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Gildan Activewear Inc
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Welcome to the Third Quarter 2018 Gildan Activewear Earnings Conference Call. My name is Jacky, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please remember that this conference is being recorded.I will now turn the call over to Sophie Argiriou. You may begin.
Thank you. Good morning everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the third quarter of 2018. We also issued our third quarter shareholder report containing management's discussion and analysis of consolidated financial statements. All of which 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.With me 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. Shortly, Rhod will be providing commentary on our results for the quarter and our business outlook for 2018, after which a Q&A session will follow.Today's conference call includes certain statements that 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, I'll turn the call over to Rhod.
Thanks, Sophie. Good morning everyone, and thank you for joining the call. During the third quarter, we generated adjusted EPS of $0.57, up 7.5% over last year. We delivered mid-single digit organic topline growth, driven by the strength of the activewear category, which was up double digits from gains in our key growth areas. Moreover, we were pleased with our execution this quarter considering the shipping limitations we navigated through Hurricane Florence disrupted distribution operations in September, which is typically our strongest month of the quarter.From an SG&A perspective, we saw cost reductions materialized from the plans we set in motion at the beginning of the year. We announced our organizational consolidation. Our SG&A expenses in the quarter were down as a percentage of sales by 150 basis points, in line with 100 basis points to 200 basis points target we set and communicated at the beginning of the year.Furthermore, we expect to see continued improvement next quarter, as we continue to focus on driving further efficiencies across our organization. The leverage we gained in SG&A offset a good part of the anticipated gross margin pressure for the quarter, leaving us with adjusted operating income slightly above the prior year level.Now, let me take you through our third quarter results in a little more detail, and then we'll cover our guidance update and our outlook for the fourth quarter. Sales for the third quarter came in at $754 million, up 5.3% over the prior year quarter. We estimate that we could have shifted another $30 million in the quarter, if not the disruption we faced due to Hurricane Florence. We lost shipping days in our larger distribution facilities in Eden, North Carolina and Charleston, South Carolina, as both inbound and outbound shipments were affected due to port and real closures and the need to temporarily shut down to evacuate employees.So, Florence impacted sales during the quarter, although we expect to be able to recuperate about half of those sales in the fourth quarter, mostly on the imprintable side. The mid-single-digit sales growth in the quarter, as I mentioned earlier, was due to higher activewear sales, which were up 12.1% over the same period last year, driven by both the unit sales volume growth and higher net selling prices.Activewear volume growth was broad-based. We continue to see strong growth in fleece products, fashion basics, global lifestyle brands and international markets. We were again particularly pleased with international sales, which were up 28% in the quarter with all markets generating double-digit growth. We also saw strong double-digit growth on the e-commerce side.In the hosiery and underwear category, we generated $142 million of sales this quarter, down approximately 17% over the same period last year. Overall, industry demand in the sub-category was down for the quarter according to NPD data. The decline was also largely attributable to sock program losses in the mass channel, which we have previously communicated and continued weakness in license brand sales. In addition, out of the $30 million sales impact we saw from Hurricane Florence, approximately $15 million were lost sales in this category, as we were unable to fulfill certain replenishment orders in September.Gross margin in the quarter was 29%, down 200 basis points over the same period in 2017. As was anticipated, gross margin was impacted by inflationary cost pressures and the flow-through of costs associated with the supply chain disruption in Central America earlier in the year. Manufacturing costs associated with the optimization and the ramp-up of activewear capacity, particularly for fleece production on the selling side that we called out last quarter, also put pressure on gross margin this quarter.Clearly, gross margin pressure is a theme we've been working against all year. Now as we move into Q4, we expect the combination of higher net selling prices and the positive impact of product mix will be better aligned to offset higher raw material and other input costs in this quarter.SG&A expenses during the third quarter declined 7.1%, to $88.1 million. And as a percentage of sales, SG&A expenses improved to 150 basis points over the prior year quarter to 11.7%, mainly due to the benefit of cost reductions stemming from the company's recent organizational consolidation.Putting this all together, adjusted operating income came in at $130.7 million, up 2.6% from $127.4 million last year. Adjusted operating margin for the quarter totaled 17.3%, down 50 basis points as the gross margin decline was largely offset by SG&A leverage in the quarter. Adjusted net earnings of $118.2 million during Q3 were in line with the prior year levels, while adjusted diluted EPS of $0.57 was up 7.5%, reflecting the benefit of a lower share count compared to the prior year.Free cash flow of $118 million came in as expected. The approximate $30 million decline over the prior year was mainly due to higher working capital and CapEx requirements for the quarter. We invested $33 million in capital expenditures in the quarter, primarily in textile capacity and related selling expansion, distribution and information technology. If you recall, towards the end of the second quarter, our newest textile facility Rio Nance VI commenced operations and is ramping up on plan.We are now producing some of our newer programs for our global lifestyle brand customers in this plant, with higher-end performance features and fashion attributes. During the quarter, we continued to execute on our share buyback plan, repurchasing just over 1.7 million shares for approximately $50 million. Today, during 2018, the company was repurchased approximately 12.6 million shares. Finally, our net debt level at the end of the quarter totaled $819 million and our net debt to adjusted EBITDA leverage ratio was 1.4x, in line with our leverage framework.Turning to the outlook, we narrowed our full year adjusted EPS projection to $1.85 to $1.87 inside our prior range of $1.85 to $1.90, reflecting the results we saw in the third quarter. We reconfirm our full year sales guidance of mid-single digit growth, as we continue to project double-digit sales growth in activewear in the fourth quarter, including fashion basics and international growth and shipments under two new private label activewear programs. These drivers along with shipments under a new private label underwear program are projected to more than offset additional expected decline in hosiery sales during the fourth quarter.After reflecting foregone soft sales in Q3 related to the impact of Hurricane Florence, softness in sock demand overall and potentially more weakness in licensed brand sales, we now expect sales in the hosiery and underwear category to be down approximately $125 million for the year, compared to our prior estimate of projected decline of $85 million.Adjusted EBITDA is now projected to come in towards the lower end of our previous range of $605 million to $620 million and capital expenditures continue to be projected to be approximately $125 million. Free cash flow for 2018 is now expected to come in between $400 million and $425 million versus previous guidance of in excess of $425 million due to higher than previously anticipated year-end working capital requirements as we head into 2019. So closer to our original guidance on free cash flow.Our full year updated guidance implies adjusted EPS in Q4 in the range of $0.42 to $0.44, driven primarily by double-digit activewear sales growth and strong improvement in SG&A leverage. So wrapping up, with three quarters now behind us, we feel good about delivering on financial targets for 2018, despite the various headwinds we've faced this year. More importantly, we continue to feel good about our long-term growth prospects and the way our strategy is unfolding. At our Investor Day in March, we talked about the kinds of changes we are anticipating and seeing in the marketplace both for our incredible products and in the retail space.When you look at 2018 so far, there have been clear signals that retailers are increasingly committed to their private label strategies and developing their own exclusive brands are greater differentiation on the selling floor and providing quality and value for their customers. And in that respect, given our competencies as a large-scale low cost, vertically integrated and responsible manufacturer, we feel we are well positioned to pursue this opportunity.During the third quarter, we secured a large private label men's underwear program for 2019 with our largest mass retail customer. A shelf space allocated to our current men's underwear program within this retailer will be increasing and allotted to this new program, which will be manufacturing under the retailer private label brand in 2019.Overall beyond this positive news, we are encouraged by the developments we're seeing in all markets and we will continue to capitalize on opportunities that work for our customers and align with our capabilities and our strategic drivers, including building on our momentum in fashion basics, international markets with global lifestyle brands, e-commerce, our growing underwear business at a more stabilized hosiery platform. We are executing on our plans and enhancing our positioning and we remain committed to delivering our long-term objective of mid-single digit top line growth and high single-digit to low double-digit EPS growth and ultimately driving strong shareholder value over the long term.Thank you, and I'll now turn the call back over to Sophie.
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 in order to get everyone the opportunity to ask a question. We will circle back for a second round of questions as time permits. I will now turn the call over back to the operator to start the Q&A session, Thank you.
Thank you. We will now begin the question-and-answer session. [Operator instruction]. Our first question comes from Mark Petrie with CIBC. Please go ahead.
Good morning. I wanted to just ask about that private label contract win and you mentioned total shelf space for men's underwear, that retailer is increasing. But, what does that mean for shelf space of the Gildan brand product versus today?
Well, the shelf space of the Gildan product will transition into the retailer private label and the shelf space will increase for approximately 50% with the retailers private label, as they continue to focus on driving their branch strategy.
Okay, that's great, thanks. And then, how should we think about expectations for profitability of a contract of that type of size and magnitude?
I mean, the company has positioned itself like we said at the beginning year to realign ourselves for reality supporting these large private label programs. And if you look at where we're going, think we're on track as a company to based on leveraging our low-cost manufacturing, right-sizing our SG&A, which has come down by a 150 basis points for all of that increase. Believe it or not, it has come out of our retail cost structure and we also reinvested a lot of capital into our direct-to-consumer our e-commerce platform. So we are rightsizing the business, we feel very comfortable that we'll get good returns on capital on all of our private label programs in the future and it fits in with the criteria that we set to drive the future long-term growth strategy of the company.
Okay, and then I wanted to just ask about gross margin, Rhod you mentioned it's been under pressure sort of year-to-date, but you're expecting better balance in Q4, driven by better price and mix, can you just give some more detail on the drivers of that exactly and then your expectations about how gross margin is looking for 2019 given the additional shift in mix towards more private label?
Yeah, Mark. So if you look at the way that the margins are evolving as we said -- as we work away through the year, right, that we are going to use price and mix to offset some of the pressures that we're seeing from a fiber perspective and some of the headwinds that we saw from the manufacturing cost standpoint. Some of the headwinds, for example, that we called out last quarter, right, as we saw things like supply chain disruptions in Central America. As we've seen, the ramp-up costs associated with really driving more activewear to a certain extent, some of the inflationary pressure. So, we knew that these cost pressures coming through, and we've been managing that with price and mix. And really if you look at the evolution of the year and as we move into Q4, I think you will really see from a gross margin perspective, that price and mix effect that we will allow us to cover the increases we've seen in fiber manufacturing costs. And then clearly, we've got this really good drop through improvement in SG&A that will be coming through. So, when you look at our margins overall and we -- after the end of the year we said that from an operating margin perspective, we expect that our margins would be slightly down. Now I think we feel pretty positive about the way we're going to end the year from our margin perspective as far as hitting that. And then as we move into 2019, we've got a lot of good drivers from an overall perspective. I don't give guidance right now on margin for 2019, but you can see all of these factors are playing through very nicely. From a cost perspective, you got to remember we had that $0.08 coming through that we called out last quarter. And then we've had some other impacts in the supply chain from the Hurricane Florence for example that we'll be dealing with. And then, all of that basically for the most part of the work Co.'s way through as we head into 2019. So I think we're well positioned as we end the year and head into the next year.
Okay, thanks. And then just quick to follow up, when you're talking about price, have you taken sort of incremental price action from what was done sort of beginning of the year?
We've taken incremental price action. And we think that there is definitely a room based on the inflationary cost pressures and fiber and labor transportation, dyes, chemicals to support price increases for '19 as well. So we're very comfortable that we can lift some price up in '19. And also some of the pricing that we increased this year was -- hasn't pull-through for the full year. So we'll get benefit of that next year as well.
And that's across sort of categories and channels?
That's across all of our businesses.
Okay, thanks very much.
Our next question comes from Heather Balsky with BOA, Bank of America. Please go ahead.
Hi, thank you for taking my question. I guess to start with regards to the new private label program launch, how are you thinking about the rest of your Gildan branded program and what's the feedback you're getting from your retail partners?
Our Gildan brand, in general, is still doing very well with all the other retailer partners. In fact, it's doing very well online right now, and it's growing potentially, in fact, it's almost doubled its sales online this year. So we're still pretty excited and still in our brand portfolio, going to be our #1 brand of all the brands that we still have in our lineup. So it's got pretty good distribution and we're so excited about it and we think that we're well positioned and we leverage our low-cost manufacturing, the value creation that we offered our Gildan brand is still exciting and opportunistic for retailers. So we're going to continue to support it and we're very excited that we can think in the future, it will continue to grow.
Great, thank you. And on the last call, you talked about the available capacity at Rio Nance VI. And with this new program, sort of, where does that put you in terms of your plan and how do you think of the buildup to get the remaining capacity?
Well, we said last time that we've got a lot of capacity increases coming on. Rio Nance VI is ramping up as we speak. It's going to ramp up through '19 to 100% of its capacity. We have incremental capacity coming online in '19 in both Rio Nance I and Rio Nance V. We have excess capacity still available for us in our Mexican operations. So overall, we have enough capacity to continue supporting the business. And if you look at the drivers for next year, we still have very good drivers between our fashion basics, our international businesses, the roll-out of the full year private label programs that we secured in Q4, the launch of our new space's underwear. So really we're well positioned. And as these private label programs continue to become available. We'll allocate as much of capacity as we can as fast as we can to support the opportunity at retail. So, I think we're well positioned to support the growth and we're also well positioned to continue to drive our low-cost model in our capacity. And we also are going to benefit from lower distribution costs, as we go forward. And we started 3 distribution centers this year and we also made a big investments in e-commerce that will continue to support our e-commerce sales and yet make us more efficient in that process as well. So we're making the investments where we see we need to and we're managing the business to ultimately give us the best returns we can and drive our top line sales.
Thank you very much.
Thank you. Our next question comes from Kenric Tyghe with Raymond James. Please go ahead.
Thank you. Good morning. Glenn. Just a quick follow-up on the private label underwear. Given your positioning both in terms of footprint and time to market et cetera, would it be reasonable to assume that there are a number of discussions with respect to private label underwear programs currently ongoing or that we could expect to have ongoing?
For us, we're going to continue to look at the opportunities that come available. So each retailer has driven their own strategy. So the answer is, look, there's lots of opportunity, this a shift. We think that's really escalating and we're on the forefront of trying to take advantage of the opportunity. So the answer is yes, underwear is a good category private label because it's very low SKUs which meet our criteria and we're going to focus on the underwear category as really the primary area where we think private level because it's something that we can sell really across all channels of distribution because of the low amount of SKUs to support that business with each one of these retailers. It fits well with our capabilities. We're also looking at working with our large mass retailers on activewear programs. So everything is working together. We're very excited that we have the capacity to support it and we're right-sizing the SG&A of the company to take advantage and make sure that we maintain good healthy margins as we go forward.
Great, thank you. And If I could just switch gears quickly to a comment that was made on the licensed brand socks sales, is the performance there or the underperformance a function of share gains at retail for private label or is there some other dynamic in the licensed brand sock business that we should be aware of?
No, I think it's just a stock point in terms of distribution. But we are working together with our license force to reinvigorate that business. So we think that that's going to come back. It's just a question of working with our retail partners and there's been a little bit of loss of the momentum in shelf space. But we feel that that's coming back right now and the brand has got momentum back. So hopefully, we'll see a turnaround in '19.
Great. Thank you. I'll leave it there.
Our next question comes from Martin Landry with GMP Securities. Please go ahead.
Hi, good morning. I wanted to talk about cotton prices a little bit. You source your cotton needs I think 6 to 9 months in advance at least, so you're probably now starting to source your cotton for next year and wondering what should we expect in terms of cotton prices for 2019. Is it fair to say that it could be flat to down versus '18?
First of all, you don't take cotton and polyester together. Polyester price has gone up this year -- during the year. Obviously, [ as costs has gone ] up and so forth and capacity requirements. So look, I don't want to give out exactly what our costs are, but they definitely there's pressure on fiber, there's pressure on labor, there's pressure on dyes, chemicals, transportation so inflation is a factor. And I think that all that together, we'll support price increases as we go on to '19. Not just with us, I think that's an industry phenomenon at this point.
Okay. But looking at my screen, I mean it looks like cotton prices have gone down versus where they were this summer and is it fair to say that you're going to -- you should benefit from that in the first half of the year?
Well, don't forget in the first half of the year, cotton you buy -- nine months. So if you look at the price nine months ago, that's we will see in the first half of the year. And then what are you seeing today project that maybe nine months, so that's a better way of looking at it.
Okay and then just wondering if you can bridge for us the gross margin decline of 200 bps this year? Is it possible to have the main drivers of that decline?
I think the way to think about it Martin for the quarter right is effectively we have fiber price increases coming through, right. For the most part again, we're offsetting with price and mix. And that, for the most part, is imbalanced. For the most part, I would say we pretty well caught up, we're pretty well aligned, especially when we move into the fourth quarter. And then, don't forget about those manufacturing cost impacts that we talked about. That $0.08 that's coming through, right. That's driving negative impact that we called out that occurred in Q3 and to a lesser extent in Q4. So that's really what's effectively driving that. I would say that gross margin -- the negative impact on gross margin again largely offset by our SG&A performance right, which was down 150 -- 160 basis points in the quarter. So I would say as -- again as we move into Q4, and you really start to see that gross margin come through. And again I think with the SG&A, we'll be well set up as we finished the end of the year.
Okay, that's it from me. Thank you.
Our next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Thank you, good morning. I just wanted to focus in here on some of the SG&A. Obviously you had that savings come through in Q3. And I'm just curious, do you expect a similar sort of magnitude of savings into Q4 do you expect to accelerate and then I guess along those lines, how do you see SG&A evolving through 2019?
2019 SG&A will be flattish relative to '18. There might be some inflation in there, but basically, our objective is to keep it flat. And even in '19, we won't materialize all the cost savings that we [ think finally in our ] whole realignment. Some of that will go through into '20. So we're going to continue to be aggressive on the SG&A. And I would say that our objective is to be sub 4% as a company on a go-forward basis longer term, and that's sort of the target that we're looking to achieve. So we're heading towards that and that will be a function of continuing to leverage our cost structure and our distribution capacity and our infrastructure to drive top line sales basically by maintaining a flattish to slightly up SG&A.
Right. And when you say flattish, you mean on a percent of sales basis?
I mean flattish in total dollars, but there might be a little bit of inflation there, but [it's going to work -- trying to] keep it flattish in total dollars for '19 and there just might be some. On constant basis, we're flat. There might be some inflation that we will be able to offset going through the '19.
Okay, that's great. And then just on the new private label program they have secured for next year. Can you just give a little bit of context around when that begins to flow through and when we should expect to see it coming through in the numbers and in terms of the shelf space allocation increasing by I think you said 50%?
So, it will start in Q2.
Starts in Q2, okay. And can you just remind us, is it typically a multi-year commitment?
We're working very closely with our retailers and the commitment is to drive their strategy and we're supporting it. So typically, anything else, it has to be the successful in sell-through, but I mean obviously we're here to support them long-term.
And on a per unit basis, is there any dampening to the revenue number that you would have expected versus your Gildan branded product?
[ I don't say that now ] because it's not for me to say, but I'll say that the product will be well positioned. Like anything we do in Gildan, we add best value, best quality, best features on all of our products and we will continue to support this retailer, making sure that they have a great quality product and great price.
Okay, that's great. Thank you.
Our next question comes from Vishal Shreedhar with National Bank. Please go ahead.
Hi, thanks for taking my question. Just wanted to take a few steps back and get your insight on how traditionally private label underwear has performed in retail over the longer term and also associated with that if you think that the retail that awarded you that program will change the way it markets the private label?
Well, I would say that private label has really never been a big factor at retail because there's never been anybody who has been able to supply at low-cost manufacturing products, quality products to the retailers themselves. When we started off with Gildan, obviously we were very successful out of the gate and even our Gildan brand, the consumer awareness of our brand at the time we launched it was almost zero. So what's sold our brand at Walmart really -- at our mass market retailer was really the value proposition of our product, the quality of the product, the price of the product. So that's proven to be successful and changed I think the way people look at underwear on a go-forward basis. So, I think that the value equation as long as it's there as it's priced right for a consumer, we've proven that these products to sell, and the fact is that there is really nobody else that can really provide this especially in our geographic hemisphere, which is a replenishment program. So we're well positioned and we're pretty excited about it. We think this is going to be a great program and we will see what happen as we go into next year.
Okay, thanks for that. I wanted to just -- another long-term question, just given all the growth in the printwear business and maybe a little bit of a change here as you focus on fashion more so international more so, maybe you can talk about in your experience how this business might perform if economic strength fades?
Our business is performing great. To be honest with you, I mean our printwear business sales were really strong. It's driven from our fashion basics business, which is driven by Anvil, American Apparel, Comfort Colors, the launch of our [ AM G ]. Our fleece [ Mossy ] POS is performing very, very good. Our international business is very strong, and it's up 28% and it's really supported again by fashion -- our fashion basic business. And we launched our American Apparel brand there, which is going very well. We're expanding American Apparel into Australia, New Zealand, Japan. So everything we've done, the investments that we've made, brands we've developed, our manufacturing capacity both in yarn spinning and now we're bringing on in Rio Nance VI, which will only enhance our positioning of our products, will help continue to drive our success of these products through '19 and beyond. So we think we're well positioned. We are going to know the foundation we have made through these acquisitions and the investments we made are really driving our sales and we see that happening and continuing the '19 and beyond.
Okay, thanks. Thanks for your comments.
Our next question comes from Derek Dley with Canaccord Genuity. Please go ahead.
Yeah, hi. And just on your private label program. Last quarter, you mentioned, I believe you had secured three retail programs and now you've got one more. What were the additional contracts secured during this quarter?
No, we have two activewear programs and an underwear program, which is basically secured, which are being rolled out in Q4. And then this new mass market retail program will be the fourth program.
Okay, got it. And in terms of the SG&A initiatives, obviously, you guys are hitting your targets of 150 basis points to 200 basis points in leverage. Can you just talk about what exactly some of those cost saving initiatives were, I believe, you just added they were almost solely focused on what was previously your retail division?
We went through a realignment. We're better utilizing our resources by doing consolidation of obviously divisions, back office, et cetera. We're also -- we had a much of cohesive distribution strategy. We started this year over 1.5 million square feet of distribution capacity. Some of that has come out of the divesting of low-end socks that we use to have. It took a lot of space and SG&A to support it. So, that was strategically part of our decision to get shutter some of that business. But ultimately, we've taken a lot of distribution capacity out. Despite that, we even invested heavily in e-commerce capabilities asset to be more efficient to support that business as we go forward. So, we're really focused on leveraging our SG&A. We're also focused on overall working capital, to be perfectly honest with you, and how we go to market with our products have been more focused on the product offerings and narrowing ourselves to make sure that we're continuing to drive not just low cost but also working capital. And the thing is, we're also looking at even though our SG&A is focused in the [ I’ve checked this in the period in the sub-4% ], we're also looking at significant manufacturing savings. The headwinds that we have that Rhod alluded to before, lot of those won't happen on a year-over-year basis. We're training significantly today to support our fleece business. We almost doubled our capacity during the year. We’re talking about 5,000, 6,000 people just in training. Once they get fully trained, obviously there is an efficiency thing. We're going to optimize our textiles with the launch of new Nance VI. So, we've a lot of other initiatives. So, one thing about our company is that we're always constantly looking at ways to be more efficient on the cost side and we're also looking at both the SG&A as well. So I think we have a good plan to support growth going forward and to leverage our operating margins.
Our next question comes from Brian Morrison with TD Securities. Please go ahead.
Good morning, Glenn. I appreciate you don't want to get into the details of the economics on the mass contract, but just in terms of high level and winning these contracts you've announced, can you just talk about the competitive process just discuss the level of importance of the key inputs talking about price production capacity, the quality incumbent relationship? I presume that this morning's announcement was a competitive process. I just want to understand the inputs of the successful bid to understand future awards.
Well, I think [ they have ] two things. One is that our -- we're well positioned because the size of the program is quite large, so obviously it takes somebody with the capital structure and the manufacturing capacity to be able to support it. There are not a lot of people I think out there can actually pull that off. So this is an important part. So, we obviously are well recognized and we see this as an opportunity. We're basically working very closely with our customers to make sure that we understand what the requirements to be able to support it. And we're working and understanding where they're driving their strategy on their floor and what make sense for us. We're looking at basic replenishment activewear, T-shirts, sweatshirts, underwear really is our sweet spot basically, so we know we've identified where we can go. If you come to our facilities in Central America, somebody walks through there and says geez I can get everything I need here, so you guys have one-stop shop, low-cost or CSR compliant. So, that's our sales pitch, right. So, I think we're well positioned and capable of putting all the features required either whatever yarn they need, whatever types of finish they need. So, we've really got a great opportunity and I think our manufacturing capabilities speak for themselves and they will continue to leverage what we have and bring on additional capacity to support this opportunity. And as programs become available, we continue to work with our retail partners to see what programs meet our criteria and where we can have value.
I appreciate all that and I agree with that. Can you just maybe comment how competitive a process was this?
I can't explain to you what type of – [ this is to cut it out ], the answer is no, I don't think it was [ to cut it out ]. I think we have the capability to supporting this program with our retail partner.
Yeah, thank you. In terms of e-commerce obviously continuing to invest, can you just update to the piece capabilities, update on where that stands, what remains outstanding to service all markets maybe just from a product and geographic perspective?
We're really focused on U.S. market right now. And we're also focused a little bit international on American Apparel, our direct-to-consumer. We've opened up over 225 countries with that brand. Most recently, we started shipping at Canada. But as far as the omnichannel customers and marketplace customers in the United States, that's really where we put in a lot of capacity, that's where we see the big opportunity for us. And that capacity is installed now. And we've already seen great success this last quarter. We'll continue to see success next quarter and we're also looking to add a lot of product onto our product place basically. Our underwear business is doing very well. Our Gildan brand underwear is doing very well. We want doubled our sales -- marketplace sales in the quarter. So, we're doing very well. We've got the position in place in this part of the investments we made really on the year. So, we're in a position to execute on that opportunity as we go forward in '19.
Sorry to squeeze this last one, you bring up American Apparel, you hadn't really mentioned much about that before. Still on track to achieve the $100 million run rate at the end of the year? I know you updated that last quarter.
Yes, right.
Thank you.
Our next question comes from Keith Howlett with Desjardins Securities. Please go ahead.
Yes, thanks. I was wondering if you can outline what products are covered by the new private label agreement, is it just men's underwear or is it any broader group of products?
Men's Underwear. The shelf space that we had before that's been March.
And will that product being marketed under an existing brand of that retailer or will it sort of try to distinguish the enhanced quality and features by using a new brand?
I don't want to say anything about the retailer. That is confidential, so you'll wait [ until the source ].
And is the product only with respect to the U.S. market?
This program, yes.
Thanks. And then just finally, can you speak as to how you're picked to the piece distribution centers are functioning in the U.S. market?
Well, I just said, the focus on our e-commerce business basically is we've got everything in place right now and that's an investment that we -- even though our SG&A is down 150 basis points or 160 basis points, we've invested early on in the year for that e-commerce capacity basically which is now installed and is ready to take on more product. And as we go forward, we're going to list more products online with our market price customers basically to support our sales growth through '19.
If I could just ask one last question on advertising, as you shift sort of the proportion of business that's private label versus branded, do you anticipate a reduction in the percentage of advertising to revenue?
We're still continuing to spend money on advertising. We're supporting our total brand. We're supporting our American Apparel online brand. So, we're still supporting our Gildan brand. What we're going to do is we're going to basically make sure that we spend proportionally, it's where we see each one of these brands, but ultimately a large portion of all the SG&A reduction this year didn't come from advertising. Actually, we increased -- we've got a lot of new products being launched our Hammer tee, et cetera. So, it's really distribution and other things that we've been able to support lowering SG&A basically. And I think our advertising is probably more flattish in '18 versus '17.
Great, thank you.
Our next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead. Thanks.
And just a couple of quick follow-ups on this private label program. And when we think about 2019 and you talk about the 50% shelf space increase, should we think that the private label is the incremental 50% or is there some sort of a replacement of some existing branded sales, so it's more of a conversion of some of the shelf space as well as we think about next year?
Our brand will stay there through the first half of the year and that will be converted to private label, which will ultimately be a larger set in the store that currently is today.
Okay and then will it be sort of a conversion of the entire branded shelf space over time then?
Yes.
Okay. And then just more of a looking forward to more private label programs. I guess this one will come into effect Q2. How long of a line of sight do you have for some of these programs? Are you still working on some that could contribute for 2019 or at this point those would anything further would be more of a 2020 contributor?
Well, we're always looking and working with our customers. So before the back half of the year at this point because they work so much in advance. So right now, people are looking at the full lineup. But look I think we have today to support our '19 growth and keep driving our sales, which we forecasted to be at least a mid-single-digit growth was driven by our fashion basics, our international business, a full rollout of the three programs we're rolling out in Q4 this year or next year, the launch of this new shelf space we have. So everything that we have for '19, I think is going to keep our momentum growing on the top line. So we're feeling very comfortable of our organic growth as we move into '19. And it's not just one thing; it's all of the above, and it will continue to grow our sales as we go forward.
Okay, great. Thank you.
[Operator Instruction] Our next question comes from Patricia Baker with Scotiabank. Please go ahead.
Yeah, good morning everyone. Actually, my questions have all been answered, so I don't have another one. Thanks.
And at this time, we have no further questions.
Thank you, everyone, again. I'd like to thank you for joining us this morning. This concludes our call and we look forward to speaking to you soon. Have a great day.
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.