Gildan Activewear Inc

TSX:GIL

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2023 Gildan Activewear Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Elisabeth Hamaoui. Please go ahead.

[Elisabeth Hamaoui, Director, Investor Communications]

Good afternoon, everyone. Earlier, we issued a press release announcing our results for the first quarter of 2023. We also issued our interim shareholder report with the Canadian securities and regulatory authorities and the U.S. Securities Commission, which are available on the company's corporate website. As a reminder, please note that we will be holding our virtual AGM tomorrow morning at 10 Eastern Time. More information can be found on our Events page.

Joining me on the call are Glenn Chamandy, President and CEO of Gildan; Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer; Chuck Ward, President, Sales, Marketing and Distribution; and , Vice President, Head of Investor Relations, which Rhod will introduce in a moment.

Before I begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which 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. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Rhod.

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Thank you, Elisabeth, and thank you all for joining us today to discuss our first quarter results. Before I start, I'd like to welcome , our new Vice President, Head of Investor Relations at Gildan, who, as Elisabeth called out, is joining us on the call today. Many of you may know Jessy, as prior to her last role, she spent much of her career as a sell-side analyst, including tenures covering Gildan. We are extremely pleased to have Jessy joining the team, and I know she is looking forward to meeting with all of you.

Now moving to the results. The quarter unfolded largely as we anticipated, with sales in line with our expectations and year-over-year demand trends showing meaningful improvement sequentially across all categories and channels. We did experience some margin pressure during the quarter, which came in slightly higher than we had anticipated due to the timing of fleece shipments, which I'll address a little later.

But all in all, we were pleased with our quarterly performance. And even though the economic environment remains uncertain, we remain comfortable reconfirming our outlook today. Further and more importantly, I'd like to highlight that we are continuing to make progress with our GSG strategy. And after one year of execution, we are pleased with the initiatives we are driving under each of our strategic pillars related to capacity, innovation and ESG, which all are reinforcing our strong competitive position.

We also remain committed to our capital allocation priorities, including return of capital to shareholders, supported by our healthy balance sheet and strong annual free cash flow generation. With that, let's now turn to the details of our Q1 results.

Net sales for the first quarter came in at $703 million, reflecting a decline in activewear sales of 12%, partly offset by 7% growth in the hosiery and underwear category.

In activewear, as previously communicated, we faced a strong comparative period as we cycled post-pandemic inventory replenishment at U.S. distributors. Overall, although year-over-year POS trends at North American distributors remain down, they showed notable sequential quarterly improvement. Further, while international sales in the quarter were down 17%, continuing to maintain a positive outlook regarding recovery in international markets for the full year, encouraged by positive POS in the first quarter.

Growth in the hosiery and underwear category for the quarter was mainly driven by socks both in the mass channel and with global lifestyle brand customers. While industry demand for men's underwear remained down year-over-year, year-over-year POS trends improved sequentially, and we are pleased with how our private label underwear programs are unfolding.

Additionally, while our retail customers remain cautious on replenishment across all product categories, we were encouraged by improving inventory levels in the first quarter reflecting what we believe is an improving demand environment for our products.

Turning to margins. Gross and adjusted gross margin came in at 26.7% and 26.2%, down year-over-year by 430 and 470 basis points, respectively. This is mainly a result of the anticipated flow-through impact on our cost of sales of peak fiber costs and higher manufacturing input costs. Margins were also impacted by unfavorable mix related to fleece sales. Specifically, despite strong fleece POS in the quarter, we saw lower fleece shipments than expected as distributors are being careful in this environment to buy as close as possible to their needs, which for this category tends to be more towards the back half of the year.

Accordingly, while this impacted our margins for the quarter, the mix impact is expected to reverse throughout the remainder of the year. These factors were partly offset by the favorable impact of higher net selling prices in the quarter, which we implemented and called out last year.

SG&A expenses for the first quarter of $82 million were largely in line with prior year levels. And as a percentage of net sales were 11.6%, which was up from the prior year due to sales deleverage.

We generated operating income of 18.2% of sales, which included the benefit of a $25 million gain from the sale and leaseback of one of our U.S. distribution facilities. Excluding this gain, adjusted operating income was 14.6% of sales, slightly below our expectations, largely due to the unfavorable mix impact of the lower fleece sales during the quarter.

After reflecting increased net financial expenses of $17 million and higher GAAP income taxes tied to the lease sale and leaseback gain and factoring in continued share repurchases, we reported GAAP and adjusted diluted EPS for the quarter of $0.54 and $0.45, respectively.

Moving on to cash flow. Higher working capital investments and lower net earnings led to $179 million of cash flows used in operating activities in the first quarter. After capital expenditures of $74 million and net proceeds of $51 million from the sale and leaseback transaction, we consumed approximately $202 million of free cash flow in the first quarter. Higher capital expenditures during the quarter mostly reflected investments in our new manufacturing complex in Bangladesh. In fact, construction of the first facility is in its final stages and progressive ramp-up of operations is now underway, which will continue through 2023 into '24.

We also bought back 1 million shares in the quarter. reflecting our strong commitment to return capital to shareholders under our capital allocation priorities. The company ended the first quarter of 2023 with net debt of $1.15 billion and a net debt-to-EBITDA leverage ratio of 1.6x, in line with our 1 to 2x leverage framework.

Moving on to the outlook. Today, we reconfirmed our full year outlook, which we provided on February 23, as we continue to believe we have the ability to drive top line growth in 2023. Specifically, while the economic environment remains uncertain, and we are dealing with cautiousness on inventory levels with our customers, our POS trends were in line with our expectations for the first quarter.

Further, we continue to expect incremental sales from the rollout of new program servicing retail end markets to provide growth. We also expect continuing recovery in international markets driven by increased availability and depth of product at distributors. So even though the first half of the year will be challenging due to difficult comparative periods related to post-pandemic inventory replenishment in 2022, and the impact of peak raw material and higher input costs in our inventories flowing through our cost of sales in the first half of 2023, we see growth in margin improvement once these headwinds abate.

Summing this all up, we continue to expect sales for the full year to be up low single digits compared to 2022. Further, with margin pressures from raw materials easing in the second half. We continue to expect our adjusted operating margin to fall within our 18% to 20% annual target range for the full year. We expect CapEx to come in at the lower end of our previously stated 6% to 8% range.

And we expect strong free cash flow generation for the full year. And on the bottom line, we expect adjusted diluted EPS in line with 2022, which assumes the continuation of share repurchases aligned with our capital allocation targets of purchasing approximately 5% of our outstanding public float in 2023. So in conclusion, while we are mindful of the economic uncertainty, and we are seeing cautiousness in a mixed consumer environment, we continue to be cautiously optimistic on 2023 and continue to work hard towards delivering on our goals and creating shareholder value.

Thank you, and I will now turn the call back to Elisabeth.

[Elisabeth Hamaoui, Director, Investor Communications]

Thank you, Rhod. [Operator Instructions]. Operator, you may begin the Q&A session.

[Operator]

[Operator Instructions]. Your first question comes from the line of Paul Lejuez from Citigroup.

[Brandon Cheatham, Citigroup]

This is Brandon Cheatham on for Paul. So I just wanted to kind of dig in on the international segment. POS trends seem like they were positive, the sale down 17%, which would suggest a pretty meaningful destocking. I guess like if current trends continue, at what point do you think that they kind of run through that product and you can start to see that strong POS translate to sales?

[Glenn Chamandy]

Go ahead.

[Chuck Ward, President, Sales, Marketing & Distribution]

We think the -- again, I think most of the destocking has occurred and the inventory is in good position. So again, I think -- as you said, we saw in international, we saw POS up mid-single digits. And we think the destocking is finished. And now we will see replenishment along with POS.

[Brandon Cheatham, Citigroup]

Got you. And where is POS trending currently versus what you experienced in the quarter? Have trends improved at all?

[Chuck Ward, President, Sales, Marketing & Distribution]

Well, you were asking before about international, so I'll address that first. The international POS continues to be positive. So it's trending as it did in the first quarter. From a U.S. perspective, it is -- was flat to slightly down, but it has started to turn positive now.

[Glenn Chamandy]

And one thing just to remember maybe is that in [indiscernible] Q4 was sort of like the bottom of our POS and then it started to improve in Q1. And Q1 was slightly down from last year, and now we're planning to be flat to slightly down in Q2, I would say, more like the flattish level. But what's more important in Q1 is that, that's before the market really started to turn. So we're almost -- we're slightly below where the market started to retract basically sometime towards the end of March.

So I think that we did relatively good. And then that's where we're pretty optimistic that we're seeing good trends. One thing that I think is still affecting POS is the weather. I mean the weather in April has been terrible. We're starting to see some good days right now, but it's -- right now, it's much well here. It's still winter, but you're reading in the paper, it's just not good anywhere. So I think weather has a little bit to do with it, but we're very, I think, cautiously optimistic as we move into Q2.

[Operator]

Your next question comes from the line of Martin Landry of Stifel GMP.

[Martin Landry, Stifel Nicolaus]

I was wondering if you had discussed the inventory levels at your distributor. How many days do you have currently? And how does that compare to your historical levels?

[Glenn Chamandy]

Well, historically, the inventory level is, I would say, normal, except for we think we're on the low end of the fleece, as Rhod called out. We had a little bit more destocking than we anticipated in fleece. But the levels are pretty well in line with historic levels moving into the season.

[Martin Landry, Stifel Nicolaus]

Okay. And in your outlook, you mentioned the contribution that you expect from new retail programs. Wondering if you can discuss the size of these programs and timing.

[Glenn Chamandy]

Well, what we said earlier in our last call, if you look at the guidance, we set out for the year, we said that the U.S. overall market was going to be down around 3 -- low single digits. And we said our overall sales volume was going to be up low single digits. And the delta between those 2 is the new programs and also some growth in Europe.

[Operator]

Your next question comes from the line of George Doumet, Scotiabank.

[George Doumet, Scotiabank]

Yes, you mentioned improving inventory levels at retail -- at the retailers. Can you maybe give us some color there, perhaps in magnitude and maybe how long you think it will take to get a normalized level? And Rhod, on the last call, you mentioned that the impact of managing inventories tightly, that was around $75 million for Q1. So just wondering if you have a similar estimate for Q2.

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Yes. Look, if you look at retail inventories and where we are, I mean, obviously, through the back half of last year, effectively, there was a lot of destocking going on. And then as we moved into the first quarter, I would say we saw that stabilize somewhat. So it was a little bit variable across the different channels. But I would say it was stabilizing.

And as we're moving into Q2, on the retail side, I would say we mostly believe the destock is behind us. If you look at Q2 sales overall, in the way we think about it. And maybe this is a good opportunity just for me to run through kind of where we are on that effectively, and I called this out on prior calls, we do expect that we still will get some price in Q2, effectively.

We get to wrap around from price from last year. We saw that in Q1, and we're going to see it in Q2, probably around low single digits. And then volumes will be down from that. If you look at the distributor POS as Chuck and Glenn called out, we are seeing an improving environment as we moved into Q2. If you look at Q1, we were down low single digits, what we expected on the distributor side.

But then as we move into Q2, it's improving, as we've said. And we're looking at more like a flattish type of environment. If you look on the retail side, the POS effectively is improving also versus what we saw in Q1. In Q1, it was more like down, I would say, double digits. Now we're probably down high single digits. And so we have all of these factors together, plus we have the fact that we will not be able to comp the restocking that we saw in Q2 of last year.

And last year, very definitely in Q1 and Q2, we saw a lot of restocking. This year, in the first half, we won't be able to comp that. So if you think about where we're going to be on net sales for Q2, I would say it's going to look a lot like Q1 probably from a percentage perspective as to what we're going to see for the quarter. And that sort of wraps it all together so you can get a sense of where we're going to end up. There will be difficult to comp the restocking, but then that will all be behind us. And in many respects, that turns into a headwind in the back half.

[George Doumet, Scotiabank]

I appreciate your color there. And just maybe my last one. Looking at that 470 basis point decline in adjusted gross margin, can you maybe break that down for us? I'm just curious how much of that impact was fleece -- the negative mix from fleece? And I guess what gives you confidence that we can maybe recover some of that margin, I guess, as the year progresses?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Yes. Look, our confidence is driven by the POS on the fleece, right? So the fleece has been a very strong category for us. It continues to be a very strong category in Q1. We saw a very strong POS. So we know that effectively, the demand will come through. We were expecting a stronger demand in the first quarter than we saw, and the impact of that was probably about 100 basis points.

So our margins came in about 100 basis points lower than we were expecting as a result of that. But then, of course, that will turn into a positive tailwind as we move through Q2 and leading more into Q3 and Q4 because ultimately, that fleece will come through because of the -- again, the strong POS and ultimately, the demand will drive the sales.

[Operator]

Your next question comes from the line of Jay Sole, UBS.

[Jay Sole, UBS]

Would it be possible to maybe talk about the T-Shirt business, how the ring-spun T has performed versus open end and any trends that you're seeing in that business?

[Chuck Ward, President, Sales, Marketing & Distribution]

And thanks for the question. I guess, to your question around kind of the difference between the ring-spun and the open end, we did see the open end was down during the quarter, high single digits, whereas we saw the ring-spun up high single digits. So we're continuing to see a mix shift there to the ring-spun t-shirts. And that trend has kind of continued through first quarter, continues from last year as well.

[Jay Sole, UBS]

Got it. And then maybe [indiscernible].

[Glenn Chamandy]

Maybe just add one more thing on that because a lot of the promotional products basically that the corporate promotional side of the market hasn't really come back to its full potential. And I think that's where we're still feeling a little bit more on the basics where we're not getting the traction, which is pretty much upside, I think, as we continue to move into the future.

[Jay Sole, UBS]

Got it. And then can you talk about sort of the ramp-up of the new facilities, both Bangladesh and in Central America? Like is that connected to your ability to deliver these new programs that are servicing retail that Rhod talked about in the prepared remarks?

[Glenn Chamandy]

Well, no. Look, we have -- obviously, the ramp-up is going to help us to continue to develop our ring-spun portfolio including underwear and activewear-type products. But we're in a relatively good position from a capacity perspective. We have all of our capacity installed in Central American in DR, like we said we're going to do.

We're currently running at around 85% to 90% of our capacity in Central America. So we've got ample capacity there to support these programs and other programs. We're building up Bangladesh to start -- started and it's going to ramp up slowly during the year and really build up during 2024 for continued growth. And so we're pretty optimistic.

And look, the key thing for us is, look, we've got the capacity in place really to support the growth as we move into '23 and into '24. And we're well positioned both from a product perspective and a capacity perspective.

[Operator]

Your next question comes from the line of Stephen MacLeod, BMO Capital Markets.

[Stephen MacLeod, BMO Capital Markets]

Just wanted to circle around on the SG&A. I know it was -- it came in a bit higher as a percent of sales. But I just wanted to confirm, is there anything in there on higher costs? Or is it just a matter of deleveraging from the top line?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

It's just deleveraging. We've got our SG&A, I would say, well under control. And I think as you go through the year, for a full year, and we called this out, we're basically running to a target of around 10% of sales. And we have it well dialed in, Stephen. So if you look at what went on in the quarter, it was basically just deleveraging.

[Stephen MacLeod, BMO Capital Markets]

Okay. That makes sense. And then just as you think about the gross margin for the rest of the year, you talked about some of that fleece headwind turning into tailwind, but it sounds like that's mostly Q3 and Q4 weighted, if I understood that correctly. So if you could just confirm that, that would be great. And then, I guess, secondly to that, how does cotton price deflation that we've seen? We've seen some cotton prices come off, how does that impact your margin and your cost base going forward?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

So if you look at effectively the cotton prices, I mean, I would say that we have high cotton prices coming through our cost of sales flowing through as I called out in Q1 and to a certain extent in Q2. But then once we get past that, it will effectively be behind us. And we know that effectively that in the back half, I mean, we have a lot of our inventory already in place now, right?

So as we move into the back half, we will see the benefit of that. And we do expect our pricing will hold up well effectively because if you think about the way we priced, we never took our prices up to reflect peak cotton prices. And so our prices are, I would say, very much aligned with where cotton in our cost of goods is going to, not where it currently is because right now, we're seeing the pressure on our margins.

But where it's going to, I think I would say we're very well placed. So if you look at Q1, there was a fair amount of pressure on our overall margins as a result of cotton. And then if you -- and also, it was related to manufacturing costs as well, higher inflationary costs that were flowing through. And then if you move to Q2, that is still going to be in our cost of goods, but it's going to start to abate.

And so if you look at on a sequential basis, effectively, what the change in our margins are going to be probably in Q2 versus Q1, we're going to see a 100, 150 basis point uplift as a result of effectively the, I would say, improved cost position flowing through, and then it really improves as we move into Q3 and Q4. And again, we have a lot of that in inventory already, so we can see it coming. So that effectively is how it's all rolling through.

[Operator]

Your next question comes from the line of Luke Hannan, Canaccord Genuity.

[Luke Hannan, Canaccord Genuity]

Glenn, if we think back to last quarter, one thing that you had brought up was that your balance sheet being better equipped to handle financing more inventory than peers would be something that would help you capture share from those competitors. How has that played out through Q1 and then thus far into Q2? Are you seeing that play out? And how is that playing out versus expectations?

[Glenn Chamandy]

Well, I think we're playing right where we want to be. And we think we're gaining share in every category. I mean, to be perfectly honest with you, I think we're outperforming the market. We're giving you our POS. I think the market is below our results significantly. So we're actually outperforming the market right now, and I think we're well positioned.

The inventory is in good shape. And our inventories are high right now, mainly because we have a lot of fleece that we're gearing up for to ship in the -- as we get into the season. And we also geared up to supply the new programs that we have. But at the end of the year, our inventory should be equal to or slightly below where we started the year in '23 or way into '22. But everything is in line. Our capacity is in line, our inventory is in line. Our products are in line. Our POS is performing, and we're out working hard to build new programs and are very optimistic as we continue to move into '24.

[Luke Hannan, Canaccord Genuity]

Okay. And then for my follow-up, Rhod, correct me if I'm wrong, but I think I heard you correctly in that there will be a low single-digit benefit from price in Q2 from price that -- the carryover effect the price that was taken last year. What do you see playing out for the balance of this year as well that carryover effect, how should that play into result?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Luke, if you think of where we were in the first quarter, where it was mid-single-digit second quarter, low single-digit full year. I think I called out on the prior call, it's about low single digits. So we're not assuming price in the back half effectively. And we'll have worked our way through the wrap around by the end of the second quarter, and then that will be the full year effect, Luke.

So I think we're trying to be very balanced in the way that we think about price. Again, I think it's going to hold up well as we move into the back half because of the reasons that we outlined. But effectively, it's low single digit for the full year.

[Operator]

Your next question comes from the line of Chris Li of Desjardin.

[Christopher Li, Desjardins Securities]

Glenn, I just wanted to dive a bit deeper into the POS trend. You mentioned that it's up slightly positively in Q2 so far. Just curious, when you look at your end-user demand, which sort of segments are driving that growth? And it sounds like also from your earlier comments that you are gaining share because the market overall is down below where you are trending.

[Glenn Chamandy]

Well, I would say that in the distributor market, there's different categories, travel, entertainment, rock concerts, the experience. I mean those are the things that are continuing to drive, I think, the momentum in distributor channel. And then the -- when it goes to T-shirts going into the retail channel, which was a big boom that really slowed down last year, we're starting to see that pick up again as well as inventories subside and retailers start to buy -- open to buy and start buying more products.

So I think overall, everywhere, we're feeling pretty comfortable with the POS. And it's really more of the same. There's nothing that's changed. It's just a question of -- in our distributor business, taking share. And I think in our business and services, T-shirts to retailers, making sure that the retailers are starting to place orders and work through their inventories.

[Christopher Li, Desjardins Securities]

Okay. That's helpful. And then my other follow-up question just on sales again. Just looking at your hosiery and underwear segment, is there much seasonality with that business? And if not, is the $115 million of revenue that you did in Q1, is that a good run rate for the rest of the year with perhaps some upside in the second half as the new retail programs start to kick in?

[Glenn Chamandy]

Well, the only thing -- exactly that's the point. So I think that on a constant basis is one thing, but as we go into the back half, we're going to have all to do programs, so we should get a big lift in sales.

[Operator]

[Operator Instructions]. Your next question comes from the line of Brian Morrison, TD Securities.

[Brian Morrison, TD Securities]

Rhod, I just want to circle back to the color on the Q2 margin. Last quarter, you said that we should be back in our historical range. I appreciate the headwinds that you talked about with the sales outlook and fleece mix and input prices. But can you just maybe provide some color on the decline since the call -- the Q1 -- pardon me, the Q4 call on your outlook? Is it the fleece mix that's taking the margin down a little bit?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Yes, it is. I mean, we're being a little bit cautious. As I called out, what we're seeing is people are effectively taking the product -- want to take the product a little bit closer to the season this year. So as -- based on what we saw in Q1, we want to be a little bit cautious as we look at Q2. Again, it's going to come through. We know absolutely will. So I would say, effectively, that's what was driving, I would say, a little bit more cautious view on Q2 versus where we were when we reported Q4.

[Brian Morrison, TD Securities]

Okay. So the input prices, that will still be a headwind, but that had been anticipated previously, correct?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

That had been anticipated, correct.

[Brian Morrison, TD Securities]

Okay. And then just following up on -- pardon me, on the fleece because it's a big part of the story in terms of margin profile, POS for the industry, is that up? Or is it up for Gildan because you're taking so much market share?

[Glenn Chamandy]

Well, we don't have all the information industry market share data, but I would say that as far as we're concerned, we're seeing good signs, good POS. And it's high single, low double-digit growth so far.

[Operator]

Your next question comes from Sabahat Khan of RBC Capital Markets.

[Sabahat Khan, RBC Capital Markets]

There's a lot of commentary earlier that you shared on the inventory position of the distributors. I guess big picture, what kind of I guess, demand environment are the distributors generally preparing for? Are they expecting moderation in POS through the back half of the year? Or are they kind of expecting pledges? What's your perspective on the demand uptake? And what are the [indiscernible] from what you had?

[Glenn Chamandy]

Well, look, I think that look, everybody is cautiously optimistic, I think, is the way to position it. Inventories are in good shape now. I mean, obviously, we've called out the year-over-year impact. But as we go through, I think that the people are optimistic, but cautious about moving forward in this environment.

And it's the macro environment that is just uncertain a little bit. But I'd say that when we were early on in the year, I think people were more pessimistic than I think the tone is today. So I think that things are improving, just the vibe of the way people are thinking about the market and the opportunity. So it leaves us with optimism. We're optimistic, but cautious about what we're doing as we go forward. And I think that's a general consensus amongst our customers and end users.

[Sabahat Khan, RBC Capital Markets]

All right. Great. And then when I think about the EBIT margin range that you're providing for the year, given that you've got pricing sort of in place already, whatever you're going to see flow through, is it really volume or POS or just demand, I guess, that determines whether you're at the low end or high end of that range from here on forward?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

Well, look, we do have our cost structure, I would say, well under control. So as we go through the year, yes, I mean, we are -- it's going to be driven by what we've said on from a sales perspective, what we highlighted with respect to the low single-digit growth and what's going on in the various areas, including the rollout of the new programs, international.

I mean there's a lot of good things that are occurring as we move through the year. And that will play out. And I would say that, yes, that's why we do feel good about margins and delivering between the 18% and the 20%. So it's -- I would say we've got good line of sight on a lot of it. And of course, we don't control the macro environment. But there are a lot of positive things happening across the business. And so we, as Glenn said, are cautiously optimistic.

[Operator]

[Operator Instructions]. Your next question comes from the line of Mark Petrie of CIBC.

[Mark Petrie, CIBC]

I just had one question actually. Just on the corporate inventory levels, obviously, there's some normalization there, and you've already called out the impact of fleece, but I'm just trying to understand where do you think the inventory levels will normalize as we progress through the course of the year or by the end of the year?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

So if you look at the inventory levels, Mark, yes, if you look at where we were in the first quarter, we were up a bit versus the end of the year. I mean you expect that to a certain extent from a seasonal perspective, but also because of what went on with fleece, the rollout of the new programs, all of these things were playing in. But I think we see -- we've seen peak inventory levels.

And as we move into Q2, we would see some progress on that. And as we get to the end of the year, I think Glenn called it out, we're expecting our inventory levels to be below where we started the year. So I would say, overall, from an inventory perspective, I mean, the good news is we've got great, I would say, depth and ability to service. And that's very important in the business.

And we are seeing that there will be areas to take advantage of that. So I think we feel good about inventory. Because of that, we do expect to have strong free cash flow for the full year. I called this out on the last call. But if you look at effectively what -- where our free cash flow was last year, if you look at what we -- the build that we had in working capital last year, if you look at CapEx where it was last year and this year, we are expecting it to be down a bit from 2022.

We do expect to see strong free cash flow for the full year. So if you run through the numbers and you compare it to last year and you take inventory that's going to be slightly down, you can really see that our free cash flow could be north of $450 million for the year, a very good and strong delivery as a result of effect. We've made that investment in inventory, and now we're going to benefit from as we move through the year.

[Mark Petrie, CIBC]

Okay. And actually just one more. Just to clarify the comments with regards to the progression for gross margin into Q2, I think you had said 100 to 150 basis points uplift from Q1 on cotton sequentially. Is that right? Were you saying that specifically for cotton? Or were you saying overall that's what you expect?

[Rhodri Harries, EVP & Chief Financial & Administrative Officer]

No, it's a combination of what's going on overall. And it's been driven by cotton. It's being driven by some manufacturing -- other manufacturing costs as well. And then you get some movements as well in price and mix. But it's -- I think it's a good estimate of effectively what's going on. But look, cotton is improving for us and effectively manufacturing cost is improving for us as we go through Q2 and then very definitely as we go to Q3 and Q4.

[Operator]

There are no further questions at this time. This concludes today's conference call. You may now disconnect. Thank you.