Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Gildan Activewear Inc (NYSE:GIL)
Q1 2020 Earnings Call
Apr 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Gildan Activewear Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Sophie Argiriou. Please go ahead.

Sophie Argiriou -- Vice President, Investor Communications

Thank you, Demetria. Good afternoon, everyone and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the first quarter of 2020. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission and are available on the company's corporate website.

On the call today, we have Glenn Chamandy, our President and Chief Executive Officer and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rhod will take you through the results for the quarter and our business outlook and a Q&A session will follow.

Before we begin, please take note 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.

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

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Thank you, Sophie and good afternoon to all and thank you for joining the call. We hope everyone is staying safe and keeping as well as possible during this unprecedented time. Before we get to the results for the quarter, let's start with an update on the COVID-19 related actions the company has taken since March 23 when we last talked with you.

From the outset, as the whole situation developed, our first priority has been and remains the health and welfare of our employees, customers, suppliers and other partners as we ensure the continuity of our business.

In this regard, we are very pleased that our production of face masks and isolation gowns is now under way. We are currently selling masks in some of our facilities in Central America to support local government requirements as well as on behalf of a cooperative consortium of North American apparel and textile companies supplying non-medical masks to the healthcare sector. We are also producing non-medical masks and isolation gowns for various retailers to be distributed to healthcare organizations.

In total, we have current plans to produce over 150 million masks and gowns under this effort and we will continue to provide as much supply of product as we can as we move through the pandemic. In order to support production of masks and gowns, we have limited manufacturing activity currently under way, operating with stringent safety processes and protocols in place. Far and away, the majority of our manufacturing capacity around the world remains idle after we extended the shutdown of our operations following mid-April to respect government directives and to manage our inventory levels given the significant downturn in demand caused by the pandemic.

Our distribution centers, which have strong inventory levels, mostly remain open to service customers with appropriate safety measures in place for our employees, but at much reduced operating levels. In parallel with this reduced operating activity, we have moved quickly and decisively to control all costs, defer non-critical capital investments and to manage our working capital. In this regard, on March 30, we implemented a number of workforce measures. The Gildan Board of Directors, Glenn, myself, and the rest of the executive team agreed to forego 50% of our salaries and we have implemented pay reductions ranging from 20% to 35% across all senior management levels. Further, much of our salaried workforce is now operating on a four-day workweek.

Finally, given the uncertain duration of this crisis and the related economic impacts, we have moved forward with major additional actions to strengthen our balance sheet and liquidity position. In our March update, we indicated that after drawing down the remaining available portion of our revolving long-term bank credit facility, we stood with just over $500 million of cash and over $50 million of available credit lines. On April 6, we secured an additional $400 million of long-term debt, providing us with liquidity of over $950 million and we are currently operating with just over $650 million of cash on hand and $300 million of available credit lines.

Further, in addition to suspending our share repurchases, which we did in early March, today, we announced that we will be suspending our quarterly dividend starting with the first quarter. While returning capital to shareholders is a key priority for Gildan and we remain fully committed to doing so when the environment normalizes, we have taken these actions to ensure that we are extremely well positioned to move through this evolving, challenging and highly uncertain environment.

Now, moving on to our first quarter results. We generated $459 million in sales, down 26.4% over the prior year quarter mainly due to lower sales volumes. Although our initial expectations called for lower volumes in the first quarter, the overall volume declines in the quarter were meaningfully higher than we anticipated given significantly weaker demand in March. During the first two months of the quarter, our sales performance in North America for imprintables was relatively on track, but fell off considerably in March, typically the biggest sales month on the first quarter as the spread of the pandemic started to heighten in North America. Further, our retail sales were also impacted although less severely in the mass and online channels. Overall, these year-over-year volume declines in the quarter were partly offset by positive product mix and slightly higher net selling prices due to lower discounting.

Activewear sales of approximately $373 million fell 24.5% during the quarter, driven in imprintables by double-digit unit volume declines in both North America and international as well as due to a $6 million sales return allowance related to our SKU rationalization initiative. In retail, activewear sales were down due to store closures and lower demand caused by the pandemic although the decline was less severe than we saw in imprintables.

In the hosiery and underwear category, we generated $86.5 million in sales in the first quarter, down 34% compared to last quarter as the downturn in demand related to store closures drove lower sales. In addition, as we highlighted in February when we reported our 2019 fourth quarter results, the decline in hosiery this quarter also reflected the impact from the exit of a sock program in masks and the year-over-year impact of the initial roll-out of a new private brand sock program which launched in the first quarter last year.

In underwear, overall sales were down due to the current challenging demand environment and the year-over-year impact of fully exiting a branded underwear program in masks at the end of the first quarter of 2019, partly offset by increased sales of private brand men's underwear in the mass channel.

Gross margin in the first quarter was 23.2% and adjusted gross margin was 24.6%, after excluding an $8 million charge related to discontinued imprintable SKUs. Although adjusted gross margin was down 120 basis points over the first quarter of 2019, it is important to highlight that the year-over-year variance included 340 basis points of negative variance related to manufacturing idling and other COVID-19 related costs. Without these costs, adjusted gross margin would have been 28%, 220 basis points above the prior year level. Accordingly, COVID-19 costs more than offset favorable product mix related to our underwear business, lower raw material cost and most notably, the benefit of an improving cost structure from manufacturing optimization issues under our Back to Basics strategy.

Moving on to SG&A expenses. For the first quarter, SG&A expenses totaled $74 million, down $19 million over last year, primarily resulting from reductions in compensation expenses, lower volume-driven distribution expenses and from tightly managing all our costs, including eliminating all discretionary expenses as we move through the back part of the quarter.

Now, let me highlight certain impairment charges taken in the quarter in light of the impact of the COVID-19 situation. During the first quarter, although we did not incur any significant customer-specific accounts receivable write-offs, we increased our allowance for expected credit losses to reflect heightened credit risk in this environment. As you would expect, some of our customers are working to navigate through this challenging period and have requested extended payment terms on their account balances as they closely manage their operations and working capital positions. While we are working with these customers and fully expect payment, we are nonetheless required to assign an element of risk to these receivables and adjust our allowance for credit losses accordingly.

In addition, this quarter, we recorded an impairment charge of $94 million relating to goodwill and intangible assets acquired in previous sock and hosiery business acquisitions after conducting an impairment review of our hosiery cash-generating unit. While the longer-term outlook for this business -- for this part of our business remains unchanged and we believe that we are well positioned from a competitor perspective, the impairment was triggered by the broad impact of COVID-19 on market valuations, including for Gildan.

Finally, in the first quarter, we recorded $10 million of anticipated restructuring and acquisition related costs largely associated with the relocation of our Mexican operations and costs related to the completion of the exit of our ship-to-the-piece activities. Adding up all these elements, our operating loss in the quarter totaled $92 million compared to operating income of $33 million in the prior year. Before reflecting charges associated with restructuring and acquisition related costs, the goodwill and intangible asset impairment and discontinued imprintable SKUs, we generated adjusted operating income of $20 million in the quarter compared to $43 million in 2019. And net loss for the quarter was $0.50 per share, while adjusted EPS was $0.06, down from $0.16 last year, reflecting the sales and operating margin decline, including $0.08 of manufacturing, idling and COVID related costs.

Turning to free cash flow, we consumed $235 million of free cash flow in the first quarter of 2020 compared to $128 million consumed last year for this period. The change was mainly due to the decrease in earnings in the quarter and higher working capital from increased finished goods inventory due to a planned inventory build in the first part of the quarter. Our capital expenditures in the first quarter were approximately $26 million, primarily for textile and yarn operations.

We expect lower levels of capital spending going forward as we defer non-critical capital expenditures in the near term. Finally, under our 2019 share repurchase program, we bought back just over 843,000 shares in the first two months of 2020 for a total cost of $23.2 million. At quarter end, we had net debt of just over $1.1 billion and a net debt leverage ratio of 2.2 times trailing 12 months adjusted EBITDA.

Now, a few words on the outlook. Visibility regarding the duration and extent of the impact of the pandemic remains extremely low. And as you are already aware, on March 23, we withdrew our quarterly and annual guidance. However, to provide further context, we thought it would be helpful to update you on the demand trends we have seen thus far in April. In the imprintables channel, when we last talked during the third week of March, POS was down approximately 50% and we expected further weakness. This played out at the end of March, and in April, we have seen POS trending down 75% versus prior year levels.

Turning to our international imprintables channels, POS in Europe is tracking at similar levels as North America, while Asia is slightly better with POS down 65% from last year's levels. POS in retail channels has also decelerated in April as more and more retailers closed their doors in response to shelter-in-place and non-essential business closure directives. Overall, POS in the retail channel is down 45% in April. In this regard, our branded and licensed sock business and our global lifestyle private brand business has experienced weaker levels of POS given our high exposure to the department, sporting and specialty store channels as well as large sporting-related events.

On the other hand, we are very encouraged by the strong performance of our private brand underwear business in mass stores and our e-commerce sales, particularly as online retailers are starting to include our basic apparel product categories as priority shipments along with essentials. At this juncture, it is unclear how these trends will evolve as different actions are enacted in various jurisdictions to adjust to the ongoing phases of the pandemic. However, given what we have seen thus far in April and given broader economic expectations, we do expect a significant decline in POS and shipments for the second quarter of 2020. Accordingly, this sales outlook, combined with the impact of fixed cost absorption, while our manufacturing facilities remain idle, will likely lead to a significant earnings loss in the second quarter of 2020.

In closing, despite this outlook, the actions we have taken positions Gildan well to navigate through this challenging environment. As I highlighted earlier, our primary focus is the health and well-being of our people and the continuity and long-term success of the business. We are very proud as how our whole organization has adapted to deal with the current environment, including responding to help alleviate global PPE shortages. We have taken the steps to reduce our fixed costs and expect to continue to lower our expenses as we move forward and adjust to a weak demand outlook, which could extend through the remainder of the year. We have good inventory levels in all product categories to service our customers and we have strong liquidity overall.

Further, our Back to Basics basic strategy, which we have been implementing over the last two years to simplify and lower our cost structure, has put us in a better position to deal with these events. We have successfully navigated through challenging environments in the past, and we are confident that our strong business model, financial position and resilience will allow us to emerge successfully from this global crisis, positioned well for the long term.

With that, thank you and I will turn the call back over to Sophie.

Sophie Argiriou -- Vice President, Investor Communications

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 two and we will circle back for second round of questions if time permits. I will now turn the call over back to the operator for the question-and-answer session. Demetria, go ahead.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Paul Lejuez with Citi Research. You may proceed.

Paul Lejuez -- Citi Research -- Analyst

...the information. Curious about your expectations for cash burn in 2Q relative to Q1 just given that we've had more time to make adjustments to inventory and capex as well as SG&A. And then I just want to circle back on the financial health of your largest customers on the printwear side. What are the conversations that you are having with those folks? What sort of terms are you extending, and what are they communicating to you about future orders? Thanks.

Glenn J. Chamandy -- President & Chief Executive Officer

Rhod, do you want to deal with this?

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Yes, I will. Okay. Thanks Paul for the question. So on cash burn, when we spoke to you in mid-March, we said that we would expect to get our cash burn down to the $35 million, $40 million range as we move through the end of April and into May. And I could say that we are very much on track for that, right. So as we move through the first part of the first quarter and through the remaining part of the second quarter, our cash burn will be at that level, $35 million to $40 million. We have done a lot. We have implemented a lot of actions as we went through with the opening remarks of the call. And all of that is allowing us to effectively drive our cash burn to where we expected it would be.

If you look at the financial health of our customers, our customers are obviously like everybody else, working through the overall situation. They have taken actions to effectively manage their overall operating positions to effectively ensure that they can both service their customers, while adjusting their cost structures to deal with the reduced level of demand that we are seeing across the various states, particularly the states where you have shelter-in-place mandates.

So I would say all of our customers are -- effectively they are operating. In some cases, they may have reduced some of their warehouses in order to reduce cost, and they're adjusting to the demand footprint that is out there. And they're -- as they move through this, as you might expect, they are effectively selling down out of their inventory, and as effectively demand arises, they maybe coming to us and effectively sourcing supply from us as required in order to support the sales. But obviously given the inventory that was in the channel and the level of sales that we are seeing, obviously our shipments are very low now, because effectively distributor inventory is for the most part taking care of demand.

Paul Lejuez -- Citi Research -- Analyst

Understood. Thank you very much. Good luck.

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Thank you.

Operator

And our next question comes from Brian Morrison with TD Securities. You may proceed.

Brian Morrison -- TD Securities -- Analyst

I have to believe in this environment that several competitors must be much more negatively impacted or greater than yourself. I am curious how you view the landscape from an ability to gain market share perspective and maybe even a potential for M&A despite your cash conservation measures ongoing right now.

Glenn J. Chamandy -- President & Chief Executive Officer

Well, look, it's hard to say how our competitors will weather the storm. I think what's important is really early days right now, because there is really not a lot of business activity happening as we speak. And as we move toward the end of this year, I think we will see a lot of materialization happen in terms of how the market will shape out and the competitive landscape and how people are able to bring their capacity back on, etc., etc. So, there is definitely going to be, I think somewhat of a shake-up in the industry, in the sense where -- things obviously are changing. And the question is also -- is going be how long will it take to get demand back to the levels that it was before. So, I think what we are doing is we are putting ourselves in a pretty good position to weather the storm with the additional liquidity that we have both from a go-forward position on an organic basis as well as we have the liquidity in the event of there are opportunistic acquisitions available to us as the market unfolds in the future.

Brian Morrison -- TD Securities -- Analyst

Okay. And then Rhod, one quick one, just in terms of your prior cost saving initiatives to get to your 30 [Phonetic] and 12 [Phonetic]. I realized that those are not achievable at this point time, but in terms of facility consolidation, specifically Mexico, also maybe Canada and Honduras, are the facility consolidations, are they perceiving, are they complete, are they on pause? Where do they stand right now?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, all the facilities in Mexico have now fully been closed down. We are moving equipment basically at the end of Q4 and during Q1, we've been moving equipment throughout our system. There were some operations still being performed in Mexico that were completely discontinued toward the end of our -- middle of -- the end of March and then the balance of the equipment will be repurposed as we go forward. And regarding our future expectations both on SG&A and margins, look, there's -- nothing has changed in our business. We are continuing to execute our Back to Basics strategy from all aspects. And truthfully, this is going to make us even better and stronger, because we are able to expedite and manage our SG&A. So, we are planning on making sure that we continue to focus on SG&A as a percentage of sales. We don't anticipate as we go forward into 2021 that we will be fully recovered. We think will be moving forward in the right direction. So we are going to make sure that our SG&A is right-sized as we move into 2021. And all the things that we are doing in terms of leveraging our core competency in our Back to Basics and manufacturing will continue to improve our margins as we go forward.

Brian Morrison -- TD Securities -- Analyst

Thank you.

Operator

And our next question comes from Heather Balsky with Bank of America. You may proceed.

Heather Balsky -- Bank of America -- Analyst

Both tied to recoveries, there will be eventual recovery. I guess, first, when we do get there, can you help us think through how manufacturing reramps up? How did that process work to ramp up your facilities as demand comes in or do you have to ramp up the full facility and the other factors we should be thinking about?

And then the second question is just to follow-up on your customers, this situation is very different given the shelter-in-place, but curious what you saw back in '08, '09 and maybe what we can glean from that for this time around? Thanks.

Glenn J. Chamandy -- President & Chief Executive Officer

Okay. Well, I will start off with '08, '09 because it's an easier question to answer to be honest with you. I mean the certain sense is that '08, '09 wasn't a customer demand issue, it was very short-lived in terms of the negative POS. But it was a banking crisis, it wasn't a consumer confidence capabilities, it wasn't the event -- stop having events. We are in a complete different situation than we were in '08, '09, because consumers were still going to baseball games and football and hockey and whatever, so -- and traveling. I mean, so there was a short-term impact financially, which drove through the system, but it didn't affect the consumer, where here we really have a consumer social distancing has really been the major driver where gatherings, jog runs, schools, camps, I mean almost every single event that -- or venue that we potentially sell product to. So that's I think is a big difference. So look, as these social distancing requirements change and things open up, I mean, people are going to the beach now, and stores are opening up. We are going to have a gradual -- restaurants, and we will have a gradual increase I think in -- and a more gradual increase versus that we had a quarter maybe, I think in -- or two quarters of down POS, which I think our POS was not more than negative 25, I think back then, if I remember right.

But overall, I think this would be a little bit slower pickup, because until the sports events and the rock concerts and everything else really comes back, it will take some time. As far as our wrap up is concerned, our number one focus is definitely to -- is to make sure that we first of all utilize all of our existing inventory and what our plan is, is to ramp up our plans probably a little bit on stagnated basis, bring on capacity as we need it and somewhat drawdown a little bit on our inventory. We ended up Q1 with about -- just under $1.2 billion of inventory. We want to see that number come down and generate some cash flow from that during the course of this year again to continue to improve our liquidity situation and put us in a better position as we enter into 2021.

Heather Balsky -- Bank of America -- Analyst

Great. Thank you so much.

Operator

Your next question comes from Luke Hannon with Canaccord Genuity. You may proceed.

Luke Hannon -- Canaccord Genuity -- Analyst

Thank you. Actually I wanted to follow-up on that last point of inventory. Glenn, you mentioned you had $1.2 billion as of the end of the quarter, and I guess that that's going to be enough to satisfy demand across all channels, but I am curious about the fashion basics part of it. Is that subject to any sort of seasonality and do you envision needing to get promotional to be able to move some of that inventory out?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, look, I mean, fashion basics is a ring-spun T-shirt that -- so it's really -- it's not as products -- it's still fashion basics, basically the word basics when everything we make is pretty basic and doesn't really have a lifespan as long as in our catalog. So there is no need to liquidate inventory, because it's going to go obsolete. Definitely, I would say that we are in a position now that potentially we are -- but we will see how the market perceives as it goes out. But we are -- our inventory is in good shape. And look, at the end of the day, we are going to leverage our competitive advantage to make sure that we continue to drive our sales and drive market share as we exit, I would say this whole event as we move in -- and most of the doors open up and products start selling.

So we have an advantage I think because look we are a low-cost producer and we will leverage whatever we need to do to continue to take advantage of the opportunity and sell and drive market share as we go forward.

Luke Hannon -- Canaccord Genuity -- Analyst

Okay, understood. And then second one for me, as far as Bangladesh, I know that right now the capex that's being spent is just sort of laying the foundation for the facility there. Do you envision -- I think it was late 2021 is when you expected production from that facility. Is that still the same time frame that you are thinking or is there chance of any slippage there?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, our objective was to really support sales for 2022. So it's going to come on at the end of '21 to support '22. We are in the process nearly we are going to reduce our capital investments. The good news is like I mentioned in the last call is that we are sort of at a stage where we are doing foundational work at the facility. So over the next couple of months, it's just not a -- it's $2 million to $3 million of capital to be spent. We will put in the foundation, avoid the rainy season and then the option of timing of the plant will be sort of -- will be on our side depending on what kind of capital we want to spend and where the -- what the market conditions are as we go forward.

I mean things are changing so fast. I mean, already we are starting to see -- we just opened up recently and we are starting to see POS is picking a little bit more positively than some of our assumptions. So if the markets open up quicker and things go better, then we will look at it one way, and if things go the other way, and if there is a relapse and things get closed down, we will have to evaluate our options in terms of how we manage our whole manufacturing supply chain.

Luke Hannon -- Canaccord Genuity -- Analyst

Okay, appreciate the color.

Operator

And our next question comes from Sabahat Khan with RBC Capital Markets. You may proceed.

Sabahat Khan -- RBC Capital Markets -- Analyst

Thanks and good afternoon. Just want to get -- I guess obviously the visibility is very low on the demand side and just on the broader market, but just want to understand what kind of scenario you contemplated when you decided to sort of suspend the dividend. What do you sort of expect happens over the next few quarters in terms of cash usage? You also took out some additional debt. Just want to understand kind of what kind of decreases you might be planning for. Are we thinking [Technical Issues] half of your sales this year or potentially more, kind of what's the ballpark range [Technical Issues]?

Glenn J. Chamandy -- President & Chief Executive Officer

Rhod, you want to take this one please?

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Yes. So, when we look at the various scenarios on a go-forward basis, I mean, it really is hard to get -- to have good visibility, right, how things are going to unfold as we move forward through Q2 and into Q3 and Q4. Obviously, we have the facts from what we are seeing in April, and we've obviously taken that information and we have projected forward ultimately to try and get a sense of what the year would look like.

Now, we don't know whether it's going to be a V, whether it's going to be a U, exactly how it's going to play out, but I think what we need to do is plan for the worst and hope for the best. So I think as we -- have looked forward. We have looked at our -- effectively what our cash burn is when we have got our manufacturing idled as we said earlier, right. We have cash burn of $35 million to $40 million a month and we have projected that effectively -- as we go forward if sales stay down, then effectively, we will consume that cash that we will have to manage obviously our overall receivables and payables in a way that makes sense also to effectively minimize outflows.

And then obviously, we've got to get ready for the ramp back, but we don't really know exactly how long that's going to take and what it looks like. So I think what we have done is we have made sure that we have effectively really solidified our overall financial flexibility, our balance sheet. We've got lots of capability, let's say to effectively do what we need to do to move -- to weather the storm and then be very, very well positioned as we come out of this. So I would say again, obviously, we suspended guidance. And I think it's very difficult to give you a view, but you can just effectively I think tell from how we are setup that we are making sure that we are prepared for scenarios which are negative as we continue to move forward and obviously April has been very, very negative. But nonetheless, if things pick up, if we do really see the economy moving faster, people responding better, then we are well positioned to respond to that.

Sabahat Khan -- RBC Capital Markets -- Analyst

Okay, thanks. And then just a follow-up on that. In terms of cash availability and liquidity and so forth, if sales continue to deteriorate at these levels for a few more months, the balance sheet could get stressed. Have you been having discussions with your syndicate regarding covenant flexibility and so forth and -- or is that something you expect to deal with maybe later just on the back of the dividend cuts? Just want to get an idea of what those discussions might be.

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Look, if you look at where we are effectively with respect to our covenants, I mean, we are in compliance with our covenants currently and we expect our covenants to be manageable as we go forward, right, given the actions that we have taken with -- given all of these actions that are under way. Again, that gives us lots of flexibility, but we will continue to monitor the situation as we go forward. We will see how it unfolds. I think, again, we don't have a crystal ball. We don't know how it's going to play out. And if we do get into a very, very negative situation, where we do have to have discussions in the covenants, we do very definitely think that effectively we would be able to attain the flexibility that we need going forward. But right now, we don't see that. And so, I would say we are very comfortable with how things stand as we currently sit here today.

Sabahat Khan -- RBC Capital Markets -- Analyst

Great. Thank you for the color.

Operator

And our next question comes from Vishal Shreedhar with National Bank. You may proceed.

Vishal Shreedhar -- National Bank -- Analyst

Hi, thanks for taking my question. Regarding the shutdown, obviously, you have some fairly large programs with fairly significant retailers, and just wondering if they are understanding or appreciative of the situation that you are in and maybe you are unable to meet shipping commitments like you have in the past. And so is there potential for some increased charges from them if you can't reach your commitments that you had adhered to in the past or is it just everyone understands a different scenario?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, we have enough inventory to support demand with our major retail customers. So we are in very good inventory position, which is something that we've built up going into the season because of the anticipated high growth of sales in particularly our big large mass retailer. So I think we are pretty comfortable. I mean, sales haven't fully met our expectations. So we are in a really good inventory position. And we have a lot of products that if we need to bring to market, I mean, we don't think it will be an obstacle for us to get to market to continue supporting even as we go into the end of the second quarter and to beginning of the third quarter. So that's not an issue for us right now.

Vishal Shreedhar -- National Bank -- Analyst

Okay, that's helpful. Thank you. And on the sock and hosiery business and I know this current macro period is probably not the best one to reflect on the business, but even looking back over the last few years, the business really hasn't performed as well as some might have anticipated. I was just wondering how Gildan thinks of that sock and hosiery business. Is it still core for you guys or is this discussion for a different day? And should we still think of Gildan trying to build-out that retail product portfolio and expand into adjacent categories?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, look, I think that the -- it's still a big significant part. I mean, before this whole situation, we sort of anticipated that our sock business was plateauing. That's what we guided to in the beginning of the year. Unfortunately, lot of the -- half of our sock business is mass and the other half is somewhat geared to department and specialty stores in between our Gold Toe brand, our Under Armour license, etc. So those stores are just closed. I mean that's really what was part of the issue here and we have lost POS and therefore that was the byproduct of the writedown. So it's not that, that business has really gone away, I mean, the problem is that the stores were just not able to function. So we feel very comfortable with our sock business as it is. And I think we have a pretty good base of programs today. And like we said in our guidance, it's somewhat stable. It will come back because I mean those are I think programs that will continue to resonate with consumers as we go forward, and look at them and we are going to continue to focus on socks, underwear and activewear products in our Back to Basics strategy both with our existing brands that we do have, but also to leverage our private label opportunity with our customers. So we are pretty excited still about the opportunity for us to continue growing the business. And the other sort of take -- it's sort of a negative on your sales when POSs are down, but on the flip side, I mean, there is going to be a big change in -- I think in sourcing in the future.

I mean, our buyers are running to Asia to source product. So from a private label perspective, I think we have a lot of opportunity to leverage our low-cost manufacturing in this hemisphere as things change. I mean, to me, 40% of the global apparel is made in China. I mean, we don't see that materializing in the future. And so there is a lot of opportunity for us, let's say, for example to continue to grow our business and with our Back to Basics strategy and focusing on the big shifts from retail into private label, I think all three categories are going to be growth categories as we go forward into the future.

Vishal Shreedhar -- National Bank -- Analyst

Thanks.

Operator

And our next question comes from David Swartz with Morningstar. You may proceed.

David Swartz -- Morningstar -- Analyst

Thanks for taking my question. So in the socks and hosiery segment specifically, I understand of course that the store closures have impacted that greatly, but at the stores that are still open, can you talk about what the POS trends have been compared to like a baseline for what you had expected this time of the year?

Glenn J. Chamandy -- President & Chief Executive Officer

The POS trends were doing really well on them, I think toward the third, second week of March. Like sort of back half of March, when essentials became such a big push, a lot of the -- both mass and online retailers basically stopped receiving product and focused on the other essentials and everything else, and so -- but we have seen a tick back up to normal levels in POS in those markets today. And I think we are tracking pretty much on plan and where we are now in April basically sort of pick back up again as they started bringing products back in and replenishing their doors. I mean the big wait is over. Everybody has got toilet paper right? So I think that, that's really what's happened and I think our POS is sort of back on track with those retailers.

David Swartz -- Morningstar -- Analyst

Now, as manufacturing some day starts up again and you get back to normal production levels, can you talk about how the lower commodity prices may benefit the business?

Glenn J. Chamandy -- President & Chief Executive Officer

Well, I mean, [Technical Issues] prices are -- I mean, the prices are -- cotton is our largest commodity. I mean, it's down -- it's not [Phonetic] down significantly. It's down $0.10 a pound from what it was before the crisis started really, so -- but at the end of the day, look, I mean the deflation is probably going to be potentially a factor with oil and other things but I think that's all short lived.

I mean there is going to be another side of the coin is that how are people going to bring capacity back on. So short term, there is going to be a lot of capacity because people have inventory and didn't sell anything but then I mean how do you social distance in a factory? Do you have all your capacity? How are you going to deal with all these things? So, social distancing until it goes away is actually may be put brakes on I think in terms of the capacity. So there is all puts and takes in terms of raw materials and the capability of people bringing back capacity online after they've been shutdown. So, I don't know how it's going to play out, but I would say that look we are in a very good position from all sides. We have good inventory. We have a low-cost model. We have made a plan now to bring our facilities back, including social distancing and the capabilities of how we run our factories. I mean, we've got 54,000 employees that [Phonetic] we have to bring back to work, and it's 5,000 sewing operators in a facility. So that's our strength basically, is having to deal with these things and that's why we are the global low-cost manufacturer. So in all cases, I think we are going to be in a very good position and we are going to leverage that competency to gain market share as we go forward and make sure that we get our fair share of business as we materialize when we get out of the -- and business starts to open up again.

David Swartz -- Morningstar -- Analyst

Thanks and good luck in this difficult time.

Glenn J. Chamandy -- President & Chief Executive Officer

Thank you.

Operator

And our next question comes from Stephen MacLeod with BMO Capital Markets. You may proceed.

Stephen MacLeod -- BMO Capital Markets -- Analyst

You gave some good color around the gross profit impact in the quarter, gross margin impact of 340 basis points. Is there any way like -- is any of that just related to the initial shock of the manufacturing shutdown or is that something you would expect to accelerate as you roll into potentially -- well, Q2 and then potentially into Q3?

Glenn J. Chamandy -- President & Chief Executive Officer

Rhod?

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Well, I mean if you look at the impact right, the 340 basis points, I mean, effectively what was -- the lion's share of that was driven by labor and manufacturing shutdowns or we call period costs. There were some contract costs associated with that. There were some other costs I would say, that's driven by the COVID-19 situation. So, ultimately, as we move forward, we will see those costs effectively unfold, right? Don't forget that effectively, we shut down all -- we started to shut down effectively in March, where we had two weeks of shutdown and then as we move into April and then we go into May, we will have those full monthly costs, right, that we will see effectively being incurred, and so that's all wrapped into the $35 million to $40 million of cash burn that we bear as our facilities are idle. And if you look at it overall, you have the cash costs and then on top of that, obviously we have depreciation, right, that's effectively will be impacting us. We have probably around $13 [Phonetic] million of depreciation. So all in all, as our operations sit idle, effectively your total cost is around $50 million a month, right, effectively with the combination of non-cash and cash. And so we just expect to see that as we go forward until we start to ramp back up and that's what you saw really in the back end of the first quarter, and that's 340 basis points.

Stephen MacLeod -- BMO Capital Markets -- Analyst

Okay, that's really helpful. Thank you. And then just a question maybe forward-looking and maybe it's too soon to answer, but as you see things begin to recover in the imprintable space down the road, whether it's three months to six months or whatever the case maybe, do you see the possibility for any change in mix? Do you think that with customers and consumers potentially being -- having their own balance sheets being damaged, do you see maybe a shift like Back to Basics away from fashion basics as you see a recovery taking hold in imprintable space?

Glenn J. Chamandy -- President & Chief Executive Officer

No, I think look -- I think that the space is well balanced, where the I would say that the opportunity typically in -- sometimes in markets is price elasticity. Pricing is a little bit more aggressive. I mean, you can create demand from promotional products and other avenues that when -- because instead of merchandising something on a pen, you do it with a T-shirt and a giveaway or dog food or a case of beer, you get a T-shirt, I mean, so there is all kinds of the gimmicks that people could use, which typically has been more in the basic category. So I would say that in balance, I don't think there will be a huge shift. I mean, I think the shift still is a continued shift to fashion products. They are still growing in the market. I mean that may change but up until this situation COVID started, I mean, it was still continuing to grow. And we will see what happens, but I think I don't see a big change in the environment. And if you look at our POS from a negative perspective, it's pretty well negatively across the board. I mean, it's not -- there is not one thing that is doing well. It's sort of just right across the board, pretty closely aligned.

Stephen MacLeod -- BMO Capital Markets -- Analyst

Okay, that's it for me. Thank you very much. And I commend you on your service to the healthcare sector while your manufacturing plants are down.

Glenn J. Chamandy -- President & Chief Executive Officer

Thank you.

Operator

And our next question comes from Chris Lee with Desjardins. You may proceed.

Chris Lee -- Desjardins -- Analyst

Good afternoon. Did I hear you correctly that the POS in certain parts of your imprintable business is a little bit less negative than your internal expectations?

Glenn J. Chamandy -- President & Chief Executive Officer

No, what I said was that the last couple of days, two, three days, it was better than our expectations. So I wouldn't hold you back on that one, sorry. But it's basically -- we have been tracking at 75% negative level and with the last couple of days, it's improved some. So we don't know is that because markets are opening up, I mean -- but I mean, that's -- at the end of the day, look, when people get out of their house, they are going to start spending. Beaches have opened up. So these are types of things where -- when you [Phonetic] start taking place again, we will see POS improve. So the quicker that the social distancing eases, I think the POS would pick up. So we have taken a pretty conservative approach we think to -- because the approach we have taken in terms of where we see things going into Q2 is pretty much we saw in April. So if things get better, then obviously that will be great news for us.

Chris Lee -- Desjardins -- Analyst

Okay. And then maybe a follow-up on that is, I mean, you've been doing this a long time, and based on your experience, I mean do you think 75% down is kind of the trough -- I am trying to understand, do you think there is something structurally within the imprintable market where like you kind of reach the bottom and then maybe you'll stay there for a little bit, but can you get worse than 75% in your vision over the next [Speech Overlap]

Glenn J. Chamandy -- President & Chief Executive Officer

I would say that 75% is the bottom because everything is closed down and it's at 75%, right. Unfortunately, I think we hit the bottom, right, so which is a good news, because that's what I'm little bit -- from the optimistic side, we've plateaued off this bottom and we are trading less than that level today over the last couple of days. So, hopefully, the bottom has been hit and we're moving forward. So I think that, that's pretty much the bottom. It was the bottom in China. It's been the bottom in Europe. So it's typically been the bottom so far everywhere we have been.

Chris Lee -- Desjardins -- Analyst

Yes. And I wanted to check up on China, I think last time you gave sort of a data point where it was down 75% in February and down 35-ish in March. Do you show [Phonetic] an update on how that market is performing in April?

Glenn J. Chamandy -- President & Chief Executive Officer

We are still down around 50%, so it's not -- in that week that we gave, it started coming back and it still hasn't totally bounced back. I mean, look, China has -- even though the markets have opened up, I mean there's still not business as usual. They are much more stricter. Social distancing is still a major factor. People haven't gone out to restaurants. The car dealerships are still not doing well. Although they started their factories, it doesn't mean that they've started their social lives, right, so we -- so it hasn't come back like we anticipated to be honest with you. But I think it is a different environment. I think that it's not -- and it's also not comparing the maturity of a North American market, I mean in terms of the lifestyle and everything else. So...

Chris Lee -- Desjardins -- Analyst

Okay. That's great. And then maybe just a quick one for Rhod. I just want to confirm what you said earlier. From a modeling prospective, looking at the income statement for Q2, did I hear you correctly that if I look at my cost of goods sales and SG&A expenses, all in is running above $50 million per month, so about $150 million for the quarter?

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Yes. I mean, basically that's, I would say, a fair estimate. If you look at again what our cost structure is and where we are, we are going to try and improve upon that Chris, right, as we go forward, but that's what I said and that's what you should think about as far as the base drag, let's say that we see as we've got everything idled and we are just feeding sales out of inventory.

Chris Lee -- Desjardins -- Analyst

Okay, great. And best wishes to you, to everyone.

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Thank you.

Glenn J. Chamandy -- President & Chief Executive Officer

Thank you.

Operator

And our next question comes from Mark Petrie with CIBC. You may proceed.

Mark Petrie -- CIBC Capital Markets -- Analyst

Yes, thanks. I was just curious if you have seen any trends in you e-commerce business that might have surprised you or might in fact how you think about that business going forward or how you kind of want to approach it?

Glenn J. Chamandy -- President & Chief Executive Officer

No. I think, look, our e-commerce business is doing very well. We projected to have a significant increase this year. It slowed down a little bit, like I said, at the end of March, but it's picked back up and it's really where we needed to be. We have all of our products currently being sold online, including American Apparel today, like Comfort Colors brands, so everything we have -- Gildan's underwear, so everything we have is I think performing well and I think we are well positioned to continue to grow.

Mark Petrie -- CIBC Capital Markets -- Analyst

Okay, thanks. And then Glenn you touched on this earlier and maybe it's just way too early to ask something like this, but I was curious about how your capacity would be affected by social distancing in your plants if that was a reality that you guys needed to operate under.

Glenn J. Chamandy -- President & Chief Executive Officer

Well, it is a reality for sure, right. So what we have -- we have already worked our plans to reconfigure our selling lines because that's really where the big issue is. Selling in textiles is not a big issue at all really. So we already have a plan and during the time that we have started to develop the mask and the gowns, these plants are already geared up to develop a format of social distancing, which we're going to roll-out to rest of our facilities. So we have to configure all of our lines and put in all the restrictions and testing and etc. One of the things of being a global manufacturer is that we have a good indication of some of this happening because of our business in China. We have done things like we bought COVID test kits, for example, from Korea back in March. So we can test all the employees and have that capability. We have got abundance of masks that we're producing for them. We have now geared up to have additional transportation because we can't put so many people in the buses, working at different types of shifts, so we can adapt to the space that we require. So all these types of things we have already put in place to -- in anticipation of coming online and it's all being piloted right now during the development of mask and gowns and I think we are in pretty good shape to restart when we need to with the social distancing in mind. Hello.

Sophie Argiriou -- Vice President, Investor Communications

Hello.

Operator

Ladies and gentleman, this concludes our Q&A portion for today's conference. I would now like to turn the call back over to Sophie Argiriou for closing remarks.

Sophie Argiriou -- Vice President, Investor Communications

Okay. Thanks, Demetria. Before ending the conference call today, I'd like to remind you that we will be holding our Annual Shareholders Meeting tomorrow morning at 10:00 AM Eastern Time that is. And it's going to be in virtual format.

So with that, I'd like to thank everyone for joining us again today and we look forward to speaking to you very soon. Have a good evening. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Sophie Argiriou -- Vice President, Investor Communications

Rhodri J. Harries -- Executive Vice-President, Chief Financial and Administrative Officer

Glenn J. Chamandy -- President & Chief Executive Officer

Paul Lejuez -- Citi Research -- Analyst

Brian Morrison -- TD Securities -- Analyst

Heather Balsky -- Bank of America -- Analyst

Luke Hannon -- Canaccord Genuity -- Analyst

Sabahat Khan -- RBC Capital Markets -- Analyst

Vishal Shreedhar -- National Bank -- Analyst

David Swartz -- Morningstar -- Analyst

Stephen MacLeod -- BMO Capital Markets -- Analyst

Chris Lee -- Desjardins -- Analyst

Mark Petrie -- CIBC Capital Markets -- Analyst

More GIL analysis

All earnings call transcripts

AlphaStreet Logo