the quarter were 21.1% compared to 26.2% in the first quarter of last year, after reflecting the reclassification of manufacturing depreciation and certain other expenses to cost of sales as previously explained in our year-end MD&A. Annual and quarterly comparative figures have been provided in the investor relations section of our website. The decline in gross margins compared to last year was due to higher cotton and energy costs which reduced margins by approximately 750 basis points, more unfavorable product mix, which reduced margins by approximately 250 basis points and higher depreciation absorbed in cost of sales, which negatively impacted margins by 100 basis points.

These negative factors were partially offset by nonrecurrence of sock inventory write-downs in the first quarter of last year and favorable manufacturing efficiency, which positively impacted margins by 450 basis points, after taking account of the unfavorable impact of additional packaging costs related to the transition later in the year in our sock private label brands and the impact of increases in labor rates in our manufacturing operations. Our manufacturing operations including the Dominican Republic facility are running well. Also the positive impact of higher activewear net selling prices enhanced gross margins by 150 basis points. Gross margins in the first quarter of fiscal 2009 on a pro forma basis without giving effect to the reclassification of manufacturing depreciation and other items as previously outlined would have been just over 27% compared to 31.5% a year ago.

Selling, general and administrative expenses after reflecting the reclassification of certain items in [both] years increased by close to $2 million due to the increase in our accounts receivable provision. Other positive and negative factors including higher legal and professional fees, lower volume related distribution expenses and the impact of the lower value of Canadian dollar were offsetting. In the quarter we generated free cash flow of $3 million after capital expenditures and a payment of approximately $24 million of income taxes related to prior fiscal years. We generated approximately $120 million from accounts receivable collections and our wholesale distributor customers were and continue to be up-to-date with their payments and generally in compliance with our normal credit terms with the exception of the distributors in connection with which we have taken specific provisions.

Inventories increased by approximately $66 million from a low level in the first quarter of last year due to an increase in finish goods of activewear to service anticipated market demand, combined with impact of higher cotton and energy cost included in inventory. Although we are comfortable with our inventory levels at the end of the quarter, management will monitor inventory levels closely in the context of market conditions given the current economic uncertainties and plan production downtime if and when required to appropriately manage inventory levels. We ended the quarter with net indebtedness of $37 million and subsequently continue to have continued unused borrowing capacity under our $400 million committed five-year bank credit facility. We have continued to track our December guidance assumptions through the end of January despite of continuing difficult market conditions. And net selling prices continue to be more favorable when assumed in December.

Preliminary S.T.A.R.S. data for the month of January indicates Gildan continued to significantly further increase market share compared to the December quarter. Although the same report also indicates a significant decline in unit shipments from US distributors to screen printers compared with January 2008. While we have always maintained the view that monthly demand fluctuations are volatile and not necessarily indicative of trends, the January demand data reinforces uncertainty regarding the severity and duration of the current economic and financial crisis, the resulting outlook for consumer and corporate spending, and the potential impact of the downturn in the economic environment on the markets and customers which we serve. Consequently it is increasingly difficult to provide investors with reliable forecast of end-use demand and distributor replenishment against the background of the current unprecedented economic uncertainty and volatility.

If specific concern in light of the growing economic and financial crisis is that although we currently have no overdue accounts receivable which we have not appropriately provided against, continuing weak end-use demand and tighter credit markets may affect the financial condition and liquidity of wholesale distributors, resulting in increased credit risk and a need for the Company to balance short-term market share in the screen print channel with such increased customer credit risk. Rather than further widen our previous EPS guidance range which was already wide in order to take account of these uncertainties, we have decided for the present to suspend EPS guidance. In addition to EPS other financial performance metrics on which management will place emphasis in fiscal 2009 are free cash flow and balance sheet leverage. Consequently in the current economic environment Gildan also intends to prudently manage its receivable and inventory levels and its capital expenditures. Inventories will be carefully monitored in relation to market conditions as they evolve and the Company will evaluate the need for production downtime if required to allow inventories to sell demand.

The Company is continuing to defer construction of of its Rio Nance Five facility until the economic outlook can support a further major capacity expansion becomes clearer. In addition the Company has decided to proceed cautiously on other expansion projects and defer the ramp up of its second sock manufacturing facility in Honduras. Gildan plans to transfer its US sock finishing operation to an existing lease facility in Honduras in order to achieve planned manufacturing efficiencies without incurring major capital costs or creating significant new industry over capacity. The Rio Nance Four building will be utilized as a distribution center while sock capacity expansion requirements are reassessed in order to accelerate our international growth opportunities. Capital expenditures for fiscal 2009 are now projected at approximately $80 million compared to the Company's most recent forecast of $115 million. As we manages through the current economic uncertainty in fiscal 2009, we will continue to focus on enhancing our long-term strategic positioning. In particular we intend to insure that we continue to optimize cash flow and maintain our strong balance sheet and finance capacity to be able to take advantage of any strategic opportunities that may result from the current economic turbulence.

Thank you, Laurence. Before moving to the Q&A, since there are a number of people who would like to ask a question I would ask that you limit your initial questions to two or three, and then re-enter cue to ask additional questions should time allow. I will now turn the call over to the operator to begin the question-and-answer session. Eric?

Thank you. (Operator Instructions). And stand by for your audio questions. (Operator Instructions) Your first question comes from the line of Sara O'Brien with RBC Capital, please proceed.

Hi, guys. Can you talk about the suspended guidance, is this because the market is deteriorated worse than you expected when you gave us the guidance for '09, or is it because you don't know at this point, or is it because credit risk you think will impact the results coming out? Like which is the biggest, I'm sure it's a combination, but what's the biggest factor behind suspending guidance here?

It's not that we have seen further deterioration in excess of the assumptions that we made at the time. It's more the continuing uncertainty and unpredictability and particularly how this might impact the replenishment of inventories and inventories carried at the distributor level. Also as we mentioned, big factor is as these economic conditions continue and this uncertainty continues it can potentially affect the financial condition and of our wholesale distributor customers. Also the fact that the tighter credit markets and that will -- the impact of that will be to cause us to carefully balance aggressive incremental market share with evaluating our credit risk. So that's the main uncertainty that we know that is causing our decision to suspend our guidance. As I said in the comments, one option we had was to build these uncertainties in by widening our guidance range, but we though the most appropriate thing to do was to suspend our guidance while we gain better visibility.

Okay. And maybe just on the -- is Glenn there with you?

Yes, I'm here.

Hi, Glenn. Maybe just on the pricing front, it sounds like you've discounted. Is price discounting, I guess in this environment it's tough to say, but are you winning the kind of market share you would expect or would you expect to go further on price discounting to test how much you can push volumes out there?

Well, the reality is part of pricing strategy obviously is to try and gain as much market share as possible, but the reality is that there's a point where no return in terms of spending my good money after bad money. So what we found so far is that, we did get -- we are getting our incremental market share with spending less money on the promotional side and managing our credit risk also the same time. Putting these things together we think we can still generate and penetrate our market share objective, and our objective obviously is to take the least amount of exposure as possible. And partly is that business is relatively bad we can see the type of decreases in the market, so it's not a fundamental case where we're creating new business, I mean there's only so much business to be had. So we did some promotions in December, it created a lot of demand, in the month of January the market was down significantly and part of that could have been we pushed product from one period to another period.

So not necessarily are we gaining overall business by continuing to put price pressure on the market, but we believe the momentum of our brand and our position in the marketplace will allow us to continue gaining the shares that we have our objectives we set forth for this year.

Sara, just to finish off, just to reiterate the net selling price in both the first quarter and through January were lower than the levels that we had assumed when we gave our guidance in December.

Okay, I'm sorry I misunderstood that so they were lower than the 7% to 9% that you guided to.

Net selling prices are higher, sorry, discounts are lower than in the first than we had assumed when we gave our guidance both in the first quarter and in January.

Okay. And maybe just related to the managing the credit, I notice your receivable days are down to 30 days. Is there like an anomaly in this particular quarter?

Our trade receivables are in the low 40s Sara. So not quite sure how we're arriving at that.

Okay, I'll take a look at that. And just a last question, if you do decide, Glenn, to shut down some production capacity how, how bad an impact could that be to gross margin, like how much operating leverage is in there. You talked about in Q1 cotton and energy being really high, that's a negative impact to gross margin. But if you have to shut down some of your production do you have a sense of how low gross margin can go?

Well, first of all, we're still running at our existing operating plan that we set forth in the beginning of the year. We took a couple extra days in one of our facilities at Christmastime, but we're basically running at full capacity right now. And we're going to manage our inventory levels, we're comfortable with the inventory level we have now. We're not going to necessarily let them grow from this point on. So in the event we do take some downtime we will take it out let's say for example in big chunks like a week at a time to bring down our and manage our inventories. For every week of inventory that we take out of our manufacturing facilities is roughly about a $0.03 impact to the EPS.

Okay. But at this time you have no immediate plans to shut down for specific weeks during the year?

Right now we're going full speed and we're going to continue to market the market conditions and manage our inventory appropriately. In the event that we see conditions deteriorating we will take some time-out, but what's more important is our plants are running at 100% efficiency. Rather than taking the plants down to a 70% level for the year, we're running them so we can capitalize on the opportunity in the case the market does pick up and there's incremental opportunities for us along the way. So we will take it out if we acquire it and the cost of every million dozens we take out of our production, our manufacturing production will be around $0.03.

Sorry one million, okay, that makes sense roughly. Okay. And then just lastly on the wages, the wage increases in Honduras outside of the [macapadora] territories, what, what's sort of in your expectation for wage increases going forward from now, do you expect to have to boost them significantly or how do you feel about that?

We don't see any significant increases in wages for next year. That increase that was nontextile related is really for government and it's actually being contested. As far as we're concerned we feel comfortable that we will have a very normalized increase in wages which is already factored into or plans.

Okay, great, thanks.

Next question comes from the line of Jessy Hayem with TD Securities, please proceed.

Thank you, good afternoon. Just on the market share gains that you have been able to obtain I guess this quarter likely because of the discounting that you have put through, I'm curious to know if there's a way for you to gauge this kind of crossover that occurs to the Gildan brand, if it's permanent or if you feel maybe once the discounting not there some of that could go back, any color you can give us on the type of clientele you're gaining from the discounting.

Well, first of all the discounting wasn't gained necessarily market share gain. Market share gain is because of the brand and just the way we market our products in general and the momentum we have behind Gildan as a Company. The reality is that when we promote most of the industry actually matches these prices. So it's not that we have a big price advantage in the market. The objective of launching the discounting in the month of December was actually to stimulate demand to the end user and get people to start buying T-shirts similar to any other industry. So we don't think that we need to have promotion to actually gain market share, because there's no secrets out there and everybody's going to react. So at this point in time, we believe that the momentum we have on our brand and our products is sufficient enough to continue driving share.

We will promote our products only because we want end users to -- encourage end users to buy our products. If you look at the industry what's happened is that a lot of the higher, high end selling products are actually moving slower relative to the basic T-shirt category. So T-shirts are still -- if you look golf shirts are down more significantly for example than T-shirts. T-shirts are still a product of choice, especially in a recession environment. And the price of them makes it palatable for people to use them as promotional vehicles and giveaways. So therefore that's sort of our positioning as we go forward.

Right. So if I understand though correctly also from the statement you mentioned earlier that you may be willing to forgo some of the market share gains to refrain taking some at-risks in certain cases.

I think we want to mitigate our exposure from a credit point of view. Objectively we still want to try and gain as much market share as we can.

Okay. And then Glenn, I'm not clear I guess on what's going on with the socks transfer given that you're deferring the Rio Nance Four ramp up. I think originally you were saying first of all there's a transfer of sock finishing offshore, that's to be done by June, and then on a separate note I think with the deferral of Rio Nance Four, can you go over that so I guess I'm sure we're clear on that?

Sure. What we have done basically is what we have left in the United States is knitting operation as well as packaging and finishing facilities. And the differential in cost between North American production and let's say Honduran production, there's two components. The knitting is more capital intensive and machine driven, similar like the textiles, and the packaging is more labor intensive, similar to a sewing operation. So we're moving all the finishing operations which we intended to move, in temporary warehouses, temporary facilities prior to Rio Nance Four getting built. Rather than moving them into four we're going to keep the temporary buildings and execute as fast as possible to move that production to Honduras. So all the high labor content production will be shifted to Honduras by the end of our third quarter.

And if you look at the savings on a per dozen basis probably 70% of the savings is in that labor intensive operation. So we're still going to account for the bulk of the savings, but what we're going to do is avoid the big CapEx for example, partly because we're not going to buy like new equipment, we will run the existing equipment that's already located in the premises in the United States. So we're going to defer Rio Nance Four, it's going to be used as a distribution center to help execute our international strategy and develop the markets we talked about in the past which we're pursuing aggressively, and we spent a lot of time moving product from our facilities into those functional markets in the Q1 additional sales as we go into the balance of the year. So the building will be utilized and it will actually help us from a marketing point of view to help with international markets.

Okay. Actually on that subject, that was my third question. Could you talk to the progress that you have made in international markets seeing that of course these markets were penalized in 2008 because of your lack of capacity? Have you started to sell a bit more into those markets, and just I guess any color you can give us on the progress you've made there?

We're heading in the right direction. Our business in Europe was down in October. But as we started bringing inventory in the marketplace we started seeing a rebound in November and December. It's really taken us -- we had no inventory at the end of September. Just share a little light on the inventory number we have right now, if you look and I just want to make this point, because I think it's part and parcel of really where we stand today, but if you look at last year in Q3, we carried over 3.5 million dozens of orders on our books from Q3 from the beginning of April all the way through the end of August. And as well as we have to destock all these other warehouses that we have like in Europe and Canada, in Mexico, we had to actually stop shipping products into those functional markets because we didn't have capacity available to them.

So when you look at our actual inventory today ,and you say well, how much inventory do I need from the September point, okay, and say look because our inventory were to low in September, well if we missed 3.5 million dozens in the height of the selling season, plus we need to add probably over a million dozens, we probably think even to 1.5 million to some of our functional markets, that five million dozen increase going to the peak of the summer selling season is a realistic target of inventory and that's approximately where we are at the end of Q1. So we feel comfortable with our inventory number. Now what we've done during Q1 is we started moving this inventory into Europe into different market places so we haven't had the effect of additional sales because we didn't have everything ready. But as we go forward into the balance of the year we're anticipating to do whatever we can to penetrate these markets.

Okay, fair enough. And I guess you have a good gauge of demand being there to move that inventory from your warehouses into I guess customers hands?

Yes, we do. We feel comfortable with the levels of inventory we're going to bring there, and once you're fully in stock it gives you really the ability to service -- it's not people it's not just about price, I mean there's quality, there's service, there's a lot of things that happen, and we need to make sure that we have all ducks in a row basically to really do a good job in these functional markets.

Okay, thank you, I'll circle back for more.

Thanks.

Your next question comes from Eric Tracy with BB&T Capital Markets, please proceed.

Yes, good afternoon. Maybe just to follow on the question in terms of inventory, possible break downs for what was finished goods versus sort of you mentioned a higher commodity prices for the quarter, Laurence?

Yes. The -- out of the $66 million or $67 million that I mentioned, about $18 million was due to higher cost in energy costs and $65 million was higher finished goods. And the balance was lower raw material and work in process.

Okay. So just thinking through the dynamic of again trying to manage inventories at least at these levels yet still running at full capacity, how should we think about sort of the assumptions around the unit volume expectations for the balance of the year? I know you're not giving specific guidance, but is it directionally speaking sort of staying as is, and if it does do you then have to shut down production or is there some implied kind of turn from that unit volume?

Well, there's seasonality in the business obviously that affects demand. We are expecting lower sales in Q2 and then an improvement in Q3 as we start comparing with the lower base when we were capacity constrained in the second half of last year. And also the comps in Q3 and Q4 were down compared to the previous year. So they already reflected some downturn in the market.

Okay. But within that is there some sort of expectation of overall macro or market turn from existing levels sales declines?

What did we say 10%.

I don't think -- we're not providing guidance, we had said in December 10% overall decline in demand from distributors to screen printers. And I'd say that question at this point would be more the levels of inventories that distributors will carry rather than demand.

Okay. And then maybe either Glenn or Laurence, just in terms of the capacity, any chance having the flexibility to maybe reallocate some of that capacity as opposed to shutting down to maybe going after some retail programs? I know the demand there is weak as well, but doesn't seem to be as weak as the wholesale channel, I know that takes time setting that up. But any opportunity maybe in the back half of the year to chase some of that business at retail?

I mean we're working as diligently as possible obviously in every aspect of our business, international, retail to secure and look at all the opportunities that we have in hand. That's one of the main reasons why we're running our business and our capacity at full level and taking weeks at a time. So in the event there is opportunity we can capitalize on that opportunity quite easily and we can turn off and on our capacity relatively quickly. So that's really our objective.

In the retail front we continue to make in roads. We picked up another 700 store chain company called Fred's this year, which we rolled out our Gildan underwear to 700 stores in December. After the first six weeks of us actually selling our products there with our value proposition we're actually outselling the national brand that they have in that store by over 34%. So our retail strategy is working. We're continuing to pick up new customers. We picked up about three or four new customers this year, smaller in size, like a Fred's, which is still significant for our business and our strategy is go forward. But I think one of the big fundamental opportunities that we have right now is that looking at our major retailer, which is Wal-Mart right now, were going through a major change with them in terms of developing all of our packaging and converting existing brands that we serviced them in the past to the new brands that they are operating. I'm not sure if you followed but they made a big announcement this week that they're actually moving all their buying to New York basically from [Bennetville].

Yes.

And the people in New York actually are responsible for actually driving a lot of their private label strategy as a Company. So this is we think will play in our favor pretty good, because we think that their whole focus as they go forward is going to continue to develop their brand strategy. And as we continue to work closely with them and roll out these types of products like socks under their new brand names, that they're upgrading value quality relationship that the potentially be opportunities for the other categories. As well as, every time the retailers make significant changes like this, they're basically going to have a complete new buying staff, so all the old relationships that they have in the past really won't be as entrenched as they are going forward which also give us a very good opportunity to look at potentially new business. And so we're really excited actually about some of the opportunities we have going forward and believe me we don't miss a minute trying to look at what we can do to continue to enhance our opportunity in light we have additional capacity.

So just a real quick follow up on that, just in terms of that potential new buying would you say there's a shift at Wal-Mart or the major mass retailers in terms of increasing their private label mix and your ability to capitalize on that? And as a result of that is your sort of strategy shifted, because I know you were thinking parallel both branded and private label, are you now maybe focused a little bit more just on the private label side?

Well, I think in the case of Wal-Mart, I mean we think they're definitely making a big shift into private label. That's why they have made this whole decision we believe this is only our opinion of obviously moving to New York and the same team that's going to be basically was hired to run their private label division is now going to be responsible for all the buying. So we think that's the direction we're heading, they're heading. We believe that this is going to create opportunity for Gildan and we're going to continue to pursue our branded strategy and companies like threads and some of these original accounts, it just takes a little longer. But we're still pursuing both strategies and the people that are carrying our brands are doing very well with it. It's outselling and is still doing very well. We're doing a combination of both. We're not drawing a line in the sand saying, we're strictly focusing on private label. We think that's always been our focus from Wal-Mart and we're their largest private label sock supplier today and we plan to extend that to other categories as we go forward.

Okay. Fair enough, thank you guys.

Next question comes from the line of Sarah Hughes with Cormark Securities, please proceed.

Hi guys, just further on the move into the retail market. If you were to win some new larger programs in 2010, when would you be awarded those programs?

Well, we're constantly working with retailers. There's no set thing, it depends on if it's replacement program, is it something new they're putting in the store, there's no specific timing. But really right now we're working -- now's the time to start working for spring of 2010 as between now and the May period.

Okay. And then Laurence in your comments you indicated that January industry shipments I guess from S.T.A.R.S. data were down versus last year. Just wondering if you give us some sense what they were versus the November, December timeframe.

Well I caution you that this is preliminary data that may change. But the preliminary S.T.A.R.S. number was down just over 20% compared with January a year ago.

Okay.

And at the same time as I mentioned our market share increased significantly compared with the first quarter.

Okay.

Just to make one more point to that is that in December because of the heavy promotion that we had which we believe affected the actual sell-through in January, because we ended up pulling some dozens forward. And in the first two weeks of January there was really very limited promotion activity. So a lot of that has to do with moving dozens around. We don't know if that's directly in the relationship to the market, that's why we have to take some of these promotions in a grain of salt really in terms of how we're positioning and how we go forward from this point.

T-shirts were actually up in the month of December.

T-shirt sales were up 2% in the month of December off of November big decrease. So could those sales have been up due to the fact people bought early because of the pricing activity, and therefore the first two weeks in January, there was no promotion, we lost sell through. So that's something that we're monitoring and if you take those two months on a whole the average would be 10% which is in line with really our forecast as we went forward into the balance of the year. So that's why we're not sure necessarily if the significant discounting is going to generate incremental business as an industry and we really don't need it to drive more market share.

Okay. Thanks. Okay, and then just lastly. Wondering Laurence, if you can provide some indication in terms of when the higher cost inventory will be gone through the system. Does it take another couple quarters or --

High cost

In terms of cotton and energy cost.

It will all be consumed

Sorry. Pardon.

During the second quarter it will all be consumed

Okay, great, thank you.

Your next question comes from Robin Brody with Highline, please proceed.

Hi guys. Can you just give us some better clarity on what is going on with pricing in your active wear as it pertains to the first quarter, because you guys mentioned pricing was up 2.5%, I think year over year for the category, but I thought there was also significant discounting, which drove some of the sales. Can you just help us reconcile that?

Well, what it means is that discounts, Robin, did not fully offset the selling price increases that we implemented during the course of 2008 and the beginning of 2009. But we still retained some of the benefit of these price increases.

And the total selling price increase from the first quarter of '08 to the fourth quarter of '08 was about 10%, is that correct?

It was close to that.

Close to that, is that what you said?

8%.

Okay. And then can you just give us -- last year you said the activewear revenue was $168 million, how many units did that include?

We don't give out the units, Robin.

Okay. And then on the sock business, why were socks ASPs down given it's a different channel? Does it have the same pressures?

Socks selling prices.

Yes.

That's due to mix because we discontinued -- part of the decrease in our sock sales was due to the distinction of product lines, and the product lines which we discontinued were more fashion-oriented socks that sold at a higher price because they didn't fit our model of being a white basic nonfashion sock that can go into our facility in Honduras. As we divested ourselves of the fashion product lines obviously the mix change from a pricing point of view.

And then when we think about the rest of the year in terms of volumes, how should we think about that given the stocking of the distributor channels is likely over? What are your thoughts going forward? You originally said I think 48 million to 49 million dozens for activewear?

We're not giving to give any updates on guidance in volume because we are suspending our guidance for the year because don't have clear visibility. But what, I said earlier is that sock activewear shipments are going to be down in Q2 and we would expect improvement after that as we come off base that reflects the time when we were capacity constrained last year. And also we will be measuring against down for the year before.

Now, do you guys see that is the destocking over at the distributor channel, has selling equalled sell through or --

I think this is again the reason that we're suspending guidance, one of the reasons, Robin, is that's very hard to predict, and it's a function of the economy and the visibility that distributors have on end demand.

Right, but at the current sales levels at the distributor level do you think that the destocking like are they reordering for every --

What we can say, what we can say is they're at low levels of inventory just now. And if demand strengthens it will certainly create pressure to create replenishment.

Thanks. My last question is just on the 28% decline in units, I mean how much can you attribute to destocking versus lack of slowing of demand?

I ran through that in the script, I said that slowing of demand was a million dozens. Destocking was about [$1.7 million or $1.8 million]. Then there was about a [$600,000] benefit from our higher market share combined with increase from the low sales.

Okay. Thanks a lot guys.

You're welcome.

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

Hi gentlemen. Just, Laurence, on the cotton, can you tell us, Glenn, what you paid for cotton in the quarter including your hedge position?

What went through our cost of sales in the quarter you mean.

Cotton per pound if you can give it to us.

Going through our cost of sales you mean.

Yes.

It was around $0.70.

$0.70, okay. And for Q2, I guess when will you start -- I think cotton slows around $0.46.

I'm not going to give you specifics, but our cotton costs will continue to come down quarter by quarter as we go through the year. And the latter part of the year lower than the prior year comparative and we're talking -- we said previously we're talking about a 10% year over year increase in annual cotton costs.

All right. And just remind me how much have you all hedged for the year?

We're fully hedged for the current year.

In 2010 where do you stand?

It's very early days at this point (inaudible) we're waiting to see how market conditions evolve.

So you don't have any hedges on for 2010 right now?

Not prepared to discuss whether we hedged anything for 2010 at this point, Doug, if you don't mind.

Can you give us an idea of the leverage if you paid spot on cotton what would the impact on earnings have been.

Difference in the cotton prices about $0.035 EPS.

Okay. And fuel, when will you start to see the benefit of the decline in fuel prices.

Well, the fuel we consumed during Q1 was around $150 a barrel oil and we're going to start quite quickly to benefit from the oil prices.

What will the actual benefit be to EPS?

What do you mean what will the benefit be?

$150 oil versus -- it's $36 today. When you start to realize the benefits, what impact will that have on earnings?

Well, every $10 per barrel of oil is about [$0.04] impact EPS.

It's not just the -- you can't look at the price of oil because we buy bunker and bunker is not exactly tied into the per barrel oil, so you just have to be careful what you're looking at.

Okay. And could you remind me what percentage of depreciation goes through cost of sales now?

What -- I'd say about $8.5 million of depreciation went through cost of sales in the quarter.

So for modeling purposes roughly 50/50 between cost of sales and SG&A?

And SG&A was about, I'll give you the break down. About $8.5 million went through cost of sales, about $3.5 million was inventory, and about $3.5 million was reflected in SG&A.

Okay. And just two other quick things just to clarify, Rio Nance Four and Rio Nance Five have been deferred, both of them?

Yes, they have.

And I think that's it, thank you.

Your question comes from the line of David Glick with Buckingham Research Group, please produced.

I guess it's now good evening. Most of my questions have been asked. Just clarification on the expansion of Rio Nance One, is that going forward? You discussed four and five, I think you were adding textile capacity at Rio Nance One.

In our forecast we are planning to add additional capacity both in the Dominical Republic and Rio Nance One?.

Yes.

We haven't pulled the trigger on it right now. We're very close, we're probably going to do the DR in the next few months or so. The timeframe for actually getting this into production is relatively quickly, so we're talking four five months from the time we pull the trigger installed up and running because going through existing facilities. So we're just being a little bit cautious right now. But we're going to probably do the DR on first step then follow up with Rio nance as we go through the season. We can confirm exactly where we stand in May in our next conference call.

Great, and just one last one. Can you give us a sense for the rate of progress you're making in expanding allocating capacity and actually selling it through into international markets and direct to screen printers, how quickly that's come along or not relative to your expectations when we talked about this in early December?

Well, first of all it's only been a month, not a lot has changed. I mean basically we put everything in place in the first quarter, and like I said before, we're anticipating continued penetration. It doesn't happen overnight. It's unfortunately because all of a sudden we wake up and have inventory everybody wants to buy for us. That's the first step of starting to really penetrate a market. There's a lot of other things you need to do to really be successful. But now we have major commitment happening. We believe that it is going to be significant dividends. They may not all be seen this year, but as we go through the balance of this year into next year we will see huge momentum as we go forward. Just to put things in perspective the largest producer in Europe for example is still two and a half times our size. And what we always say, it's the same competitors, same factors as in North America. So there's no reason for us not to continue to expand just a question of allocating the inventory and the commitment to the channel and we're working very closely with our customers and hopefully we will see dividends as we go forward.

Is the demand from screen printers to distributors, is it as challenging just generally speaking in international markets as it is in the US?

Sorry. Could you repeat your question please?

Yes, the demand sides of the equation from screen printers to the distributors in Europe and some of the international markets, I mean is the end use demand as weak in the international markets that you're trying to penetrate as it is in the US?

Well we are relatively -- I think it's a little better to be honest with you only because it's also not as big a market. So we don't think that the Europe -- we don't have the same type as statistics as we do S.T.A.R.S. here in North America. But just from our channel checks and our customers and our sales guys on the road, it's more flattish I would say than -- or slightly down than what we see here in the United States.

Okay, great, thanks a lot, good luck.

Thank you.

Your final question comes from the line of Jim Chartier with Monness, Crespi & Hardt, please proceed.

Good evening. I want to follow up on the inventory question for the distributors. Can you give us an order of magnitude where you think distributor inventory levels are versus the same time last year?

Well, I think the best way I can answer it is that the impact of the aging inventory in the quarter compared with the change that took place during the quarter in the previous year impacted us by about 1.7 million dozens and we're half the market.

Okay. And then as far as the -- we know that one of your distributors is about 23% of your total revenues. Can you talk about the size of some of your -- can you discuss the size of some of your other large distributors, and how long it would take for other distributors to pick up the business if one of those went out of business?

I don't think we really want to speculate our situation. I think what we have always said is that our demand is pulled through by screen printers and we have access to the channel through all our distributor channel customer relationships.

Okay. Then finally you mentioned on the last conference call trying to penetrate the private label business for screen printers. Can you tell us where you are in that?

Well, again we're pursuing that part of our strategy. That's something that was implemented in Q1 and we're planning to project some incremental volume there this year. And just like our other businesses, you just don't show up and all of a sudden you get the business. You've got to work the customers over, you've got to make the commitment and these are all things we're doing. We put people on those specific accounts to service that part of the market and we're hoping to benefit from them as we go through the course of this year.

Okay. Thank you.

Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the call over to Sophie Argiriou for closing remarks.

Thank you Eric. I'd like to thank everyone for joining us. As you all know, we will be holding our annual meeting of shareholders tomorrow at 11:00 AM, so we will remain available for follow-up questions this evening. I'd like to thank everybody once again, and we look forward to talking to you again at our next earnings conference call. Have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.