Gildan Activewear Inc (GIL) 2017 Q3 法說會逐字稿

Welcome to the Q3 2017 Gildan Activewear Earnings Conference Call. My name is Vanessa, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Sophie Argiriou. You may begin.

Thank you, Vanessa. Good morning to all, and thank you for joining us. Earlier this morning, we issued our third quarter press release announcing our earnings results. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission and are available on our website at www.gildan.com.

On the call today, I'm joined by Glenn Chamandy, our President and Chief Executive Officer; and Rhodri Harries, Gildan's Executive Vice President and Chief Financial and Administrative Officer.

The conference call will begin with Rhod taking you through the results for the quarter and our business outlook for the year, after which a Q&A session will follow.

Before we start, let me remind you that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results.

And with that, Rhod, I will turn the call over to you.

Thank you, Sophie. Good morning, everyone, and thank you for joining the call. This morning reported third quarter adjusted EPS of $0.53, up 6% over Q3 2016 and consolidated sales of $716 million, which came in essentially in line with last year. We were pleased with the strength of the Printwear business, which continued to perform well in the growth areas that we are pursuing, including continued strong gains in the higher price, higher margin fashion, and performance product categories and solid growth in international markets.

American Apparel was also accretive to earnings in the quarter, as we continue to make good progress on our integration plans for this business. Production of American Apparel products is ramping up nicely. Our new West Coast distribution center is now fully operational. Ecommerce, marketing, and merchandising teams are in place, and early in the third quarter, we successfully launched the direct to consumer ecommerce platform for this brand.

Where we did see softness during the quarter was in our branded apparel segment, specifically in our soft business, where the combination of weak market demand in this product category, together retailer inventory management, and then lower than expected POS from transition to a new stock program continued to a year-over-year revenue decline in branded apparel.

That said, the combination of stronger margin performance in Printwear from a more favorable mix, the earnings contribution from American Apparel, and lower income taxes more than offset this impact during the quarter. We also continue to generate strong free cash flow in the third quarter with year to date levels of free cash flow coming in ahead of plan. Consequently, with strong adjusted EPS to date and stronger cash generation, we raised our EPS and free cash flow targets for the year.

Turning to our segmented results. We grew Printwear sales by 4% to $481 million during the quarter. The increase reflected the benefit of the American Apparel acquisition, which contributed $15 million of sales, along with strong double-digit growth in sales of fashion basics and performance products and higher net selling prices, partly offset by lower unit sales of basics.

In addition, international sales grew in excess of 20% for the quarter with all markets delivering strong gains, with the impact of foreign exchange being neutral on sales for the reporting period.

Printwear operating income of approximately $128 million in the quarter was up just over 3% while the operating margin of 26.5% remained effectively in line with last year. Selling price increases put in place early in the year and favorable product mix offset anticipated headwinds from higher raw material and other input costs and higher SG&A expenses, primarily related to acquisitions.

In the Brand Apparel segment, sales of $236 million in the quarter were down approximately $17 million or 7% over the third quarter of last year, reflecting tough retail market conditions during the third quarter, including severe weather impacts in part of the U.S., which compounded already weak store traffic trends. In addition, retailers were focused on managing tighter inventory levels, which led to retailer destocking more broadly across the retail markets.

While we continue to generate higher sales with the Gildan brand in men's underwear, where our POS for September was up 20%, and we continue to gain market share, and while growth during the quarter in active wear was strong, our overall sock business was down in the quarter.

The decrease reflected weak demand in the sock category, particularly for higher margin sock brands in department stores, national chains, and sporting goods. We also saw pressure in our sock business as we transition to a new Gildan branded sock program at a mass retailer. A program is positioned at a higher price point to reflect the introduction of more premium product attributes, including higher value ring spun cotton, and higher performance features. And POSes initially ramped up slower than we expected.

Now, turning to branded apparel operating income. During the quarter, we generated approximately $25 million in operating income compared to $30 million a year ago. Operating margin for the quarter was 10.7% down 100 basis points compared to the third quarter of last year, although essentially comparable to second quarter margin levels. The decline versus last year was due to unfavorable mix, driven by lower sales of higher margin sock products.

Turning back to consolidated results. From a free cash flow perspective, we generated $150 million of free cash flow in the quarter bringing the year to date total free cash flow in excess of $350 million, close to $100 million ahead of where we were a year ago. This was driven by higher earnings, working capital improvements, and lower CapEx. During the quarter, we spent $19 million in capital expenditures spread over textile capacity, garment dyeing, and distribution investments.

Moving to capital return. During the third quarter, we continued progress on our planned share repurchase program for the year. We bought back another $3.9 million common shares under our NCIB program at a total cost of $119.3 million, bringing our year to date share repurchases to $9.8 million common shares. With the initial allotment of share repurchases under the program almost complete, today we announced that we will be increasing the program by 4.6 million shares or another 2% of the share base in effect of the start of the program this past February.

Finally, we ended the quarter with net debt of $658 million or 1.1x adjusted EBITDA at the low end of our target leverage range.

Turning to the outlook. Given the company's year to date performance, we feel well positioned to exceed the high end of our original guidance range and are now projecting adjusted EPS of $1.70 to $1.72. This means at the midpoint, we expect to see 13% EPS growth over the prior year. Consolidated net sales growth for the year is expected to be in the mid to high single digit range with high single digit sales growth in Printwear and low single digit branded apparel sales growth. We now expect adjusted EBITDA for the year to be in the range of $580 million to $590 million, up from the high end of our original guidance range of $555 million to $585 million.

And as I mentioned earlier, we're also raising our free cash flow guidance and expect free cash flow to be in excess of $450 million, up from our previous guidance of in excess of $425 million. In closing, I would like to reiterate our confidence in the longer-term outlook for Gildan. We continue to remain focused on driving our business unit strategies, growing our revenue, increasing our margins, and generating strong free cash flow.

At this juncture, for 2018, we see that the drivers of EPS growth will consist of unit volume growth in key product categories as well as operating margin expansion, as we continue to increase penetration in higher margin product segments and leverage our SG&A infrastructure.

While we continue to focus on driving branded apparel operating margin expansion, I would also highlight that we believe further margin expansion remains achievable in the Printwear business. Growth in that business should come not only from increases in unit volumes but also more favorable product mix and if we capitalize on the shift towards fashion basics.

In addition, traction with the American Apparel brand is expected to accelerate in 2018 as we continue to drive that business forward. Lastly, free cash flow generation continues to build and our strong balance sheet positions us well to continue to pursue accretive acquisitions, while at the same time returning capital to our shareholders through dividends and share buybacks.

So in short, our competitive positioning remains strong, our focus on driving growth and higher profitability is clear, and together with our snug financial positioning, we remain excited about our ability to drive strong returns on invested capital and delivering long-term value for our shareholders.

With that, I will wrap up but before doing so, I would like to take this opportunity to announce that we will host an Investor Day shortly after we initiate our guidance for 2018, towards the end of February where Glenn and I will be joined by our senior leadership team to further highlight Gildan's strategy and outlook. We will get a date for this meeting out to you as soon as possible and we look forward to seeing you there. I will now turn the call back over to Sophie.

Sophie Argiriou^ Thank you, Rhod. That concludes our formal remarks. Before moving to the Q&A session, I ask that you limit the number of questions to 2 in order to give everyone the opportunity to ask a question. We will circle back for a second round of questions as time permits. I'll now turn the call over back to the operator for the question and answer session.

(Operator Instructions) We have our first question from Kenric Tyghe with Raymond James.

Glenn, if we could just speak to the performance in the sock business. Was there an issue with respect to the switchover and perhaps some packaging changes or otherwise at that particular mass retailer that caused some dislocation more than just some of the new product introductions you were mentioning? It just seems that the headwinds were perhaps even greater than would have been expected or greater than perhaps we were following. And any other color you can share with respect to the sock performance and the market share performance in the quarter.

Okay, well first of all, like Rhod said in his commentary that socks in general were down, particularly in the department specialty stores, which probably quite a significant downturn for us. I think when it comes to the mass, 2 things have happened is one, by repositioning our sock to higher prices, we obviously have lost a little bit of market share. We did have some picks up in terms of launching the product, in terms of getting it out to market and doing the reset. And those were really the factors I think that contributed to the loss of market share.

So I would say even on a going forward basis, just where we're positioned at the higher price point, we won't be able to maintain the share we had. But we think that we're positioned to continue driving our brand strategy because, look, we want to develop Gildan as a premium brand. We're positioned today with an open pack, much better quality sock, ring spun. So it fits more in terms of where we think we need to be positioned long-term and building our overall brand strategy. So we're still very confident in our strategy and look, at the end of the day, we're continuing to win our underwear business, really, which we think is the number one most brand oriented segment in the channel continues to do very well in market with a 20% gain in share despite the heavy competition from back to school from our competitors.

So we're very comfortable with our positioning and we're very excited about the future outcome of the brand strategy at mass.

If I could switch gears to Printwear, could you provide us with an update on how the fleece orders are evolving and clearly, your EPS guidance indicated you seem pretty confident with how that is evolving. But could you provide some update as to the fleece order patterns and where you stand at this point?

Our fleece is doing very well. We've seen actually a pretty good tick up in market share so far this quarter, the month of October, which is really where we start seeing the height of the sell season. So we're on track we think to achieve our plans. It's reflected in obviously our guidance that we've sent to the market. So I would say that overall where fleece is on track. The overall business in Printwear is good. Our POS is positive in all categories driven by -- except for the basic t-shirts, but our performance in fashion shirts are doing very well. We've seen great growth in international. Pricing is stable. We've got basically a good balance of inventory in the channel so our Printwear business is doing very well as we speak today.

Our next question comes from Anthony Zicha with Scotiabank.

Glenn, can you please provide some color on the sock market compared to the underwear market. Could you give us some insight on the consumer behavior. Are they buying one product more online than the other rather than visiting the store?

I think that in both categories, both socks and underwear, if you look at the market share on online sales, it's still relatively small today. It's in the 6% range and a lot of that is much higher end type products. I think what's the difference between socks and underwear is the one is more brand driven and which has typically been the underwear market where private label has not been a major factor, wherein socks there's a much greater amount of private label out in the market. And those are really I think the 2 differentiations between the 2 categories. But in both cases, I mean they're very competitively priced and online is still not a major factor in the category.

And then with reference to the storm impact, is it possible that we could quantify the impact on retail versus the Printwear? And also, can you give us some color on the pricing increases if that was the case at the retail on different products?

Anthony, it's Rhod. On the storm impact, really, it impacted in a few different places, right. We saw the, as I called out in the script, the weaker traffic trends probably that were sort of compounded by the impact of the storm, particularly in the southeast U.S. So one, you've got it on the sales side and then secondly, we did see a little bit of impact on supply chain from a cost perspective. So if you look at the storm impacts during the quarter from a sales standpoint, a little bit of an impact and then some cost coming through. I would say what we're seeing probably this quarter and flowing through in the next couple quarters is probably about a penny impact related to the storm.

Considering the challenges in the retail environment, Glenn, are you seeing some potential M&A activity becoming more attractive than it was let's say a year ago?

I can't answer that, to be perfectly honest with you. I think that as far as we're concerned, we usually adapt to market conditions and as we go forward, we're going to continue to drive our strategy. We think we have a lot of runway still. We're going to leverage our infrastructure and everything we've built today. We're looking for expanding our topline organically even despite the pressure we're having this year. We think we still have a lot of opportunities to continue to expand within the position that we have as we continue to drive our underwear strategy and reposition ourselves in sock. So we're pretty comfortable with driving our forward -- as we go-forward and also, focusing on margin expansion, SG&A leverage, and making sure that we increase the profitability of our branded group as we move into 2018.

Our next question is from Mark Petrie with CIBC.

I'm wondering if you could follow-up on your comments with regards to socks and how you repositioned the product at higher quality and higher price points. Is that something that you are actively pursuing in terms of the underwear positioning as mass and --

Well, our underwear positioning at mass is relatively stable, but what we're doing is we're developing a lot of new products right now. So we have different categories in underwear. So we've launched some new products in 2017, some stretch products for example. We're looking to expand on that as we move forward into 2018 and we did raise our prices in the beginning of the year. So our price point is up a little bit in retail, which has not affected our sell through at all. And so we're well positioned and we're going to continue to one day at a time and keep building our platform basically, and leverage our opportunity as we see it going forward.

Wondering if you could just provide a bit more color in terms of the gross margin. That number has been reasonably volatile. How do you feel about the pricing today? And I know you don't disclose relative hedging levels, but can you give us a sense of how you expect the gross margin and sort of pricing versus cotton costs to play out Q4 into 2018.

I would just say that we've taken a price increase early in the year. So our pricing in cotton are in balance as we see today, so we're truly very comfortable with our positioning as we move into 2018.

Just so we understand, your relative cotton costs from Q3 into Q4, I understand the pricing is stable but your relative costs, do those change? Are those still ebbing up?

Our costs in Q3 and Q4 are higher than Q1 and Q2. That answer is yes, slightly higher, and we reflected -- our pricing strategy will reflect the increase in cotton costs and on a go-forward basis, everything will be balanced and in line.

Our next question is from Martin Landry with GMP Securities.

You mentioned on American Apparel that you're rolling out your direct to consumer platform. I think you've done that in October so wondering how many countries is this available and what's your target in terms of percentage of sales that will come from ecommerce from American Apparel.

Well, I would just say, let me just tell you a little bit about American Apparel because at the end of the day, we don't know how big is big, to be honest with you, with the brand. We just started off basically. We're on track this year to achieve our goal in the first year, but you've got to understand what we've done so far and I think how well we're performing with the acquisition. Since we bought the company and really just taking it back, we just bought the intellectual property and about $10 million worth of inventory. And today, we've launched over 700 styles and leveraged really our supply chain basically to implement and start producing all these products. There's nobody in the world that could have pulled that off basically in this timeframe that we did it.

We've opened up our new distribution center in LA basically, which is going to service our print channel, but as well as all of our direct to consumer for the U.S. market. We're expanding as we're going forward because I think the thing with American Apparel, it's just not a direct to consumer strategy. That's what so great about this brand. It services both channels of our distribution. So we're expanding our distribution as we go forward in 2018 domestically, but very aggressively internationally. We have a lot of opportunity. We've opened up distributors in every single country in which we operate have all been gravitating towards that and excited about the brand. We launched our direct to consumer strategy in the U.S., and you can go on our website and see exactly the look and feel, and it's doing very well. We're excited about it and we're launching our direct to consumer strategy in international markets as we go forward into 2018. And we're also setting up our marketplace strategy as well. So we have different areas of opportunity for us. We've got a pretty good runway ahead of us in terms of the brand itself, the opportunity. We're really excited about it and this is just another way about how we are positioning ourselves and our company to be very tactical and make good acquisitions, and basically leverage them and leverage our infrastructure to get higher returns on capital for our shareholders. So I can't tell you how big it's going to be, because if I told you, I'd make you a little nervous. But at the end of the day, we think it's quite a large opportunity for the company as we go forward.

Because I think last quarter, you were talking about a goal of sales for this year of $50 million to $75 million. It looks like you're tracking around $33 million so far but given all the rollout that you're doing, maybe don't give us a guidance longer-term but is it fair to say that there's a potential for your $50 million to $75 million goal to double in sales next year?

I would say that we're on track to achieve our goals for this year and we're definitely on track to have significant increases as we go forward into next year.

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

I wanted to drill down a little bit on the socks performance in the quarter. Can you talk a little bit about why demand is weaker Is that just traffic? Is there something else going on in the industry for the category that you can point to?

I can't answer why demand is lower but the overall category is down across the board. It could be weather related. It could be just a structural change interest the way people's behaviors and what they're wearing on their feet. But at the end of the day, that's something that obviously could be cyclical. We just don't know. So maybe that answers your question, but we know definitely when it comes to the more formal socks and people are wearing truthfully today a little bit more casual, I think that there's a lot more casual socks in the department specialty stores today, which has put a little pressure on our traditional Gold Toe brand. But overall, the category seems to be trending down. Maybe it's hit its bottom, but we'll see as we go forward.

And then on the underwear side, you cited some good sales of Gildan branded men's underwear. Can you provide any numbers around where you think your share is and whether you think it's up sequentially or year-over-year?

Our share is up about 250 basis points from last year.

11% in September, Stephen, up 250 as Glenn said. So a 20% increase in share over.

Just one final question on the Printwear business. Obviously, some puts and takes by category but can you talk a little bit about the weakness around basics. What was the driver of basics being down in the quarter?

At the end of the day, you can look at it in different ways is look, we sell -- the price of a basic shirt sells for a lot less than a fashion shirt, right. So the market is trending towards fashion, which in theory in Printwear is great for us because that means that the price elasticity is there and consumers in that category are spending more money to buy the products. They're looking for better features, better garments. So even our fashion basics -- really, the big difference between the fashion basic and the basic is the fabrication and sometimes a little bit the fit. So really, we think this is very positive for us because overall, our POS is positive but yet, we're leveraging the higher price, higher margin products, which is ultimately providing better returns as we go forward. And I think we saw this coming for a long time and if you look at the company, and that's part of our success is that we invest in very long strategic opportunities and our whole yarn investment strategy, which we set forth 2 or 3 years ago to invest $400 million in yarn, a lot of that yarn capacity was built to support, which we thought was the growing area of the market, which is this fashion basics and that's what's allowing us to get these great returns on capital. And we also combined that I think with our acquisition strategy, which I think has been very tactical. And if you look at what we've done over the last let's say couple years, we bought 3 or 4 great companies. We've paid very low multiples for these companies. We've got very high returns on capital with very low risk. We leveraged really our supply chain. We've driven our organic sales plan and I think that's the important thing is that all these acquisitions that we've achieved are what's shaping Printwear today and allowing us to continue to have strong earnings as we move into 2018. These acquisitions have given us new product categories, new brands like American Apparel. We've added capacity like Swift. We just purchased Swift and also Alstyle. We've entered new markets and new channels of distribution. So everything we're doing today with either our capital investments, our acquisition strategy, really we're positioning ourselves we think as we move forward into the future to continue strong earnings and growth potential, and performance.

Our next question comes from Derek Dley with Canaccord Genuity.

Just following up on that commentary on the fashion basics segment, where are you guys seeing -- which channels are you guys seeing most of your shelf space gains coming from?

The channels we defined it as basically basic, which was 60% of the market and the fashion and performance was roughly the other 40%. So that 40% part is growing at a much quicker rate. The unit volume is basically just shifting and year volume is going up in general but the shift is -- the growth is coming in unit volume is coming in from the fashion side, but it's also compounded by higher selling prices and higher margins. So that's actually a double whammy for us in terms of helping drive earnings as we go forward.

In terms of that fashion basics and the performance basics market, what channels specifically within those segments are you guys growing in the fastest?

Well, it's all going into the Printwear segment so the segment services, souvenir, rock concerts, restaurants. It's just basically the old -- it's just a switch in the overall market where people are willing to trade up and spend a little bit more money for a better quality product basically at higher prices.

And have you seen that 60/40 split? Was that 70/30 2 years ago or where did that come from?

I would say 5 years ago it was 100% all basic, right, I mean so that what happens. So over time this thing has gravitated and we still have not the same type of share we have in the basic side where we have a dominant position. But the capital investments we're making in our brand strategy, our objective is to align ourselves to have a larger market share in that segment and there's lots of opportunity for growth as we go forward, not just in the U.S. but also in our international markets.

In the international markets in Europe, fashion basics and performance where it makes up a greater component of the overall market; is that correct?

Yes, fashion is a little bit bigger in Europe than it is -- yes, the split is the other way around. It's probably 60% fashion and 40% basics. So there, we've been sort of competing in the smaller side of the market and now, with all these products we have, we're leveraging American Apparel there next year. We've opened up distribution on almost all of our countries in Europe. We're bringing our Comfort Colors brand to the European market because we've now added up enough capacity because one of our major capacity expansions this year was in our garment dye area in Honduras so we can support international sales. So these are all products -- we're bringing in our Anvil product, which is doing very well both domestically and we're going to be leveraging that in international markets. So we have a whole brand portfolio of fashion products that will continue to grow both markets as we go forward.

Our next question comes from Vishal Shreedhar with National Bank.

Just on the license brands, I was hoping you could give us some perspective there. Is management pleased with the performance of those contracts and how should we think about when those contracts expire, what I'm trying to do is to gauge and see if there's any likelihood that these contracts will go away, like the private label business did, and if there's any risk to sales from that standpoint.

No. We're growing that category. I think that in general, there's a lot of opportunity for growth and one of our capacity expansion opportunities right now, particularly in Rio Nance 6, is to build that plant to be a fashion open width factory. So we're in the process of building up Rio Nance 6. It's going to be starting in the second quarter of next year. It's going to be the largest plant of its type in the region. It's probably going to have a greater capacity than the whole region itself, just to give you an idea. And these lifestyle brands in which we service basically are looking to gravitate and bring product close to this hemisphere so they can respond to their consumers. So we think, again, we're making an investment to support them but also to support our own fashion business itself by, again, investing in the proper capital investments to support future sales. So Rio Nance 6 is going to be a big plus for us to continue driving that segment as we go forward in the future.

So it's unlikely that you'll divest some of those brands on a net basis. That business will continue to grow.

We're growing that business.

And I was hoping you could give us an update on online maybe percentage of that business that's online of your business in aggregate.

Online is doing well. We have a small base right now. So we're going to continue to drive our online strategy. What I said in one of my calls previous, the key thing for us to building our online strategy is actually from a distribution capacity perspective because to ship online, you really need to be able to ship to the piece. And what we've done in California, basically, by building our DTC distribution strategy is actually putting in that skillset. So now, our plan is as we go forward is to continue looking at ways to leverage that, not just with American Apparel but also looking at how we're going to leverage that with all of our other brands, which we probably truthfully have underperformed in that area. That's actually an area of opportunity for the company. It represents both consolidated is around 5% of our overall revenues today in branded but that's an area where we're probably underperforming the market. But what we need to do is we need to make the investment in obviously our systems as well as our distribution capacity to be able to grow it. And that's going to be our plan as we move forward into 2018.

Our next question comes from Andrew Burns with D.A. Davidson.

Two longer-term oriented questions for you. First on manufacturing automation, it's an increasingly a focused point in the apparel industry. Could you talk about your view on the potential to automate portions of the cut and sew process and what investments or technologies are you looking at? Is there significant opportunity to reduce both the labor component of cut and sew over time?

You're talking about the robotic article that's been flying around the Wall Street Journal. At the end of the day, there's no company in the apparel space that's making capital investments like Gildan has done and runs supply chain as effective and efficient as ours. So we will continue to invest in capital where we think we can get the returns and we're also going to make sure that we invest in the technology and be ahead of the curve in any type of new technology that will revolutionize this market. So I can assure you that we will be the first and foremost to be able to drive any type of new advances in technology. It's still a long way away when you’ve read some of those articles. We have a very good pulse on what it takes to produce and develop this type of technology. There are ways to -- and machines available to -- that in the interim that we're working on, especially as we move into more open width fabric and side seam garments, and other things to reduce our cost structure. So we have a lot of technology, which again, we'll share at our investor conference in February next year, or really March. And we're looking forward to explain to you where we're going. But at the end of the day, the capital investments that we've made have positioned us to have a unique supply chain that will allow us to continue driving top line sales. Doing acquisitions has been something that's been very effective to us. We launched 700 styles with American Apparel basically effectively put into our supply chain in a very short period of time.

So I think we're well positioned and I think one thing investors should have is confidence that we are going to continue to make an investment and be the state of the art manufacturing in this hemisphere and the world.

Clearly, the retail channel is going through a period of profound change as sales migrate online. I was wondering how you think about the Printwear business model evolving over the coming years and to what extent you think you'll be able to find more pockets of the screen print business where you'll be able to leverage ecommerce and increase the direct to screen printer transaction versus --

Listen, the world is changing and at the end of the day, our Printwear business, our branded business, and ecommerce business is becoming one market. To give you an example, if you go on Amazon and you Google Comfort Colors, there's 7,000 hits on Comfort Colors today. We don't sell Comfort Colors. It's all resellers that are selling the product. So there's becoming big diversions of these marketplaces and what's growing a lot of our Printwear business is ecommerce because our products are being sold everywhere. Another area of opportunity, for example, historically if you wanted to buy a t-shirt because your daughter is having a birthday party and you want to get some shirts printed, today you can click a picture, send it online and have a company supply you a product printed and delivered to you in a very short period of time. Those types of currents didn't happen 4 or 5 years ago because of lead times and structural changes. So ecommerce has changed the Printwear business and is growing the Printwear business and the whole universe is becoming one whole market basically and that's what really I think the effect of ecommerce. Another way of looking at it is maybe years back you had a consumer that shopped at Dollar General and you had a consumer that shopped at Macy's. Today, you can go online and shop anywhere you want. So again, the consumer basically and the overall market experience is changing and one thing that we're looking at as a company is how do we adapt to that change. And as we go forward, we're looking at ways to better service the overall market and make sure that we're taking advantage in all of our channels of distribution and making the changes as this market realigns itself on a go-forward basis.

Our next question comes from Jim Duffy with Stifel.

Two lines of question for me. First, on SG&A, Rhod, all signs point to top line trends remaining difficult. How are you balancing SG&A management against investment in the brands and the business? And then related to that, you spoke to leverage opportunities in 2018. What type of revenue trends would you need to see to deliver on that and still make healthy levels of investment in the business?

I'll just comment on SG&A and I'll let Glenn talk about revenue trends. I think if you look at SG&A, we're being very focused on our SG&A, right. We're managing it well. I think if you look at the -- some of the changes in SG&A and some increases that we've seen, a lot of that is related to acquisitions. That's what's driving American Apparel. We're being very focused on digital marketing and the shift of our SG&A and how we spend to support our business overall. So I think we're very comfortable with the trend in our SG&A. We've always been very focused and we're going to remain very focused to make sure we're spending and focusing that SG&A in the growth areas of our business.

And maybe I'll just comment, look, at the end of the day, we continue to be very bullish on our -- obviously, as we go forward. Obviously, we're growing off a big base but we basically have our Printwear market, which is going to continue to drive based on our leadership position as the market grows itself. We're going to continue to expand in our fashion basics and performance area. We're going to expand internationally. We're going to leverage all of our acquisitions, which is Comfort Colors, Alstyle, and obviously American Apparel, and we're going to leverage our overall leader position in Printwear.

In branded, we're definitely -- look, we have work to do. There's no question. We're not happy with our results as we speak today. We're going to continue to look at ways to grow the top line in that business as we go forward. We're securing new programs as we speak into 2018 and we're very committed to making sure that we drive our brand strategy as well as we drive the overall performance of the company. And we're also still very excited also about our expansion in our GLB business with our global lifestyle brand. So we have areas of growth in all of these 4 categories of growth. So we're very excited about how we drive and leverage our SG&A and drive top line sales as we move into 2018.

Glenn, the marketing budget as it relates to branded, have you seen any changes there? Are you continuing to make investments? Have you pulled back some as volumes diversify across brands? Can you speak for a moment about what you're doing with marketing?

We're continuing to spend. Our spending is up in advertising. We're committed to continue driving our brand strategy. Our awareness is basically continuing to go. We've had a big increase in our awareness in the brand this year. We're looking at different ways to spend our money, obviously, as the market changes into digital and other areas. But look, we're committed to continue spending and we're getting results because our share is continuing to grow and we're excited about our positioning.

Lastly, Rhod, tax rate (inaudible) in the quarter. Can you speak for a moment about some of the mix variables influencing tax rate and the outlook for that looking forward?

Yes, if you look at the tax rate for the quarter, our effective tax rate was around 2% and if you look at for the full year, we were calling our tax rate around 5%. Now, I would say it's closer to 4% and really what's driving that Jim is the shift in what we're seeing in the mix of profitability between our Printwear business and our branded apparel business. As our branded apparel business, we're adjusting our forecast for branded apparel. We're able to effectively lower our overall tax rate and so that's what's driving us down from 5% for the full year to 4% now. And in the quarter, we effectively saw that impact and we did some true up for the prior quarters as well. So I think our tax rate is coming in well for the year.

Our next question comes from Sabahat Khan with RBC Capital Markets.

Just one quick follow-up on the socks category. It is a large market share for you guys, but what would you say the overall growth of that category of retail, including brick and mortar and ecommerce just generally for the industry?

The overall category is flat to slightly down and has been down for the last couple years actually. So it hasn't had any signs of growth. It's been flat to down over the last couple of years. That's the overall market. But it's been also down much more in department specialty stores relative to where mass and online. Those areas are growing still, offset by department and specialty.

Just in the share buyback increase that you announced this morning, any commentary on how much of that you would look to execute on by the end of the year and how much of a share buyback is reflected in your new guidance for EPS?

If you look at where we are from a share buyback perspective, what we effectively reflected in our guidance for the full year is the completion of our current program, which is 5% buyback program. So if we go above that as we go forward, we have the flexibility. We've announced the increase from 5% to 7%. That will give us some upside.

Not material for this year. Positive for 2018.

Rolling into 2018.

Our next question comes from Tal Woolley with Eight Capital.

I wanted to ask a couple questions on inventory. It looks like year-over-year, inventories are flat, but I'm assuming there was a bit of a build for American Apparel and so that means you probably brought down your core inventory positions a bit, which is great. Can you talk a little bit more about how much room there might be to go on that process going forward?

So you're right, Tal. If you look at the inventories, I think we're very pleased with the way we've been performing from an inventory perspective. We did see the build for American Apparel. We've seen also the impact of higher cotton costs rolling through inventories as well. So I think we're very pleased with the way we've performed from an inventory perspective. I think if you look at how we see inventories playing out through the end of the year, we continue to see good performance as well. And I think if we look at overall working capital, we are very focused on effectively being very efficient with our working capital. We need working capital to support the business. We need it to support the Printwear business, we need it to support branded apparel.

But one of the key areas of focus that we have is making sure that we continue to be very efficient with our overall working capital, not only our inventories, our receivables, and we continue to drive total working capital down. If we look on a go-forward basis, we see opportunities to do that, particularly as we move through the end of the year and then really into 2018. So really strong focus on total working capital is one of the key ways we're managing the overall capital in the business. That being said, we do need to support our Printwear business and we do need to support our branded apparel business.

And we don't want to knee jerk ourselves in terms of bringing it down too fast. So we're trying to keep it the level of dollars constant and our sales growing forward is probably the way that you look at it over the next couple of years let's say.

If we look at the branded apparel business, if you consider your different clientele there, your mass accounts, sporting goods, department stores, if you take into account their store level and warehouse inventories, do they hold different levels?

They hold different levels for sure. The destocking wasn't a one particular customer. It was basically across the board. The total decline in general wasn't that large but it just adds a up a little bit every -- a little bit here, a little bit here because we sell into so many different channels of distribution. So it's just a function of I think conservativeness and obviously, retailers worrying about their own state of their business in today's environment.

Lastly, on trade agreements, obviously, there's a whole lot of chatter about what's going on with NAFTA and I certainly have no idea about what exactly what will go on there. But I know CAFTA is the primary trade agreement that you rely on. Is there any concern or risk factors for the business related to any changes in NAFTA?

For us, we don't need to use our Mexican facility to service the U.S. because of the nature of our business model. Because from Mexico, we can service Canada, we can service Europe, we can service Central America and South America. So we have a lot of opportunity basically, and the Mexican market itself. Don't forget Mexico, which is the primary market where a lot of those products are going. So I don't think it's going to affect us one way or the other. So to answer your question, do I think it's -- from an apparels perspective, the U.S. has a positive surplus going into Mexico because of all the yarns and things that people are shipping into the market. So I think that they're a good balance. So it depends on what the fight is going to be and is it the auto industry or is it the apparel industry. So I'm not overly concerned to be honest with you.

Our next question comes from Keith Howlett with Desjardins Securities.

I had a question on the fashion basics and performance wear segment in U.S. Printwear. Do you think that you're growing in line with the market or ahead or behind of the growth in those segments?

I think we're starting to grow faster than the market right now. We're taking market share and in fact, we know we've taken market share this year. And we're doing it just because of we have more brands that we're selling today. We have fashion basics in the Gildan brand. We have in Anvil, Comfort Colors, and now American Apparel. So we have a lot of investment in brands that are servicing that segment. We're launching a brand new brand next year, which we think is going to be something that will really take the market by storm. So we have other things that are coming up the pipe. So we're pretty comfortable that we're going to continue to take share in the category and we're well positioned. And so we've made the investments in order for us to be able to be well positioned by investing significant capital in yarn spinning, and as we leverage our Rio Nance 6 facility that's going to allow us to encourage more sales, more styles, and bigger opportunity.

With respect to American Apparel, do you anticipate that Printwear -- screen printers are going to buy on your online site or is it all supposed to be consumers?

Online is strictly consumers and the printers are buying VR distributors, basically, the traditional way we bring our products to market. So we have really 2 separate markets and American Apparel itself had serviced both these markets in the past prior to us acquiring the company.

And on your lifestyle apparel manufacturing business, the major brands have been struggling in the U.S. market, I guess, maybe. Does that directly impact your business with them? Or was that business sort of flat year-over-year?

I think we're well positioned. These brands sell lots of products. They sell shoes. They sell all kinds of products, right. So where we're positioned I think we're very comfortable that we had a good growth in that area this year and we're very bullish about the future in the categories in which we're servicing.

Our next question comes from Brian Morrison with TD Securities.

A couple follow-up questions. Rhod, on the Printwear side you said international sales up 20% in the quarter. Can you just provide some color on the annual run rate of this business? I presume it's around $250 million or so. And really where the key areas of strength out of this quarter? Is it being driven by Asian market penetration?

If you look at the Printwear business, it's $250 million, a little bit about that I would say for the business overall from an international perspective and when you look at the different markets around the world, Asia going very, very well, very strong. But we also saw strength in Europe. Actually, I said in my comments, we saw strength in all of the regions but we were very pleased with Asia. We were very pleased with Europe and good strength elsewhere.

Okay, and then just really a simplified question with this shift toward the higher price, higher margin fashion basics and performance. Can you just remind us -- I don't believe all of your textile facilities can service this segment. I'm sure that Anvil and 5 and 6 can. But can you just remind us what facilities can and how much of your capacity when RN 6 comes online can service this segment?

Most of our plants are pretty diversified in terms of being able to service the market. We can adjust some of the equipment in terms of knitting to be able to support that type of product category, which we've been doing up until now. So right now, up until now, we've been producing in 5, in Rio Nance 1. So basically, in Mexico. So we have it spread out everywhere but the difference is that our core styles of fashion basics is a single 30s t-shirt, which is the staple of that segment. But what ends up happening with Rio Nance 6 is that's it's going to allow us to bring new fabrications to market. And that's the fundamental difference. So when you're making tubular products, you need to have size small, size medium, size large, size extra-large. So you have to develop it in 5, 6 machines versus when you cut and sew, and create side seams and make open width fabric, you only have to develop one product, one machine, and one development, which allows you to be much more flexible, and also allows you to make smaller runs more efficiently because the volume on some of these styles is not there relative. So it will help us to support even better working capital initiatives at the same time as we look at putting some of the products through 6 that may be through Rio Nance 5. So Rio Nance 6 is actually going to be very accretive to our supply chain because we've been producing these fashion styles in our core plants and a lot of that product will be shipped into Rio Nance 6, which will allow us to reduce our costs in our core plants and actually give us more flexibility from a working capital perspective as we build 6. So we think we're well positioned to be a win-win as we go forward.

We now have a question from Stephen MacLeod with BMO Capital

markets.

All my questions have been answered. Thank you.

We have no further questions in queue. I will now turn the call back over to Sophie Argiriou for closing remarks.

Thank you everyone. Once again, we'd like to thank you for your interest and for participating on the call. This concludes the call and we look forward to speaking to you soon. Have a great day.

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