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Gildan Activewear Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 Gildan Activewear Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sophie Argiriou, VP, Investor Communications. Please go ahead.
Thank you, Mercy. Good morning to all and thank you for joining us. Earlier we issued a press release announcing our earnings results for the third 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 will be 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 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 US Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results.I will now turn the call over to Rhod.
Thank you, Sophie. Good morning and thank you all for joining us on our third quarter call. We hope that you and your families are healthy and staying safe. This morning we posted results reflecting a strong recovery from the prior quarter. Sales came back nicely, more than doubling from the second quarter. We saw a good retail performance with sales up year-over-year driven by momentum in underwear and although the pandemic continues to weigh on the demand for imprintables used for large events other areas within this part of our business are growing and mitigating the impact.Further, we are making good progress with our Back to Basics strategy as we continue to focus on servicing our customers with a more streamlined product portfolio, which in turn is allowing us to remove complexity from our business and fully leverage our manufacturing platform to drive market share growth. In this regard, during the third quarter, we saw manufacturing cost efficiencies from our Back to Basics strategy come through as we brought back more capacity online and together with the sequential improvement in product mix as sales improved we generated gross margin of 22.5%, a strong recovery from the second quarter.This was achieved despite a continuing year-over-year impact from period costs related to below normal manufacturing capacity utilization rates, and albeit better but the sub-optimal product mix, given that COVID related environment. Moreover, we kept a strong focus on managing our SG&A expenses, which came in at 10% of sales. So adding all this up, we returned to a profit in the quarter with GAAP EPS of $0.28 and adjusted diluted EPS of $0.30. We were also very pleased with our strong free cash flow generation $137 million in the quarter or on a cumulative basis $300 million in the last 2 quarters as we continue to tightly manage our working capital and capital expenditures.Finally, our liquidity position at the end of the quarter further improved to $1.3 billion, leaving us in a strong financial standing. Before I get into the specifics of the quarter's results, I would like to provide a status update on our manufacturing operations. With improving sales across our channels of distribution, our team did an outstanding job on ramping up production levels during the quarter, bringing back our factory employees to a safe workplace and navigating through the requirements of safety protocols and social distancing measures in this new operating environment.This is not without its challenges as many in the industry are facing but nonetheless, with the expertise of our team and the benefit of owning and operating vertically integrated manufacturing operations, our production levels by the end of the third quarter were back up at 75% of overall pre-COVID capacity. I can say we've continued to bring more of the production back on, as we have moved into the fourth quarter as our manufacturing team continues to navigate well through this environment.Turning to our operating results. We generated sales of $602 million in the quarter, down 18.6% versus last year at significantly better than the 71% decline in the second quarter. Activewear sales of $456 million in the quarter were down 26.3% while sales in the hosiery and underwear category totaling $146 million were up 21.2%. Lower Activewear sales was mainly due to lower sales volumes of imprintables, down 21% in North America and 25% in our international markets together with unfavorable product mix and the impact of the continuation of higher promotional discounting in the U.S. imprintables channel as we continue to drive for share in this environment.Although point of sales was down year-over-year for our imprintables products, similar levels we saw we exited the second quarter trends remained relatively stable through the quarter. On average, POS in North America was down in the 15% to 20% level and down 25% in international markets. Putting these numbers together, you can tell, we saw further imprintables distributor destocking in the quarter in North America. However, the level of destocking is considerably from what we experienced in the second quarter.On the retail side, as I mentioned earlier, growth was driven by the strength of our underwear sales which doubled in the quarter, reflecting strong market share gains related to our men's private brand and Gildan brand programs. While hosiery sales were flat sequentially, sales were down slightly compared to last year. Gross margin of 22.5% in the third quarter was down 490 basis points from last year as manufacturing efficiencies generated from our Back to Basics initiatives and lower raw material costs were more than offset by a $15 million or 250 basis point impact on gross margin, related to unabsorbed overhead costs due to lower manufacturing utilization.Gross margin was also impacted by higher imprintables promotional discounting and unfavorable product mix compared to last year. Although product mix impacted margins by 280 basis points in the quarter on a sequential basis, most improved significantly compared to the 600 basis point impact we saw in the second quarter and we expect the negative impact from product mix to continue to reverse as our sales continue to normalize going forward.Moving on to SG&A. SG&A expenses totaled $61.5 million or 10.2% of sales, down $17.5 million over last year. The decrease stemmed from cost savings related to Back to Basics initiatives including lower compensation expenses resulting from permanent workforce reductions announced last quarter as well as lower volume driven distribution costs. Adding up all these elements operating income totaled $68.8 million in the quarter and $73.5 million on an adjusted basis down from 117.9 and $122.3 million respectively in the third quarter of 2019. After financial expenses of $11.4 million in the quarter, net earnings totaled $56.4 million or $0.28 per diluted share and $59.2 million or $0.30 per diluted share on an adjusted basis.Turning to free cash flow in the balance sheet. As I mentioned at the beginning of my remarks, we delivered another strong quarter of free cash flow performance, generating $137 million in the quarter, bringing us to a 2-quarter cumulative total of over $300 million of free cash flow generated thus far as we move through the pandemic. Further, we expect to build on this level next quarter with the continued strong focus on working capital management. All our key customers are continuing to manage well, as they move through this environment and our DSOs, which has grown in the second quarter are now well normalized.Inventories at the end of the third quarter were $939 million, down 9% sequentially and 10% compared to last year as we continue to focus on carefully managing raw materials with our finished goods level. Putting way at the end of the third quarter, the company's net debt stood at $850 million, our leverage ratio for debt covenant purposes with 2x net debt to adjusted EBITDA and we ended the quarter with approximately $1.3 billion of liquidity, which provides us with strong flexibility as we move towards 2021 in a still uncertain environment. So overall, a good quarter given the circumstances.Now before opening the call to questions, let me leave you with some commentary on what we're currently seeing in the marketplace. Moving into the fourth quarter, POS trends across our imprintables channels have further improved averaging for the month of October down in the 10% range in the U.S. and in international markets down between 20% and 25% compared to last year, depending on the market.On the retail side, sales for most of our products are currently up from last year thus far in the quarter. While this is an encouraging start to the fourth quarter, we nonetheless remain cautious given the ongoing trajectory of the pandemic, particularly with news of the recent surge in cases globally and the unclear global economic outlook and the impact all of this could have in the demand for our products. Having said that, we feel the actions we have taken heading into and during the pandemic have provided us with the financial and operating flexibility to continue to navigate well through the crisis.We are pleased with the continuing the progress on our Back to Basics strategy and we will continue to focus our efforts in this regard while we can control outcomes regardless of the global environment. For example, having completed our imprintables SKU rationalization initiative last quarter, we are currently performing a strategic retail product review, which we expect to complete by the end of the year as we previously communicated. To the extent overview leads to a decision to rationalize any part of our retail product offering, a related inventory charge could be incurred in the fourth quarter, which we do not currently expect to exceed $25 million.So overall good work done to date on our Back to Basics strategy, but more to do as we fundamentally strengthen our competitive position in order to allow us to emerge from this pandemic as a stronger company. Following, you would have seen that we called out in our press release, the recognition that we recently received related to sustainability in the Wall Street Journal's inaugural ranking. We are particularly pleased with this recognition as it reflects the strong culture within Gildan regarding sustainably managing our business. On behalf of the rest of the senior management team, I would like to finish this update by thanking the whole Gildan team who operate with this mindset every day.Thank you. And we will now turn the call back over to Sophie.
Thank you, Rhod. [Operator Instructions] I'll now turn the call over back to the operator for the question-and-answer session. Mercy?
[Operator Instructions] Your first question is from the line of Paul Lejuez with Citibank.
Hello.
Yes, Paul.
Are you hearing me?
Yes. We hear you.
Sorry about that. Curious if you've seen any improvement in the promotional levels within the imprintables channel this quarter versus last quarter? I'm curious if there any categories that stand out as being more or less promotional, or is it promotions across the board. You mentioned the sales trends are better this quarter but curious if anything has changed on the promotional front and then probably, I'm just curious about your raw materials outlook for the first half of 2021. Thanks.
Sure. Maybe on the commercial, we have commented that we are continuing to drive our Back to Basics strategy which is includes continuing price and promote our products and basically is allowing us to continue to generate market share and improve our POS. And where we are spending and promoting our products is in the fashion basics fleece category, our open-end basic T-shirts and our fleece products and those are the main 3 areas that we are promoting and those are the 3 big categories that are driving our POS and the market share gains as we speak. So it's not a product support promotion, it's specifically 3 categories to date.
The second part of your question, Paul, is our raw materials. And I think if you look at raw materials, cotton prices are going up, but I think if you -- obviously if you look at the lag time, I think in the first half you won't necessarily see that, but obviously, there is some upward pressure as we go forward.
And your next question is from Chris Li with Desjardins.
Well, hi, good morning. Hi Glenn, I know we're still far away from the new normal. But I was just curious if you can give more colors on what drove the POS improvement from Q3 to October because considering your end-user demand that's quite impressive improvement. So if you provide some more colors on that it will be much appreciated. Thank you.
Well, even Q3 was we are pretty excited about the improvement in Q3 to be very honest with you. If you look at our industry, and we're a little bit like the airline industry, travelers, tourism and sporting events is rock concerts. None of these things have really come back and social distancing is still a factor so the good news is that our products are in strong demand. Our lifestyle of basic casual stay at home is driving sales and what is happening is that there is alternative ways to bring product to market and that's great news is that we've an efficient industry. So the big insertion in the product and screen t-shirts and retail customers for example, that are now carrying more products online reselling has been very strong. At the end of the day, really what we're positions is -- position to have an effective supply chain to support the shifting in the market and the shifting of behavior of how people are consuming the products. I think that's really the most important and start of this whole thing is that us being able to continue to increase our market share in a market under these issues of social gatherings and social distancing. So we're very excited about it. We don't have all the answers because it's a very fluid market and a lot of products are we sought to distributors and gets sold to screen printers so it's hard for us to get a total and one it, but it's very encouraging and as we booked into October, we continue to see further upside in terms of more sales and market share gains.
Kay, that's helpful. Maybe a quick follow-up. You mentioned I think last quarter that your expectation is still that by next year sales will recover to around 80% to 85% of the pre-COVID level by 2021. I know there's still a lot of moving parts, but is that still your view?
Well, I mean from where we are today, I would say, yes, that's a good view. We see that in Q3, we see slightly improving so far this quarter, but the pandemic is also worsening. What we see in Europe today so that's really a function of overall how it affects, but I think that where we are and how we position our business regardless, I think we're well-positioned. We have a good handle on our manufacturing capacity to be able to go up or down or support any demand of the market, our inventory levels are in very good shape, our debt has come down and we continue driving more cash flow as we move into Q4 and into Q1 as we continue to focus on our inventories. When you look at our whole strategy of Back to Basics what it means is improving our availability of selling and driving price -- market share by price but ultimately continuing to reduce the amount of working capital required to support the business. All those things together are going to continue to play a big part in the recovery for us and drive share.
That's helpful and best of luck for the rest of the year and continue to stay safe.
Thank you.
And your next question comes from the line of Vishal Shreedhar with National Bank.
Hi, thanks for taking my questions, and congrats on this result in a tough period. Regarding your wholesaler customers, I'm wondering if you can update us on the state of the inventory in the wholesale channel and now that we've seen restocking for some period of time, is it reasonable to --destocking, sorry for some period of time. Is it reasonable to expect restocking in the coming quarters and also maybe just tag along the financial health of the average wholesale customer?
The health of our customers are sort of in the same position we are, they have seen a big recovery in the industry so because most of these products are being sold to our distributors. So as we recover, they recover. They also have managed their working capital and their financial stability as well. So we're all in the same direction there and the inventory is yes, they probably have to lower at the end of Q3 and will be a little bit of, but I would say are stable but they will probably grow a little bit Q4 as demand continues to grow to support the future sales. But there is a very good shape. Our customers are in good shape, and we're pretty excited in our position right now.
Okay, I appreciate that color and just a follow on to that. With respect to your own manufacturing capability and the restrictions imposed associated with COVID-19, can you talk about Gildan's ability to make sufficient inventory to reflect the seemingly improving demand outlook? Do you foresee any problems related to COVID-19 and perhaps social distancing and restrictions in the manufacturing footprint?
I think one of the things in our strength is being a vertically integrated manufacturer. When you really see how we've performed this quarter and how we brought back our production is a real function of our strength of our manufacturing teams. They did a great job. We've brought back capacity to the 75% level, which is lower than somewhat the sales level because we are focusing on making sure that we continue to drive free cash flow and bring down our inventories. We're continuing to increase it as we speak into Q4 to support demand. We have all the flexibility really to decide how fast we want to go up and if we have to scale back down we can do that probably with ease too because we're going to manage really what occurs in the market. We've got available capacity to continue growing to a 100% pre-COVID levels. That's our operating goal. We've got capacity that is being installed as we speak from the closure of our Mexican facilities that we closed down in March are we're repurposing in Central America, and we're continuing to expand and plan for Bangladesh expansion, which is planning to come online in Q2 of 2022.So I think we're in a very good position from a manufacturing perspective to continue to support sales growth and we're also in the position that in sales curtail we can support that relatively easy where we are today. So -- and now I think we're excited. We have all the protocols in our factories to redesign our plants, our social distancing, the transportation, testing employees every single day when they come in for tests and temperatures scans, sanitation is there with footwear, I mean we have put in all the protocol. It is a factor that COVID is quite relevant in Central America. But we've been able to operate and control our situation in our factories, I think pretty well so far.
And your next question comes from the line of Sab Khan with RBC.
Just…
Saba, we're having trouble hearing you.
And your line is open. I think question was withdrawn. Your next question is from Stephen MacLeod with BMO.
Thank you. Good morning.
Good morning.
Good morning.
Good morning. I just had a couple of questions on the imprintables segment -- or actually, sort of one question on the imprintables segment and then one other. In terms of the imprintables, can you just talk a little bit about categories where you saw incremental strengths between Q2 and Q3 and then where are you seeing incremental strength between Q3 and into October?
Well, really, from Q2 to Q3, we saw a big improvement everywhere because the sales of -- obviously, material has grown, but the categories that are driving is really the fashion basic ring-spun t-shirts, I mean, those are the -- those have actually -- are turning positive in the first part of the Q4. They were actually positive in Q3 actually, too, as well and more positive in Q4.Our basic category was still negative in Q3, but it's actually turned positive so far in Q4 and our fleece was positive in Q3 and continues to accelerate in Q4, so the areas that we're promoting and driving our back to basic strategy on price and availability are proving to be the growth drivers of the -- our sales.The other styles that we have -- we have a lot of fringe shoes, fringe items let's say, for example, a long sleeve, a pocket, a tank top, that are actually shirts that are noncore. A lot of those products get sold into these souvenir tourism market, etcetera, so they haven't come back as fast as the basic T-shirts, let's say, for example. So what's driving this -- the fashion category, basics now are, just like I said, have come back into positive territory this one month, and this has been strong pretty much all through even Q2 and Q3.
Great, thank you. And then on the margin side, you had some nice growth in Q3 sequentially and you talked about sort of margins normalizing or certainly the mix impact normalizing. And can you just talk a little bit about how you expect that to evolve, and then do you still view that 30% level was potentially attainable as you get into 2021, 2022?
Yes, I mean, if you look at the margin even how it's evolved, we have seen those -- the impact that we called out as we move from Q2 to Q3 and you can see them continue to evolve as we move into Q4. So we had -- in Q2, we had a lot of period costs. In Q3, we also had period costs and call it out 250 basis points, right? As we move on our manufacturing on average about 70% utilization, 75% at the end of the quarter. And then as we move into Q4, that will improve as we continue to ramp up our production. So effectively, that will diminish.On the mix side, we have seen the evolution of the mix, right? Point negative in Q2, Q3 also negative, 280 basis point impact. And then as we move into Q4, effectively as the mix starts to normalize, that should diminish -- we still have mix impacts like -- as Glenn called out, rich products, the pockets, things like those, they do have a negative impact. And if that's not in your mix, you don't get that, but effectively, as we continue -- our sales continue to come back, we do see positive mix overall. Fleece is an area where, effectively, we probably -- if you look at Q3, effectively some of that has shifted into Q4 for a number of different reasons and that's -- that drives positive margin.So overall, I would say our margin is evolving as effectively everything normalizes and as we drive to 2021. If you look at our longer-term targets, we're very definitely are driving towards those targets. It's going to take some time. We call that out last quarter, effectively, previously we had said that we thought we would be able to pre-COVID hit those targets by the end of 2021 on a run-rate basis. I think you have to push that back now, given what's going on from a COVID perspective, right? Because you got to get to a more normalized environment overall where print -- where business is back to where it was in 2019. But we're still going after those targets.
Okay, that's helpful. Thank you and congrats on the great quarter.
Thank you.
And your next question is from the line of Mark Petrie with CIBC.
Hey, good morning. Working capital, obviously been very, very strong. Rhod, you highlighted your optimism for Q4. So is this just representative of a permanently more efficient operating structure as a result of the reduced skew count and what sort of runway do you see for this sort of further -- potentially further reduction in working capital or are we sort of at a relatively stable level once we see the further benefit in Q4?
We're going to continue working on it, right? If you look at the working capital, as we simplify our overall structure as we have effectively worked on our product portfolio, I mean, everything associated with Back to Basics. We'll translate ultimately into improved working capital better turns. And so we've done a lot and you're seeing the benefit come through. But we still have more to do as we said. We're working on our retail portfolio and we'll be doing that in Q4. And those types of initiatives, they ultimately translate into better working capital performance as you move forward.So I wouldn't say that we're done -- we've done a lot, but I wouldn't say we're done yet, Mark. And we are -- we'll be looking to drive better efficiency as we move into 2021 on the back of, I would say, strong performance in 2020.
And then not only does it improve our working capital, but also we're going to lower SG&A and improve our efficiency of our distribution centers and other parts of our business. So -- and also, it will allow us to keep more inventory, even our inventories are coming down, we're going to have more inventory in the areas so that we can improve our availability and our service to our customers basically. So it's a win-win, less inventory, lower costs better availability, that's what Back to Basics is all about.
Yes, understood. Thanks. And just with regards to the performance in retail and your private label program, how much -- and the growth there, I guess, also in the Gildan brand too, but predominantly private label, it sounds like. So how much of the growth there was increased shelf space versus improving velocity? And is there any visibility to any further change in shelf space or are you sort of stable with where you are at today? Thanks.
Thanks. Well, I think that the growth is because of both shelf space and velocity, it really is, isn't is, today, right? So we've continued to take share. Our products are doing very well and we're looking to continue growing as we move forward into the future. So we're pretty excited about the level of growth. And I think this is a continued operation as we move forward and POS continues to evolve.
And your next question is from Luke Hannan with Canaccord.
Thanks, good morning. Glenn, I was wondering if you could give a little bit of color on the retail segment of the Activewear division, just curious to know what the trends are like for the different sort of end customers there specifically like the retail -- the specialty channel, and maybe mass and maybe just some of the other different customers and how POS is trending amongst those.
Retail sales overall were flat bit our mass products were actually up and some of our products that we sold to global lifestyle brands were down in the quarter. So our mass is actually doing very well.
Okay, thanks. Rhod you touched on that manufacturing capacity was 75% I think as of the end of the quarter. Just curious to know if that number has changed significantly since quarter-end.
We pushed it up so effectively we're 75% and we continue to bring it up as we moved into Q4.
We're bringing it up in line with the trend to POS in the industry. Still keeping in mind trying to manage our working capital and inventory levels. So that's sort of how we just look at it.
Your next question is from the line of Brian Morrison with TD Securities.
Hey, good morning. I just want to follow up on that point actually, Rhod. Can you just maybe put a number to Q4 capacity utilization, maybe in early outlook for 2021 as it's going to impact expense period costs. Then just in terms of mix, are you simply referring to lower fleece and higher retail in terms of the weight on gross margin right now?
If you look at capacity utilization, I think, again, I'm not giving guidance for the quarter but I effectively I think given where we are currently running probably around 85% is a good number ultimately. Probably where we're going to settle out for Q3, Q4. Then if we look at the gross margin effectively the impact of gross margin, it does normalize as we revert back to, I would say the historical levels, as our sales moves up because again I would say across all of our product lines we just get a better mix I would say, on average. But if you look at Q4, there will be some things that will drive it, as I said, as well as you touched upon period costs will help fleece is going to help more generally. Again I think the way to think about that mix impact we were 600 basis points. We were 280 basis points down this quarter and then I would say there is just a steady progression as we keep moving forward as our sales come back.
Okay, thank you. Then, Glenn, just in terms of opportunities with global travel restrictions in your cost structure improvement and obviously more just in time requirements, I'm curious if you're seeing heightened opportunities in GLV or private label that's typically outsource from Asia.
We're seeing a lot of demand for large creep that service all of the retailers and online sellers. That's really the big catalyst to our POS growth because look at I mean at the end of the day, people have brands and want to repurpose a shirt they can take a Gildan product either fashion basics or fleece, all of our garments have tearaway labels. They can quickly change the label on the product and re-brand all of our products. So we're a conduit for success for a quick turn onshore. Just in general when people look to make regulating a screen-printed product. I think the part about the bigger picture about on-shoring and global supply chain. I think that's still a big opportunity for us as we look at the 2021 because a lot of big companies, retailers, large users of product have been fighting off COVID and managing their overall inventories and crisis management et cetera but when the dust settles and people look to grow and how they're going to manage businesses before obviously the lack of travel, the convenience purchasing in this hemisphere, I think is going to be a big plus for us and also the disputes ARPU with 5 weeks versus the 5 months of those measures. I think we're well positioned. Right now, we're getting a lot of that at once. Business has been [indiscernible] has been servicing a lot of the mass retailers as well as the online sellers and I think that the next step for us is to seize the opportunity potentially coming our way as the markets recover.
And sorry, are you stating that based on discussions to date or just your intuition?
It's more intuition, and hardly some discussions yes.
Your next question is from Jim Duffy with Stifel.
Thank you. Good morning. Hope you guys are doing well. I have a question on the retail market landscape. Can you speak to any differences that you're seeing in POS versus your reported sales? I'm curious to what extent growth in 3Q was replenishment of depleted inventories exiting 2Q, how that compares to POS trends. Then if you could speak about quarter-to-date POS trends and how that fits with what you're seeing in your shipments that would be helpful.
Well, Q3 is obviously the biggest part of the year for underwear in particular, and all of our POS was driven by point of sale and we basically we're actually chasing product right now be honest with you because our sales are so strong. So it's all point of sale. We've seen POS slightly come down a little bit from these levels in the first part of October but that's seasonal. I mean you only have a space of Back to School and then basically we have a big place towards the end of the holiday season. So I think overall, we're very encouraged. It's all based on growth on point of sale with consumers buying our products, basically as we sell.
Thank you. Glenn, can you comment on the competitive environment in imprintables? Are competitors matching your promotional stance? And then it sounds like you think distributor destocking is complete here, at what point would you expect to get to a more normalized pricing environment?
We think to look at our objective is to leverage our Back to Basics strategy in the first a little bit about this strategy after SKU rationalization is price building. So we're going to continue to be very aggressive on price for the foreseeable future. We think we can do that and still obtain our margin objectives because we're going to be driving manufacturing efficiencies as well as SG&A reductions associated with our back to basic strategy. So our objective right now is continue to build our leadership position, drive market share in the categories that were under-developed, particularly in the fashion basics fleece category and we think we're going see this foreseeable future through 2021. That's definitely our plan and it's paying dividends because we're seeing market share growth and we're also seeing, I think we're gaining market share gains. I mean gaining market share through our pricing strategies where we continue to do it. We don't believe that our competitors have the staying power to even continue this type of pricing. We're leveraging our low-cost manufacturing and they don't have the same cost structure as we do so there may be some short-term competitors matching but in the longer-term basis, we believe that pricing availability will win for us and we're going to get back on the offensive and making sure that we continue to drive share in underdeveloped categories.
Just one quick follow-up if I may related to that, is the market environment now stable now such that if there were M&A opportunities that presented themselves you would be ready to capitalize on that.
Well, I think we're very happy and we believe that with the capacity we got coming online, bringing up pre-COVID levels and then expanding our capacity beyond and including the expansion Bangladesh, we can continue to do that organically with all the opportunities that we do have. That's part of our Back to Basics strategy is focus on maximizing our capacity, utilizing it and we have a large capacity that's available between the re-purposing of our Mexican capacity as well as the Bangladeshi capacity coming online, which is only Phase 1. We also have a Phase II. So we've got enough in front of us we think to continue driving sales and that's why we're focusing on our price, our availability and our market share.
Your next question comes from the line of Mauricio Serna Vega with UBS.
Hi. Good morning and thanks for taking my questions. I want to ask if you could provide a little bit more insight on how the end-user segments have behaved throughout the quarter particularly very interested to see how you're seeing some of like the corporate work and also like the social events, you see. How do you see that evolving maybe next year and how much would you expect that to come back?
Well, right now the good news is that the end user is still getting our products through different opportunities. In other words last retailer online selling, they're making up the void I think of the tourism and travel. So the question is going to be all functional with the pandemic, when social gatherings will commence again and then we'll see the traditional business come back. So I can't really answer that question as I don't know when that will happen. But the good news is that in spite of all these events now occurring, we're very encouraged with our POS almost coming back to normalization, and that's a function of us taking share as well as the market recovering and finding ways to bring product to the end user. So I'd definitely answer that question, to be honest with you.
Okay, understood. And just one quick follow-up. You were also mentioning that probably sales might rebound next year to around 80% to 85% pre-COVID, so how should we think about the SG&A? Because I mean you have implemented the Back to Basic strategy. So just wondering like how much of the SG&A should we see that bounce back next year assuming there is back to a more normalized environment?
Let's see -- we will see volume driven distribution costs right? That will roll into our SG&A. But I mean I think the way to think about SG&A more broadly is that we're driving to this 12% target, right? We have 2 targets, our gross margin target and SG&A target, and the 12% SG&A is something that we think that we're very close to or below that this quarter, and we think we can run at that level or better as we move into '21.
And your final question comes from the line of Sabahat Khan with RBC Capital.
Thanks. Just on the commentary in the press release around the rationalization of kind of the retail offering, can you talk about the $25 million potential charge that you talked about, can you talk about which focus areas within your portfolio that might be from and sort of what's driving this rationalization or just review of the strategy on the retail side? Thanks.
We are just continuing to optimize our business, we're going to simplify our retail business as idealized to market consensus, we have masks growing. We have basically online selling growing. So we want to focus on our growth drivers and making sure that we have our products associated with those areas of distribution and simplifying our product line of the assortment that we have the complexity of the products we're selling and reducing the SKUs for improved efficiency, like we did in Printwear. We think that all of this will help us drive sales as we go forward, reduce our inventory levels, reduce our SG&A and actually improve margins and ultimately that's what we're going to do is implement same active basic strategy and retail as we did in the Printwear market.So you can see from our results in Printwear, it's paid big dividends, I think that it's the same type of opportunity in Retail and just [indiscernible] staying focused and drive our strategy with United fronts, and we're looking and very excited about our positioning.
Okay. And then I know there has been a bit of discussion on the call around kind of the current POS being down only 10% versus prior year. And it seems like even in the absence of any large gatherings, other channels like online and resellers have stepped up and when the pandemic started, there was a bit of concern that if the corporate spend goes away, maybe not all of it comes back. How are you thinking about this new channel that have popped up like the online demand, work from home consumer buying some of these products? Do you think maybe that adds to the end-market over time, maybe replaces some of the lost demand that might be there on the corporate side when we come out the other side? How are you thinking about how the end market looks today and the fact that you're back to kind of 2019 levels even without large events.
Well, I would say that intuition will tell you that the market is going to grow for us when the recovery happens, and that's probably the way we would look at it, and you think about it, we have very efficient supply chain between the online and also -- we're also servicing a lot of large screen printers of products that are servicing retailers and mass market, things that get reprinted traditionally. So I think that overall I would say, to answer your question the market is growing because channel distribution is expand. And so when -- when travel does come back, corporate promotional spending does come back, definitely we will have a bigger market than we had before COVID.
All right, thank you.
And there are no further questions at this time.
Okay. I'd like to thank everyone for joining us today and we look forward to speaking to you very soon. Have a good day and stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.