Gildan Activewear Inc (GIL) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Gildan Activewear earnings conference call. I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the presentation over to your host for today's call, Ms. Sophie Argiriou, Director Investor Communications, please proceed.

Thank you, Becky. Good morning, everyone. Thank you for joining us for our fiscal 2009 third quarter conference call and webcast. The press release and our interim quarterly shareholder report containing management's discussion and analysis and consolidated financial statements are available on the investor section is of our website at www.gildan.com and will be filed with Canadian securities regulatory authorities and US securities commission. The audio replay of this conference call will also be available on our website. I am joined here today by Glenn Chamandy, our President and Chief Executive Officer, and Lawrence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer.

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 and Exchange Commission and Canadian securities regulatory authorities that may affect the Company's future results. I would now like to turn the call over to Lawrence.

Good morning. This morning we reported our results for our third fiscal quarter. EPS before restructuring charges, which relate primarily to the consolidation of our sock finishing operations which we announced on December 11, 2008, was $0.37. Before the positive impact of income tax recoveries relating to prior years, EPS was $0.32, slightly above our internal forecast for the quarter and $0.03 above the consensus of analysts filing with First Call. The $0.05 income tax recovery in the quarter results primarily from the finalization of the Canada Revenue Agency's audit of our 2004 to 2006 fiscal years and further confirms the settlement of our 2000 to 2003 audit, including that the CRA would continue to accept our transfer pricing methodology. Adjusted EPS of $0.32 for the quarter was 31.9% lower than the third quarter of last year, due to lower unit sales volumes and lower gross margins due to unfavorable product mix and promotional discounting in the screen print channel.

The third quarter of this year comprised the normal 13 weeks compared with 14 weeks in the third quarter a year ago. Every fifth year the third quarter of the fiscal year includes an extra week in order to realign our 52 week financial reporting cycle with the calendar year. Including the impact of the week less of sales this year, net sales were $308 million down 19.2% from the third quarter of last year. Sales of activewear and underwear were $258 million, down 15.6% from last year and sales of socks were $50 million, down 33.6% from the third quarter of last year. The decline in sales of activewear and underwear was due to four factors. More unfavorable activewear product mix reflecting a lower proportion of sales of fleece and long sleeve T-shirts, as well as a higher proportion of sales of irregulars as we continue to run down our inventory of second quality products.

Secondly, a 2.6% decline in activewear net selling prices due to increased promotional activity in the wholesale distributer channel compared to last year, which more than offset the benefit of success of increases in gross selling prices. Thirdly, the impact of the stronger US dollar and selling price realizations for Canadian and international sales. And fourthly, a 3.5% decline in unit sales volume. The reduction in unit sales was due to a 16.6% decline in overall industry shipments from US wholesale distributors to US screen printers, which negatively affected Gildan shipments in the quarter by approximately 1.5 million dozens, and the difference in the number of weeks of sales, which impacted shipments by approximately 700,000 dozens. These factors were, however, largely offset by the replenishment of inventories in the distributer channel, primarily to replenish Broder subsequent to their successful debt restructuring and by the impact of our year-over-year increase in market share.

Last year, our inventories in the channel were significantly reduced during the course of the third quarter due to production constraints. Activewear shipments to imprinted private label customers increased significantly from a small base and shipments to international screen print markets were also up in spite of global economic conditions. Market share increased in all product categories in the US distributer channel compared to the third quarter of last year. Market share in the 100% cotton T-shirt category was 62.3%, similar to the second quarter. Market share declined sequentially in 50/50 T-shirts and fleece compared to the second quarter due to our decision to manage our credit exposure and reduce shipments to Broder during the second quarter, which limited their sell through of Gildan products in the first two months of the third quarter.

Another related issue to arise from Broder's conference call two days ago is that they indicated they continue to have close to $80 million of excess inventories. Broder has confirmed that none of these excess inventories consist of Gildan products. Overall, industry inventories in the US wholesale distributer channel at the end of the third quarter were down by 13.2% compared to a year ago and days of finished goods inventories in the channel were in good balance. Gildan's share of distributor inventories was 49.5%, which was well below our market share, so the demand for Gildan products exceeds our share of inventories in the channel. The reduction in sock sales in the mass retailer channel compared to the third quarter of last year was due to three factors. One, the loss of the extra week which impacted sock shipments by close to a million dozens.

Secondly, the discontinuance of certain sock product lines and programs last year, which impacted unit sales in the third quarter of this year by close to 2 million dozens. And thirdly, the timing impact of year-over-year fluctuations and inventories at the retailer level. In the third quarter last year, the timing of replenishment of inventories by major retail customers positively impacted our sales volumes by close to 1 million dozens. While in the third quarter of the current year, the phaseout of private label brands being replaced and upgraded resulted in a net reduction of retailer inventories of over 0.5 million dozens. We are pleased with the sales performance of our continuing programs during the quarter, particularly in the context of the current market conditions. And the initial performance of our new private label brands has been very strong continuing into the fourth quarter.

For the fourth quarter, we are projecting a relatively modest decline in sock sales compared with last year, as the year-over-year impact of discontinued lines is projected to be partially offset by growth in new and continuing programs. The Company's main strategic thrust and focus of our energies continues to be to pursue major new retail programs in underwear and activewear. Our objective is to secure strategic new programs, which will be meaningful to our sales growth in fiscal 2010. We are progressing well with discussions with retailers, but we cannot jeopardize our success by giving more information on specific programs at this stage, especially given the competitive sensitivity of such information. We reiterate that we continue to believe in our business model for retail and we continue to believe that we will achieve important new retail programs for shipment in year in fiscal 2010. In addition to pursuing activewear and underwear programs, we are also actively discussing new sock programs.

Our operations and supply chain in central America continue to be unaffected by the continuing political uncertainty in Honduras and we have no reason to believe that the Honduran situation, which also involves all of our major competitors, will have any impact on our current or future business with our wholesale or retail customers. Gross margins in the third quarter were 24.4% compared to 26.6% last year and 15.8% in the second quarter of the current fiscal year. Compared to last year, the reduction in gross margins was primarily due to the lower net selling prices, which reduced margins by approximately 260 basis points, the impact of the stronger US dollar on sales realizations in Canada and international markets, which reduced margins by approximately 160 basis points, more unfavorable product mix, which reduced margins by approximately 130 basis points, and higher cotton costs, which reduced gross margins by approximately 120 basis points.

These factors were largely offset by the impact of lower manufacturing and energy costs, which favorably impacted gross margins in the third quarter by approximately 450 basis points in spite of manufacturing downtime taken in third quarter to balance activewear inventories. Compared to the second quarter, the significant improvement in gross margins was primarily due to more favorable manufacturing efficiencies and favorable product mix, as well as slightly lower cotton costs. Increased promotional activity compared to the second quarter negatively impacted gross margins by approximately 120 basis points. Gross margin trends improved on a monthly basis during the third quarter. Gross margins are expected to improve slightly in the fourth quarter compared to the third quarter, as we are assuming further increases in promotional pricing activity in the screen print channel, which are projected to partially offset the projected benefit of more favorable product mix and lower manufacturing and cotton costs.

The third quarter was the first fiscal quarter in which Gildan's competitive cost structure was significantly impacted by our decision last year to fully cover our cotton costs before the precipitous plunge in cotton and other commodity prices. Our costs of cotton consumed during the quarter was $0.64 per pound. Our cotton costs will decrease slightly next quarter and successively over the next two quarters, as we consume the balance of our previous cotton commitments. Cotton costs have now recovered to the level at which we previously covered our requirements and futures for December delivery are currently approximately $0.64 per pound. Cotton costs for the first half of fiscal 2010 will be materially below the peak levels of the first half of fiscal 2009. The EPS impact of lower unit sales and lower gross margins in fiscal 2008 was partially offset by lower SG&A and financial expenses.

SG&A expenses declined by $3.6 million from the third quarter of last year due to reduced distribution costs, the impact of the lower valued Canadian dollar in corporate administrative expenses, and the non-recurrence of a bad debt provision in the third quarter of last year. These positive factors were partially offset by higher legal costs and the timing of accruals for performance related variable compensation expense. Excluding the impact of the prior year income tax recoveries and the tax benefit related to the restructuring charges in the quarter, the effective income tax rate for the third quarter was 2% compared with 5.8% for third quarter of fiscal 2008. The reduction in the effective income tax rate reflected the lower proportion of profits earned in Canada due to lower sales and margins in the Canadian wholesale distributer channel and lower profits earned in the US due to the closure and relocation of US sock finishing operations.

Subsequent to the conclusion of the CRA tax audits for 2000 to 2003 and 2004 to 2006, we continue to be comfortable with our low consolidated tax rate for future years in line with the Company's historical tax rate. We generated very strong cash flow in the quarter. EBITDA was $58.1 million and free cash flow amounted to $78.5 million. We ended the quarter with net indebtedness of $18.5 million, leaving significant capacity and flexibility in our $400 million revolving bank credit facility, which does not mature until 2013. Inventories were reduced by $39.2 million compared to the end of the second quarter, as finished goods inventories of activewear were reduced by approximately 2.5 million dozens. Inventories were $48.7 million higher than the end of the third quarter of fiscal 2008, when inventory levels were constrained by production issues.

Further manufacturing downtime will be scheduled as required late in the fourth quarter to manage activewear inventory levels based on the outlook for end use demand and the level of replenishment by wholesale distributors. DSO and receivables were reduced to 41 days compared to 51 days a year ago and 45 days at the end of the second quarter. The difference in DSO compared with last year was primarily due to the later timing of fleece shipments this year. A lower proportion of programs this year have been shipped with extended credit terms in the third quarter, which is expected to benefit t fleece sales in the fourth quarter. We continue to be pleased with receivables collections and we are comfortable with our credit exposures. Capital expenditures for fiscal 2009 are currently projected to be in the range of $60 million to $70 million, in line with our projections at the end of the second quarter.

The main capital expenditures in the fourth quarter are for the Dominican Republic biomass project and the new Barbados head office building to provide for the expansion of our sales and marketing headquarters, including our infrastructure to support the retail strategy. During the quarter, we will be evaluating the timing of incremental expansion of the Dominican Republic textile facility and will also be evaluating options to expand our retail distribution facilities to support our projected growth in retail. We continue to project positive free cash flows in the fourth quarter and to expect to have no debt outstanding under our bank credit facility at the fiscal year-end. In summary we are pleased with our performance in the third quarter. We exceeded our internal earnings forecast and analyst consensus estimates and achieved significant improvement in gross margins compared with the second fiscal quarter, in spite of having higher cotton costs and competition.

The new private label programs at retail have been introduced successfully and we believe we will be successful in securing further new retail programs for next year in both socks and other product categories. We have announced the completion of the CRA tax audit for the next audit cycle, which has provided further confirmation of our low tax rate. And we achieved strong cash, strong free cash flows and continue to have a very strong balance sheet with significant financing capacity and flexibility.

Thank you, Lawrence. Before we begin taking your questions, I would ask that everyone try and limit their questions to two or three in order to give everyone the opportunity to ask a question. And time permitting, of course, we will circle back for a next round of questions. I will now turn the call back to our operator in order to begin the question-and-answer session. Operator?

(Operator Instructions). And your first question comes from the line of Martin Landry of Desjardins Securities. Please proceed

Good morning. Can you give us a little more details with regards to the changeover in private label brands? Does that -- did you lose market share at that retailer?

No. We -- what happened is every time you change over a program in retail, you have to reset the stores. So the stores have to wind down their old branded inventory and then replace that with the new updated merchandise. And during that transition they bring inventories down and then they bring inventories up. And that was really the -- the reason for the decline in inventory. Also, the fact that retailers -- this -- this back to school are managing their inventories a little bit closer and that was also a factor in terms of bringing down inventories in the retail channel.

So the change in our sales was because of inventory changes at the retailer level. Point of sale data for sales from retailers to consumers was up.

Okay. Thank you. Given now that we are already midway through Q4, I was wondering how much downtime do you have planned for Q4?

Similar to Q3.

If I remember well, you only took one week in Q3?

No, we took roughly about 16 days in Q3.

16 days. Okay.

In Honduras a little less -- less than that in DR.

Okay. And did you win any retail programs during the quarter?

As we said, we are actively working on new retail programs which we are expecting to have a meaningful impact in our sales growth in 2010 compared to 2009.

Okay. All right. Thank you very much.

And your next question comes from the line of Jessy Hayem with TD Securities. Please proceed.

Thank you. Lawrence, I just want a bit of a clarification on the sock volume drop. You mention in total, I think, 3.5 million dozens, if I jotted I guess what you mentioned correctly. You have the extra week that was 1 million, discontinued sock lines 2 million dozens, and then the rest was a timing impact. Is that correct.

I said a million dozens for the extra week, 2 million for impact of discontinued programs, and about 1.5 that related to the difference between replenishment last year and destocking this year.

Okay. So it was really all volume, there was no pricing whatsoever drop in the quarter?

No. There was maybe a little bit of (inaudible - technical difficulty) impact, but no pricing drop.

Okay. And then a question, again, I guess on -- on the gross margin. Looking to see what -- what they would have been if your cotton costs were around $0.50 per pound in the quarter, which I believe is what, I think, Hanes had in the same quarter that you just provided.

Well, we're provided the sensitivity for every pound of difference in cotton costs, which is about $0.035 of EPS per pound. So from that you can extrapolate that if our cotton costs had been $0.50 instead of $0.64, our EPS would have been close to the $0.47 that we reported in the third quarter last year. And the reason we would have the same EPS as the third quarter of last year is because our margins would have been over 30% compared with the 24.4%. So that would have offset the decline in sales volume.

And any -- thank you. And any color on that -- on the cotton hedging so far in fiscal year '10?

Well, as I said, we are looking at successive slight reductions in our cotton costs over the next couple of quarters, with the differential narrowing in the first half of next year. Into the first half of next year we are looking at a significant year-over-year decline compared with the peak cotton costs in the first half of this year.

Fair enough. One final one before I circle back -- circle back, can you give us a sense of your commitment to continue expanding in Honduras, I guess, given the recent -- recent political instability that we are seeing. I mean, you obviously mentioned that this doesn't seem to be an issue when it comes to wholesalers or retailers, for that matter, assigning, I guess, new business to you. But just looking, I guess, on -- on your thoughts on -- on that?

We feel very comfortable. Look, we haven't had any disruption. We are very comfortable with our situation in central America and we are continuing to go forward with our committed expenditures, which is Rio Nancy 4, and, as Lawrence said earlier, we are planning to also evaluate the incremental capacity expansion in the DR this fiscal quarter to support potential opportunities for 2010.

Great. Thank you. I will go back for more.

And your next question comes from the line of Anthony Zicha of Scotia Capital. Please proceed.

Good morning, this is George calling in. Quick questions. Can you give us some color on the pricing moving into Q4. We know that you guys said there has been some promotional activity. We've seen also 2.6% decline this quarter, so how are they trending right now?

Well, pricing is, so far in Q4, is similar to Q3. It is still -- in the wholesale market it is still aggressive --there's still aggressive pricing in the market and that's what we are projecting for the balance of this quarter.

Okay. Thank you.

So we have built into, as I said, when we talked about a slight improvement in margins in Q4 versus Q3, that takes account of further downward pressure on pricing due to promotional activity in the wholesale channel that will partially offset our margin improvement from further manufacturing efficiencies and more favorable product mix.

Okay. So assuming that the declines in the CMI are moving into Q4, can you maybe give us some color on how that affects your 1000 basis point guidance issued last quarter?

Well, we were close to that and with a slight improvement we will be at that kind of level.

Okay. Thank you very much.

And your next question comes from the line of Eric Tracy of BB&T Capital. Please proceed.

Good morning, thanks. Maybe just to follow-up on the gross margin a little bit. So, Lawrence, I think you said you would have, ex cotton, gross margins would have been north of 30%, which I think is roughly 300 or 400 basis points over last year. Can you talk about sort of the positive pieces driving that relative to, I would expect, just again from pricing and some deleverage of the model with sales down 19%, sort of what the pieces there would drive that gain over last year?

I thought I went through that on the call, Eric, if you go back you will see that I went through the impact of each one of the components of the margin increase on the call.

Okay. Fair enough. And then, maybe just on the sales line, then, can you talk about the impact just the replenishment at Broder's, how much that contributed to the quarter?

I don't really want to give information that's -- that's Broder's information. What I can say is that when you look at the overall -- when you look at the overall change in inventory in the channel, which went down last year and up this year, the combination of the two things is probably about 800,000 dozens positive.

Okay. And then on the socks, did you all lose a program with Target in the quarter by any chance?

No. No.

That was just the timing of the inventory, destocking that you are referring to.

Yes, I mean -- the change in our sock sales is, as I went through in the call, it is related to change in retail inventory levels and the discontinue of last year's programs that happened last year and the actual sell through from retailers is -- is positive.

Okay. Then it is not inventories up 17% over last year, when can we expect that. I know you are going to continue to work down through some downtime in Q4 sort of balance the sales, do you have sort of a timeframe of maybe getting that in line with sales?

Well, we are comfortable with where we sit just now. We are planning some downtime,as we told you, at the end of the fourth quarter and I would project based on that that our inventories at the end of the year will be similar to what they were at the end of 2009.

Okay. And then just lastly on the tax -- the $0.05 from the recovery, just on a normalized basis, 2% in the quarter, what is kind of the normalized run rate we should think about going forward? And -- .

I would say something like 5%, 5% to 6%, as it has been historically.

Okay. Great. Thanks, guy.

Thanks, Eric.

And your next question comes from the line of Sara O'Brien of RBC Capital Markets. Please proceed.

Hi, guys. Glenn, just wondered if you could run through the volume uptick you are expecting for next year. I think last quarter we talked about 7 million dozens up fiscal '10 over '09. How --how are you feeling about that given like screen print direct opportunity and international and is there any change to where those volumes come from?

What we said -- what I said last quarter is that the -- we will restock the channel next year by 3 million, which means that we are actually -- our distributors are actually selling to screen printers this year in fiscal 2009 3 million dozens more than we will ship into the distributors themselves. So therefore they've destocked by 3 million dozens. So next year if business is flat on a year-over-year basis, we should be able to increase our unit volume shipments to distributors by 3 million dozen.

Okay.

We are planning -- we have a conservative plan to -- to grow our international markets, we are growing in Europe, Mexico and Asia Pacific conservatively 1 million dozens for all of those international markets. Our private label screen print area we plan to increase that by roughly 1 million dozen. And if we gain a small amount of share, let's say 2%, that would add roughly about 1 million dozens. So every share gain is worth roughly about 0.5 million dozens and say conservatively 2%. That would add about a million. That takes you to about six. And we also said, which is an unknown right now, is what will happen to the market in the market recovery.

And for every 1% that the market recovers, which is down this year by close to, let say, 18% in the last two quarters, but every 1% represents an increase to us of roughly about 300,000 dozens. So a 5% increase could add potentially even another 1.5 million dozens, for argument sake. And as well as look at -- we are planning to have significant win falls in retail as well. Not only are we planning to secure new sock programs, but we are also planning to secure new underwear and activewear programs that will be shipped in 2010 and so all together, look, we are very optimistic about our sales growth and opportunities and we are looking forward to an exciting year in 2010.

The one thing I would add to what Glenn said is in addition to the -- if there is any market recovery in 2010 compared to 2009, that should result in [ultimate] growth in the end use demand, but also further replenishment by distributors to service that demand.

Okay. Can you just -- I mean, Glenn, you just mentioned the retail opportunity or win fall you call it, is that a win fall like relative to your overall sales now or relative to the retail portion and just wondered if you would be using your current manufacturing capacity for that or do you have to build out in DR for that?

Well, we still have quite a significant amount of capacity, but part of our plan -- .

(multiple speakers) that question kind of takes us too close to providing sales guidance, Sara.

Okay, but, I mean, you did say meaningful. I think it is kind of fair to give some kind of idea.

There -- I mean, all we can say -- I am not going to quantify that and what you know is that we can provide low cost incremental expansion quickly in the DR to support any sales in excess of the 51 million dozens that we have with our existing capacity.

And the timeframe for us to add this additional capacity would be relatively quickly.

Okay. And just you had commented in the last conference call, Glenn, that you do typically need kind of a 12 to 18 month window before retail programs get put through on their shelf space. What do -- what are you thinking now what's different that sort of allows you the confidence to say you are going to see these wins in 2010 delivery.

Well, Sara, we -- we were talking about our major push initiative in retail starting in December of last year. So we have been putting the infrastructure, the resources and the commitment behind our retail strategy, not just for this year, but we really actually started last year and this is -- the hard work will pay off in 2010.

Okay. Thanks a lot.

And your next question comes from the line of Sarah Hughes of Cormark Securities. Please proceed.

Just a clarification on the cotton. Lawrence, you said you expect your cotton costs in the first half of '10 to have some significant declines from the first half of '09. Just wondering how they would compare to the second half of '09. They'd be fairly similar as you move from the second half of '09 into the first half of '10.

The first half of '10 will compare with the second half of '09, is that what you are asking.

Yes, yes.

Well, I did say that we are looking at slight successive increases as we go through each quarter in consumer decreases, reductions in our cotton costs as we consumer high costs cotton.

Okay. And then just you -- you pointed out the discrepancy in your share of industry inventory levels versus your market share.

Sarah, could you just talk up slight little bit. We are having difficulty hearing you.

Right. Is that better.

Yes.

You talked about the discrepancy in your share of industry inventory levels versus your overall market share in the industry, in the wholesale industry, just wondering how this compared previously and have you seen any change in that as you move through into-- into the third quarter?

Well, our share right now is, of our inventory, is 49% of the share in the channel and versus the over 55% share of actual share.

Okay.

That's pretty -- that's pretty consistent with last quarter and last quarter our share of inventory was about 5 percentage points below our actual market share. So, our product actually turns relatively fast. So typically we are constantly replenishing at -- at a very quick rate and therefore we typically have less -- less inventory in the channel versus our actual sell through.

Okay. Okay, thank you.

And your next question comes from the line of Doug Cooper of Paradigm Capital. Please proceed.

Hi, good morning, gentlemen. A couple of things. First on the gross margin trends you said that trended higher in each of the months in the quarter but blended, I guess, average of 24.4 in the quarter. What did it end up in June.

I --I don't think I want to give out that information. I mean, obviously, it was higher than the average and it was higher than what we are projecting for Q4 because we are assuming that we have further promotional pricing activity that has a negative effects on the margins in the fourth quarter, but even with that we will have -- we are projecting a slight increase between the Q4 and Q3.

Okay. Just between Hanes and [Nykonics] on their conference calls, Hanes said they were winning, I think, some branded retail programs in some of the big box retailers and Nykonics said they're seeing good sell through on their essentially, I guess, private label business that they are doing for the big box retailers and talked about line extensions. How do you think you should -- investors should look at those two seemingly dichotomous statements.

Well, we don't want to comment on Hanes, but we could comment on what iconic said is that they have done a great job in terms of developing the starter brand at Wal-Mart. Wal-Mart is looking to -- to maximize the value of that brand into all categories. We have now just rolled out in the our sock programs, which are all the basic bag sock programs, which is our new rollout at starter, and look, we have positioned these products to be, we think, a better value and better priced than the national brands right now. So we are very excited about the opportunity and Wal-Mart is going to continue to put more emphasis on expanding it into, hopefully, other categories.

So is it fair to say that your program, potential program with the retail big boxes would be line extensions of existing potential program -- existing programs that you have?

I just don't want to comment on that right now. But as we continue to achieve our initiatives, we will bring them to market.

Okay. In terms of if you are not in a position to be able to announce big retail wins, whether it because Wal-Mart or other big box retailers don't allow you to, if we see -- where do you stand on Rio Nancy 4 and 5. I think we talked last conference call that you are sort of shelving those CapEx projects for now. If we see you bring those back on line or accelerate those, could we read through that into a big retail wins.

Right now we -- we said in our last calls that we are -- we are continuing to go forward with Rio Nancy 4. So we are building that facility out and it is coming online for 2010. And what Lawrence said is that we have the ability to make incremental expansion to take our capacity up significantly from where it is now by, I think, some equipment in Dominican Republic and we will continue to evaluate market conditions to decide what we will do with Rio Nancy 5 as we go through into 2010.

Okay, fine. Just that market share down sequentially, as you mentioned, Lawrence, and I think fleece I noticed was down, was it 52.7 I think if my numbers are right, it was 56 in the last quarter. Who in particular took that share do you think.

Well, first of all our share is down from last quarter, but it is still up year-over-year in all categories. And basically what happened was is that the share was taken from brands that just had inventory available in the market. So we'd rather not say who -- who it was, but we are very optimistic of our brand and our position in the market and we believe that we will continue our momentum in gaining share in subsequent quarters.

And we have the orders in place for our -- to support our fleece projections for the fourth quarter.

Okay. And the final question, you said market recovery of every 1% changes 300,000 dozen to Gildan. Is that correct what you said to Glenn.

Yes, for every 1% the market recovers, that's 300,000 dozens.

And just to clarify, the market year-to-date is down roughly on a unit basis 18%? Calendar year.

Calendar year is 18, yes.

Okay, perfect. Thank you.

And your next question comes from the line of David Glick of Buckingham Research Group. Please proceed.

Thank you. Good morning. I know it is difficult to help us on 2010, I am just trying to kind of evaluate the trends as we close out the year on the top-line, Lawrence. If you look at the trends from Q1, which were down in the mid-20s improved to down roughly 17 at Q2 and if you factor out the extra week in Q3 and assume all weeks are equal, it looks like it was down about 12% or so, 12%, 13%. Should we expect the trends to continue to be -- be less negative into Q4 and is it -- is it possible we could see even flattish sales. Given the fleece shift from Q3 to Q4, I would think that those trends would continue to become less negative. Any color on that and direction would be very helpful.

Well, again, David, while we want to be helpful, we also don't want to provide guidance. All we can say is that we ourselves continue to plan on the basis of negative view of the overall economic recovery. We have said that all along. And what will drive our growth will be our own initiatives in terms of market share in our existing markets, international expansion and our major thrust to go into retail and economic recovery will be on top of that. Having said that, however, we are starting to overlap against very weak prior year comps, so that should certainly help the cadence of year-over-year declines in the market.

Thank you. And is it possible you could quantify that fleece shift in dozens from, I guess -- I don't know if it was Q2 to Q4, probably primarily Q3 to Q4, any help there would be appreciated.

You mean what our increase in fleece shipments will be in Q4 versus Q3.

Well, in other words, the amount of -- the number -- the dozens that were -- that were pushed out because you were not offering the same terms to your wholesale customers.

I think probably the only thing that we can say to provide any help is to -- the impacts of more favorable product mix in Q4 versus Q3 should be in the order of a couple of percent of impacts on margin.

Okay. Very good. Thanks a lot and good luck.

Thank you.

And your next question comes from the line of Omar Saad of Credit Suisse. Please proceed.

Thanks, good morning. Congratulations on really managing your P&L well in this difficult period.

Thank you.

Thanks, Omar.

Sure. Quick question. With the retail programs that you are thinking about for next year, when are you going to start to build inventories ahead of that and -- or is some of that in your inventory position today allocated for -- for some of those new programs that you expect to get next -- in the next fiscal year?

Unfortunately, Omar, we are just really don't want to go down this path right now. We are obviously confident with what we can and think we will achieve in retail that will impact us positively in year-end 2010. But we just don't want to compromise ourselves by providing information at this point. And I guess, when we will talk about specific programs is when we are close to shipment.

And we are still focusing on bringing our inventories to -- in line with -- at the end of '09 to be similar to '08 in terms of total dollar value.

Got it. Okay, that's helpful. Thank you. No, I totally understand. Thinking about the screen print market and that channel right now, it looks like the -- if you look at the industry data that you provide and kind of industry unit growth, we are still kind of in that mid to high teens range down year-over-year. Do you have any insight into that market and any updated thoughts on when -- do you think the trough is behind us or are you just still going under the assumption that we are kind of at this run rate where the industry's -- industry unit volumes will remain down in the teens in the coming quarters and year?

Well, I guess, that's similar question to what David was just asking. I guess the two things we're -- three things we are saying is one, is we are not planning and forecasting on the basis of economic recovery. Secondly, we should see better comps because you are starting to overlap with bad prior year comps, particularly in the December quarter when the market was down close to 20%, and thirdly, what we are basing our growth projections on is our own sales growth initiatives rather than recovery in the market, which will be an upside if it happens.

Sure. Now, in -- but in your -- in the way you think about the market, it is accepted there's an economic recovery, i.e. return to GDP growth and kind of globally, especially in the US though, does that translate into the market, the screen print market? Like help me understand the correlation to an economic recovery of the industry to the correlations to a kind of global macroeconomic recovery.

Well, typically even these -- the print industry hasn't had this type of severe downturn since -- in our 15 years in the industry. And during the last recession, the industry was down roughly 3.5%, 4% and then rebounded completely the year after. Last year in 2008 for the full year, the market was tracking around 3% through September and then we fell off a cliff basically in -- in Q4. We ended up down roughly 5% for the year. And subsequently we had the last Q1 and Q2 being relatively negative. So, we don't -- and have never seen the severity of a downturn, so hopefully, we will -- we will come back like other recessions and bounce back as the economy recovers.

Obviously, Omar, the impact of economic recovery is very material because just going through the impact in this one quarter, the impact of the market decline on our own sales was 1.5 million dozens and then as we said earlier, on top of the increase in the end use demand, if there's an economic recovery we will obviously have replenishment by distributors to service the increased end use demand and you would probably have upward pressure and pricing as well due to the more favorable supply demand balance in the industry.

Got it. Got it. So, looking at the -- kind of some of the restocking, assuming -- assuming the -- using your assumption that the macro environment stays the same and that will icing on the cake if it comes, but assuming your assumptions the macro environment kind if remains where we are now, from that perspective is the restocking into the channel is that over at this point or is there still more restocking that needs to be done to -- to meet the level of demands that -- that you are seeing now in the market?

On a year-over-year basis for next year, what we are saying is that the restocking of 3 million dozens will occur based on 2008 sales. So therefore, the actual distributor sold to screen printers 3 million dozens more to the screen printers than we actually sold to the distributors and reduced our inventories by 3 million. So if sales are flat next year on a year-over-year basis, we will increase our shipment to distributors by 3 million if the industry is flat. That answers your question.

Got it. Yes, that's perfect. Thank you.

And your next question comes from the line of Claude Proulx of BMO Capital Markets. Please proceed.

Thank you. Some quick question. The gross margin, the slight increase in gross margin from Q3 to Q4, does it include the downtime that you mentioned the same as in Q3?

Yes.

Okay. Second one, fiscal 2010 is only, what, six, seven weeks away, would you expect to start the year with producing at full capacity and then, I guess, as the year progress you will see if you need to take downtime or not.

Well, we are running at relatively close to capacity now. So we are going to run at the same type of levels we are now and the answer is yes.

Okay.

And how much downtime we take next year, obviously, will be a function of our sales for next year.

Okay. Thank you very much.

And your next question comes from the line of Vishal Shreedhar of UBS. Please proceed.

Hi, thanks. Can you talk about your 2.6% decline in pricing? Is that broad base, is that across one category more than the other?

In the activewear it is pretty well across the board. It is -- it is spread out, I think, pretty evenly amongst all the product categories.

Does your greater shipment of irregulars, does that have anything to do with that as well?

What was the question, Vishal.

You said you had more irregulars shipped in the quarter, does that have anything to do with the decline in pricing.

No, that -- that had a little bit of an impact on the margin and the mix.

Okay.

And our inventories are, right now, in line in irregulars, so that won't occur as we go forward.

Okay. One of your peers talked about gaining share in the wholesale screen print market. I was just wondering if that signifies an increased competition. I think previously you were -- you had the exclusive -- exclusive term of gaining share at least in that market.

I don't think we want to comment on what our competitors are doing. We've explained the movements in our own share and we are up significantly from last year and any sequential decline we had from Q2 related to short-term factors in terms of replenishing Broder and we continue to be comfortable with meeting the market share objectives that we have indicated before.

In your -- in your retail program, particularly branded, how do you feel about that business? Do you think the branded business is gaining traction like you are talking about the private label business? Do you view them differently?

No, but what we're focusing our., in our branded business is selling to some of the small more regional retailers and is doing very well.

So how do we think about branded over the course of 2010, do we think that business grows as well, or is that -- is that just incremental growth and we look more at the -- at the private label side.

Well it is also -- I mean, look at the -- the regional retailers, obviously in terms of their over unit volume, are not going to make a major impact in terms of dollar sales relative to big mass retailers, but proportionately they're going to grow significantly as well.

Okay. Have any of your branded retailers asked to switch -- or investigating switching to private label?

Sorry.

Have any of your branded -- the retailers that you sell branded product to right now are they looking at switching into private label?

I would rather not comment on that right now, the answer to, but the largest program we have right now in our branded retail program is with Dollar General and that program is -- comes due in March and then we will decide how they're going to position the brand at that time.

Okay. Thank you.

And remember also, Vishal, that what we are seeing is retailers upgrading private label brands and introducing visible private label brands.

Okay. Thanks a lot.

And your next question comes from the line of Scott Rattee of Blackmont Capital. Please proceed.

Hi, good morning. Just a question, there is obviously a lot of focus on the mass market retail, but I know that you have -- you have built out the screen print direct channel sales force and I was wondering if you could sort of give some color on the traction in that sort of specific part of the -- of the overall market segment.

Well, that market segment is actually supplying private label to branded screen printers and we are -- we are growing our sales there and, like I said before, we made significant traction this year. That -- that part of our business will be up significantly. And next year we plan to expand that by approximately 1million dozen.

Okay. And just sort of on the SG&A line, I know that one of the things that you'd mentioned was a bit of negative course of the audit fees. Would you be able to sort of quantify what that impact was?

I think I said legal fees not audit fee.

Oh, I'm sorry, legal fees.

And that -- in the big scheme of things that wasn't material.

Okay. So is that -- is that something we would also sort of see in that line going forward from here or is that sort of the -- represents the completion of it.

I would say that what there is, which might be in the order of $1 million or so, barring anything unforeseen, would not continue.

Okay, great. Thank you.

And your next question comes from the line of Jim Duffy of Thomas Weisel Partners. Please proceed.

Thanks and thanks for taking my question. What were the production -- .

Jim, you're a little quite.

Oh, I'm sorry. What were the production issues that suppressed the inventories a year ago?

Well, we -- we had production issues in our Dominican Republic facility a year ago that were resolved in the second half of the year, but they did significantly impact our sales and cost structure last year.

Okay. And then what is the year to year trend in average cost per unit in the inventory, presumably it is down with cotton costs coming down?

Yes, that's why you see the improvement in our gross margins. We have consumed all of our inventory that was manufactured when cotton and energy costs were at their peak. And as you go forward you see lower cost inventory that roll into our cost of sales and at the present time all of our factories are running very efficiency.

Okay, great. And so inventories are up 17% year to year on a dollar basis, what type of increase are we looking at on a unit basis, presumably, what, 10 percentage points or so higher than that?

Well, the retail inventories are down compared with last year and the -- there is an increase in our wholesale inventories compared with a year ago when we did have low inventory levels because of the manufacturing issues we had at that time. And -- and the impact of this is -- the impact of the higher wholesale inventories in dozens are largely offset by the combination of the lower retail inventories, the also cost inventory, and also lower work in process in our pipeline, as we have managed our inventories through taking some downtime.

But that's on a dollar basis, correct. So what I am talking about is if your inventories on a dollar basis are up 17% year to year, what is the increase on a unit basis?

I mean, I -- I don't want to give you the exact unit number. Maybe to just focus on the end of the year, basically our inventories will be -- retail inventories will be down slightly, we'll be down -- wholesale inventories will be up, but the wholesale inventories will be up in units. We are probably both 3.5 million dozens short of inventory at the end of 2008 to support our -- our business on a go forward basis. And so basically the overall dollar value will be similar in 2009 over 2008, with a better mix and better complexity of all the different moving pieces and we feel very comfortable in our positioning as we go forward into next year.

Okay. Thank you very much.

This concludes the question-and-answer session. I would now like to turn the call back over to Sophie Argiriou for closing remarks.

Thank you, Becky. We would like to thank you all once again for joining us this morning and we look forward to talking to you again at our next earnings conference call. Good day.

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