Gildan Activewear Inc

TSX:GIL

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Gildan Activewear Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Sophie Argiriou. Please go ahead.

[Sophie Argiriou, Vice President of Investor Communications]

Thank you, Michelle. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and the full year of 2019. The company's management's discussion and analysis and consolidated financial statements are expected to be filed with the Canadian securities and regulatory authorities and the U.S. Securities Commission tomorrow, Friday, the 21st of February, and will be available on our website. 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 Administrative Officer. Shortly, Rhod will be providing commentary on the results for the quarter and also for our business outlook for 2020. And as Michelle mentioned, afterwards, we'll hold a Q&A session.Today -- 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 on 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.

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Thank you, Sophie, and good morning, everyone. Fourth quarter net sales and adjusted EPS unfolded largely in line with the expectations we set at the end of October, with full year results for 2019 lining up with the most recent guidance we provided.As we finished the year, we were pleased with the overall progress we made on our Back to Basics strategy during 2019. Staying focused on the execution of several optimization initiatives, simplify our product portfolio and remove complexity in manufacturing and distribution operations.These actions are strengthening our competitive position as we drive to deliver growth in our gross margin and SG&A targets. If you recall, 2 years ago, we embarked on our Back to Basics plan to simplify our business and optimize operations by removing complexities that had built up in our business over the years from various acquisitions. We started to execute on our plans early in 2018, when we realigned our organizational structure and consolidated our business segments into 1 front-end sales and marketing organization, streamlining administrative, marketing and merchandising functions and consolidating certain warehouse distribution activities.During 2019, we made further progress moving on various optimization and capacity expansion projects including consolidating textile, hosiery and sock operations, while at same time wrapping up our Rio Nance VI textile facility in Honduras.Thinking longer term, we also acquired land in Bangladesh during 2019 to support plans to significantly expand our capabilities there, which we believe will better position us to execute on growth opportunities going forward.At the end of the fourth quarter, we decided to move forward with another initiative under our Back to Basic strategy to significantly reduce our imprintable product line by exiting our ship to-the-piece business, and discontinuing overlapping and less productive SKUs between brands, which we communicated we were considering when we reported third quarter results and discussed at our Investor Conference last November.The ship to-the-piece business is a much more fragmented, smaller-volume business, which does not fit with our high-volume, large-scale imprintables franchise. So under this product line rationalization initiative, we recorded GAAP charges of $55 million in the fourth quarter, consisting of inventory write-downs of approximately $48 million, and a net $7 million reversal of gross profit in connection with the sales return allowance, which reduced sales by $19 million and cost of sales by $12 million in the quarter.The sales return allowance relates to anticipated product returns associated with some of the SKUs we are discontinuing and which we expect to take back from distributors in 2020.Now let me take you through further details of our results in the fourth quarter. Reported sales totaled $659 million, down 11% over the prior year quarter due to a 15% decrease in activewear, where we generated $484 million of sales, while sales in the hosiery and underwear category of $175 million were up slightly in the quarter. The net sales decline was mainly volume-driven and included the negative impact of the unprojected sales return allowance.Before accounting for the sales allowance, total net sales generated in the fourth quarter amounted to approximately $678 million, essentially in line with our expectations. As the positive impact on sales of lower-than-anticipated levels of distributor inventory destocking of imprintables during the quarter was offset by the negative impact of weaker market demand in retail. The decrease in activewear sales during the quarter was volume-driven and a reflection of POS softness of imprintable activewear products, which we saw in the third quarter and which continued through the fourth quarter combined with the distributor inventory destocking.In principle, activewear volume declines were partly offset by activewear sales volume increases within the retail channel and slightly higher shipments in international markets. Sales in the hosiery and underwear category were up approximately $2 million in the quarter as strong double-digit sales volume growth of underwear, which also drove more favorable product mix, was largely offset by lower stock sales.Although demand from our men's underwear in the total measured market as reported by NPD retail tracking service was down for the quarter, the strength of our underwear sales was driven by market share gains mainly to our new private label men's underwear program with our largest mass retail customer. This program rolled out earlier this year and gained additional shelf space during the fourth quarter as the mass retail customers started to further expand the program and adjust store steps to better position this private brand.Finally, sales in hosiery were down in the fourth quarter due primarily to the exit of sock programs in mass compounded by lower year-over-year industry demand in this category according to NPD data.Moving on to margins. Excluding the $55 million charge related to our Back to Basics strategy, adjusted gross margin in the fourth quarter was 25.6%, down 70 basis points compared to 26.3% last year. The decrease resulted primarily from higher royalty expenses related to sales volume requirements for licensed brand sales, which came in lower than planned, and this expense negatively impacted adjusted gross margin by 50 basis points for the quarter.For 2020, our license agreement reflects lower volume thresholds. In addition to higher royalty expenses, we also saw some pressure from higher manufacturing costs related to input costs. Offsetting some of the gross margin pressure were cost savings stemming from our manufacturing optimization initiatives, from which we will continue to see benefits flow through in 2020 as well as positive underwear product mix related to higher value underwear sales.Our SG&A expenses for the first quarter -- for the fourth quarter was $76.5 million, down 17% from last year. And as a percentage of sales, SG&A expenses were 11.6%, 80 basis points better than the prior year quarter. The improvement reflected lower compensation expenses as well as cost benefits resulting from our ongoing focus on SG&A rationalization.Given our combined gross margin and SG&A performance, adjusted operating margin in the fourth quarter came in at 14.1%, up 60 basis points from 13.5% last year. Adjusted net earnings for the December quarter totaled $83.4 million or $0.41 per share and was down as we projected from adjusted net earnings of $88.9 million or $0.43 per share last year. The 4.7% decline in adjusted EPS was mainly due to lower sales in the quarter and a decrease in adjusted gross margin offset in part by lower SG&A expenses.Turning to free cash flow. For the quarter, we generated $241 million, bringing full year free cash flow to $227 million, in line with the guidance range of $200 million to $250 million we provided in October. We spent approximately $21 million on CapEx in the quarter, bringing total capital investments for the year to approximately $140 million, with the majority of the spending related to manufacturing capacity expansion projects.We repurchased approximately 4.7 million common shares in the fourth quarter for approximately $129 million, bringing our share repurchases under our buyback program in 2019 to 8.2 million shares at an overall cost of $257 million.And lastly, our net debt on December 29 totaled $862 million, bringing our net debt to adjusted EBITDA leverage ratio to 1.6x, well within our year-end target leverage range of 1 to 2x.This brings me to our guidance for 2020, which we initiated today. We are projecting GAAP diluted EPS of $1.70 to $1.80, and adjusted diluted EPS of $1.85 to $1.95 on projected sales growth for the full year between 2% to 4%.Adjusted EBITDA is projected to be in the range of $580 million to $600 million. We expect free cash flow of $325 million to $375 million and capital expenditures of approximately $125 million for the year, primarily focused on continued investments in manufacturing capacity expansion. Our income tax rate for the year is projected to be approximately 5%.Overall projected sales in 2020 reflect expected growth across our 3 key focus areas of imprintables, retail brands and private brands. We're projecting sales increases in both activewear and the hosiery and underwear category, driven by projected volume growth and favorable product mix, offset in part by anticipated unfavorable foreign exchange impacts. We expect growth in the hosiery and underwear sales category to be driven by projected double-digit growth in underwear sales due to retail shelf space gains. On the socks side, we're expecting sales to be relatively flat year-over-year as new higher value program wins this year offset our exit of less profitable programs.Our guidance assumes a stable global macro environment. At this time, we have not reflected in our guidance any material impact related to the coronavirus outbreak in China. Our imprintables business in China currently represents a small portion of our overall -- our total overall sales. Further, from a supply chain perspective, while we do source some hosiery from China and are working on contingency plans, given our inventory levels at this time, we do not currently foresee any material impact on supply, although we will continue to monitor as the situation evolves. That covers our 2020 sales guidance. Adjusted diluted EPS for 2020 reflects our sales growth assumptions, projected lower raw material costs over last year, expected cost benefits from our optimization initiatives and the benefit of share buybacks from -- during 2019.Also, GAAP EPS and adjusted EPS guidance reflects the benefit of the nonrecurrence of the $24 million trade receivables impairment charge, which impacted the first quarter in 2019. Offsetting these positive factors on earnings is the impact of inflation, which continues to affect various manufacturing input costs as well as the projected increase in SG&A expenses.Taking all this into account, we are calling for gross margin expansion, together with continued disciplined SG&A performance to deliver operating margin improvement in 2020 over 2019.With respect to estimated restructuring and acquisition-related costs in 2020, we are estimating charges of up to $30 million, representing the remaining charges related to the manufacturing and distribution optimization initiatives previously announced, primarily in connection with our Back to Basics strategy, aimed at simplifying our business and driving cost improvements across the organization.Our guidance for 2020 implies an increase in EPS for the first quarter as we comp the $24 million trade accounts receivable impairment charge. Excluding the positive year-over-year variance for the nonrecurrence of this charge, we expect GAAP EPS and adjusted EPS in the first quarter of 2020 to be down compared to the first quarter of 2019, mainly due to a projected sales decline in the high single-digit to low double-digit range, with SG&A expenses remaining relatively flat compared to the first quarter of 2019. Although we have seen recent improvement in POS in the North American imprintables channel, we are not assuming a full recovery in POS until later in the year, and are projecting POS in the first quarter of 2020 to be down compared to the first quarter last year. In addition, we expect the level of restocking in the first quarter of the year to be lower compared to the first quarter of 2019.We are also projecting lower sales in the hosiery and underwear category in the first quarter of 2020, mainly due to the impact from the exit of the mass sock program and the impact of having the initial rollout of a new private brand sock program in the first quarter of 2019. The sales impact from the exit of the mass sock program is expected to be largely offset over the course of 2020 by new sock program wins shipping later in the year. So in closing, although 2019 presented challenges we did not allow this to distract us from our plans to fundamentally strengthen our business model. Over the last 2 years, we've simplified and strengthened our operations by executing on optimization initiatives related to manufacturing and the front end of our business, including sales, marketing and distribution activities.We also continue to make strategic decisions and investments with respect to capacity expansion, both in Central America and Bangladesh, which will position us well for the future.Our progress in all these fronts not only gives us confidence in delivering our 2020 targets, but longer term we feel good about achieving our profitability targets and our prospects for driving growth in imprintables, aiding further penetration with our retail brands, particularly as they gravitate online and growing as a trusted supplier of private brands to very well-positioned, large, major customers. With that, I'll turn the call back over to Sophie.

[Sophie Argiriou, Vice President of Investor Communications]

Thank you, Rhod. That concludes our formal remarks, and we'll be starting the Q&A session. Please limit the number of questions to 2, so we can address as many callers as possible. And we'll circle back for a second round of questions as time permits. I'll now turn the call over back to the operator for the question-and-answer session. Michelle, go ahead.

[Operator]

[Operator Instructions] Our first question comes from Paul Lejuez of Citi.

[Paul Lawrence Lejuez, Managing Director and Senior Analyst]

I think when you first saw weakness in 2019 you wondered if it was more of a macro issue, perhaps you were kind of a canary in the coal mine of something bigger going on. I'm curious now from where you sit, how much you feel there's something happening from a macro perspective hurting business versus something specific to your company or the industry in general.

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, look, it's hard for us to tell, to be perfectly honest with you. The area which is more susceptible to macro changes is the corporate promotional products category. So what we've seen so far in Q4 was pretty consistent with Q3. We have seen -- and what I said in our last call is that typically, when this occurs, it's usually a pullback in spending and it never lasts usually more 2, 3, 4 quarters. So we basically have seen an improvement towards the end of Q4, and we are seeing improvements as we go through Q1. And POS is starting to come back, still negative, but it's coming back.

[Operator]

Our next question comes from Heather Balsky of Bank of America.

[Heather Nicole Balsky, Vice President]

First question is just to piggyback off of Paul. Can you just talk a little bit more about the improvement you're seeing in POS? I think you had said it was down high single digits in the third quarter. So just where is it now? And then with regards to your gross margin guidance for the full year, can you help us just think through the cadence and when the different initiatives you have in place start to flow through?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Okay. Well as far as POS, and I think maybe even looking at our projection as we go forward into next year, our POS was really down in 1 category, which is the basic category, which drove -- because our Fashion Basics are doing well, Our fleece is doing well, Comfort Colors is doing well, American Apparel is doing well. And in the Basic segment, we have really 2 different product categories. And what we're seeing today is that the heavier-weight category, which is really used more in the corporate promotional products segment, that's still down. But the lighter-weight products in that area or the mid-weight products are actually improving and we're projecting it to come up. So overall, that's why we're encouraged with our POS outcome. This really was driven by our heavier-weight basic category. And it's still down and dragging down slightly our POS, but we've seen an improvement and we're optimistic as we move through 2020. We're projecting for the full year to have positive growth. It's going to be a little bit negative in the first half in recovery, but a net positive for the full year with all these things and all these [ new ] increases.

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Okay. If I take the gross margin question, the cadence. So if we look at gross margin for the year, we are forecasting expansion. That expansion is going to be driven by mix, it's going to be driven by lower fiber costs, it's going to be driven by our manufacturing cost initiatives. We will see inflation coming through, very definitely. We see that in labor. We see it in the materials, we see it in energy, in certain types of energy. We see it also in other inputs into our process. We also will see the impact of -- we were projecting the negative impact of currency also on our margins for the full year. That's probably about $0.05, I would say, overall, from a currency perspective.And if we look at the cadence of the improvement in gross margin as it unfolds throughout 2020, we expect improvements every quarter, right? As we move from Q1 to Q2, Q3, Q4, we expect to see that improvement effectively flowing through and effectively expansion in each of the quarters of the year.

[Operator]

Our next question comes from Vishal Shreedhar of National Bank.

[Vishal Shreedhar, Analyst]

Could you give any more color on this royalty expense? And how it should impact the 2020?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, the royalty expense basically was the -- we -- our contractual royalty agreement with our licensed partner has reduced royalties as we move forward in 2020. So there'll be no impact as we move forward to 2020. But basically, the minimums that we had in 2019 weren't met. So we had a higher royalty expense relative to what our projection was, and so that affected 2019. But as we move into 2020, we have a lower threshold. So we don't expect to have any minimum expected margin.

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Just to add a little color, Vishal, we had lower hosiery sales in the fourth quarter than we were projecting. Overall, we called that out. There was weakness in the category broadly across the markets, and as a result, effectively, our sales came in lower than we were anticipating, we fell below those thresholds. But we're much better positioned as we move into 2020.

[Vishal Shreedhar, Analyst]

Okay. I understand. And just back to the Printwear market. Is it correct to assume that inventories are effectively in balance after the destocking? And is it a possible or likely scenario -- what's more likely to happen in 2020, a restocking event or another potential destocking event? Maybe you can give me some color on that.

[Glenn J. Chamandy, Founder, President, CEO & Non]

No. Look, I think we're pretty comfortable with the inventory in the channel. Like we said, what drove a lot of the excess inventory was successive price increases over the last couple of years. That sort of flushed itself out. I mean, that's one of the reasons why in Q1, the comping of the sales, basically because we had price increases at the end of '18 that were carried into Q1 of '19. So we think we're in a pretty good position. Like I said, our POS is starting to come back. We're projecting for the full year of positive POS in the Printwear category.

[Operator]

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

[Sabahat Khan, Analyst]

Just a question on the $55 million adjustment during Q4. Can you maybe walk me through kind of the logistics of what happened there? Just trying to understand why the distributors might have sent that product back before -- instead of selling it? And why you maybe wrote down the inventory rather than just kind of pushing it out into the channel? I just want to understand the kind of the process there.

[Glenn J. Chamandy, Founder, President, CEO & Non]

Okay. Well, maybe just start off by the whole strategy of our Back to Basics. And like I said, it was a good starting point. And during -- over the last 5 years, we've created a lot of complexity in our lines through either the acquisitions and what ended up happening is we ended up with fragmented SKUs, products with small volumes and duplicate sales amongst all the brands we have.So our objective was to consolidate that and to be more productive and effective. So the 2 sides of that was, one, a lot of these products were ship to-the-piece, which we're eliminating, and we're going to leverage our distributors to do that going forward, which would be a reduction of SG&A. Ultimately, by having less products basically in our line, we feel that we're going to increase our manufacturing efficiency, reduce complexity and increase margins. Ultimately, for us, we'll have better working capital in terms of availability in the company. And ultimately, what we're going to do is increase our RONA and have a better return for our shareholders. I mean that's ultimately the plan for this activity. As we look at these SKUs, I mean, there's no easy way of dealing with it. But we've always taken what I think is a leadership position in the market. And one of the things maybe we should just take a step back and look at what the benefit ultimately to this to our customers is because if you look at our distribution channel and our customers, I mean, relative, let's say, for example, to online sellers, the cost of selling online, let's say, for example, to resellers to consumers is almost $5 a unit because of the amount of complexity that's involved in supplying consumers, for example. Our industry sells -- resells product for $2 to $3, right? So when we look at how we're moving forward, the industry has seen a large increase in both SKU and brands. Our customers are facing new challenges, let's say, for example, from maybe just to carry 30,000 SKUs 10 years ago to hundreds of thousands of SKUs today. So what's -- what ended up happening was they basically have space restrictions, they have higher labor shortages today, which is affecting everybody in the industry, and their overall cost and complexity is growing. So as we've looked at this and take a leadership position, we can do this slowly and say, okay, look, let's try and wait 3 years to get these things through the pipeline or we can just sort of say, look, let's fix the problem today. Take these goods back, and we'll deal with the -- just the reselling of these products and get them out of the channel to clean up the channel and ultimately, what will end up happening is, we think, is we're going to benefit our customers by even they'll have a cost reduction sooner than later. They'll have less cost of receiving, shifting, put away, there'll be less space to support our brands and our sales will have better turns on Gildan products sooner than later. They'll have higher margins per square foot on all of our brands within their distribution centers. And overall, we'll improve and better the customer experience. So we could have done this over a long time and procrastinated and -- but at the end of the day, the best way to deal with this is to solve, I think, our customers' problem by making them more effective, but also for us to start manufacturing and put this behind us. And the one thing you have to understand is that when you're dealing with products in the market, if all of a sudden, that you don't sell size large, then how do you service that? You'll be out of stock, for example. Then you've got to start making size large to make sure you're in stock. So there's no perfect way to sort of say, how long will it take to get out of it. But the best way is just sort of just say, look, let's just take this goods back, move on and then improve our efficiency, and we'll deal with the liquidation of this merchandise, which is factored into our charge of $55 million, right? So that's really, I guess, the way you have to look at it. So net-net, we're going to become more effective, more productive, higher margins, better returns for us. But also, we're going to pass that on to our customers and our customers -- we're going to improve their experience and make sure that Gildan is -- just takes a leader position in the industry and make sure that they're driving profitability with all of our brands.

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

So I'd also just like to clarify that the charge expenditure is clear to everybody, right? So the charge is a $55 million charge, $48 million of that relates to inventory provisions for our finished goods. Roughly $7 million relates to gross profit that effectively -- we're effectively backing out related to the $90 million sales allowance. Those goods we will take back in 2020, but we actually booked the sales allowance, the impact into our 2019 numbers. We had called out that the charge could be as much as $45 million when we talked about it in Q3. It's higher, it's the $55 million because we have more SKUs that effectively we're focusing on than we originally thought and also the impact of that sales allowance. That's -- I think, effectively, we've got it very well contained in the charge, and really, obviously, supports the fundamentals of what's occurring.

[Sabahat Khan, Analyst]

Okay. And then just on the cash flow side. The CapEx for the 2020 guide came in a little bit below what we were, at least, expecting. I guess, from your perspective, is this a kind of CapEx you're planning on spending in 2020? Or have you may be pushed out kind of the build-out of Bangladesh? Just how are you thinking about the CapEx spend looking forward?

[Glenn J. Chamandy, Founder, President, CEO & Non]

No, because what we've done is, look, we're -- by consolidating Mexico, we're avoiding CapEx because we're repurposing that equipment into our existing facilities in Central America to increase our capacity to support what we said in excess of $500 million. So that's all in place. And in Bangladesh, basically, the big part of our capital expenditure will come next year. This year, we're doing building, infrastructure, which -- the majority of the equipment will start pulling in, in early 2021.

[Sabahat Khan, Analyst]

And just a quick follow-up on the earlier answer. Are you able to share the magnitude of the SKU count reduction? Or in percent, or in numbers at all?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, look, it's pretty large. But I think more importantly than the SKU because at the end of the day, we think about 2 things, one is that we're going to have a headwind a little bit, like we said in October, about $25 million in sales for the lost sales of these SKUs. Let me just put that in context. We also feel that with the SKUs that will be remaining we should support the bulk of our sales going forward. So that's why we limit it to $25 million. The magnitude of the SKU reduction is in the 40%, 45% range of our overall SKUs [ we manufacture ].

[Operator]

Our next question comes from Luke Hannan of Canaccord.

[Luke Hannan, Associate]

Most of my questions have been answered already, but I did want to follow up on something that was in the press release where it talks about the sales impact from the exit of the mass sock program, it's going to be offset by some new program wins over the remainder of the year. So I'm just curious, do you have -- is that wins that you would have had in the past where shipping begins this year? Is that wins that you expect to receive in 2020?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, those are new orders that will be set in the May period.

[Luke Hannan, Associate]

Okay. And is there any way that you could provide a cadence with the -- where the timing would be? And whether it's more front-half weighted versus back half?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, so what we're saying is that the mass program, we see the effects of that in Q1, but the new programs that we obtained are coming in basically in -- we said in May, June. And therefore, net-net of all of our sock business we're projected to be flat with a better mix in product.

[Operator]

Our next question comes from Mark Petrie of CIBC.

[Mark Robert Petrie]

Sorry, I just wanted to clarify. I know you've touched on this a couple of times, but I just wanted to clarify what you expect in terms of the impact to your revenue as a result of this SKU reduction? Obviously, there is a headwind. I think you just quantified it at $25 million. But I'm not sure I understood that exactly. So could you just walk through the puts and takes there, please?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

So you've it got right, Mark. So the headwind that we see really that as we move out of the SKUs, right? Obviously, Glenn talked about the reduction in the number of SKUs. What's happening is that effectively we'll see shifting, right, from certain SKUs to other SKUs because there's a lot of overlapping SKUS. So the actual real headwind that we see from this initiative in 2020, we've effectively characterized it as about $25 million, right? So that's what we're losing in 2020 as a result of the initiative because the majority of the sales will continue, right? It just effectively moves over to more productive distributor SKUs. So we're not -- we don't see, I would say, bigger or broader impacts beyond that, even though we are taking out a meaningful amount of our SKUs in the imprintable side to obviously drive all of this productivity and improvement going forward.

[Mark Robert Petrie]

Okay. So have you seen sort of the substitution that you would have expected from your customers over the last couple of months that kind of give you confidence in that $25 million number? Or what's a reasonable range of outcome in terms of the revenue impact?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, I mean, I think that at the end of the day, that we've -- the revenue impact is, we feel will be about $25 million. At the end of the day, because of our focus -- we've been working on this plan for some time. So we're basically seeing that the current POS is trending positive. So we're very encouraged with our overall POS trend. Like I said earlier, we're still projecting POS to be negative in the first half. It's actually doing a little better than we projected. But net-net, POS will be positive for the full year. So based on all the puts and takes, the $25 million headwind, I mean, this is sort of all factored into our plan for 2020.

[Mark Robert Petrie]

Okay. And then I just wanted to ask about the retail channel. You called out sort of the slower POS trend in Q4. I wonder if you could just give a little bit more comments in terms of category and sort of private brands versus brands. And then any change in terms of how retailers are looking at inventory levels today versus a year ago?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, I think that the big softness is both in MPD, both in socks and underwear, both categories were relatively down for the full year '19. We -- obviously, we've seen our sock business decline in '19 through a combination of negative POS, underperformance of our license business and the discontinuing of some of the private label programs is really what drove our sock business down. And those are some of the reasons why we lost -- were short a little bit in Q4. On the flip side, our underwear business is doing fantastic. It's growing significantly. We maintained more shelf space in 2020. The -- our large mass retailer has set their floor, which has been very successful. And we're planning to do the balance of their stores sometime in Q2. So we're very optimistic about our underwear business going forward, and we've got a stable sock business as we move into 2020. So we're feeling very good about our positioning. Our online business is also doing very well. We had huge growth in the Q4 in online. All of our brands are doing very well online. And so we're encouraged with that as well. So all the pieces together, I think, are there. We're really focused, our Back to Basics strategy is moving on all fronts, supporting both our retail and our Printwear initiatives. We're very comfortable as we move into 2020.

[Mark Robert Petrie]

Okay. And any change in how the retailers are approaching inventory levels?

[Glenn J. Chamandy, Founder, President, CEO & Non]

No. I think our inventories and retail are pretty [ composite ]. I mean we haven't seen any change. Two years ago, we had big changes in inventory levels, but I mean, basically we've been very consistent now for the last 24 months.

[Mark Robert Petrie]

Okay. And then just one other one to clarify is the input cost tailwind through the course of 2020. Rhod, you mentioned that margins will sequentially improve through the year. But will that tailwind remain relatively steady through the year? Or is it going to ebb and flow?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

I mean, we are seeing inflation, right, as we obviously continue to move into 2020. And that inflation we see on the labor side, we see it on the energy side, we see it on material. So I mean, we're assuming the inflation will exist, and effectively, we'll have to obviously offset that headwind as we move through the year. And basically, we'll see it in every quarter.

[Glenn J. Chamandy, Founder, President, CEO & Non]

And then like as we go forward, I mean, the benefit of consolidation of our manufacturing, which we said, with -- Mexico into our Central American operations. We said that's going to allow us to improve margins by 50 basis points. That basically -- process is still undergoing, and our Mexican facilities will only be closed in the first quarter. So they're being wound down now, but they will be fully closed in the first quarter. So a lot of that effect will come towards the end of the year and support margin expansion as we move into 2021.

[Operator]

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

[Stephen MacLeod, Analyst]

Most of my questions have been answered. I just wanted to follow up on 2 things. The first is with respect to the imprintables market. Glenn, you talked about POS still being negative and you expect negative POS to persist through the first half of the year. Can you just talk a little bit about what your visibility is for the back half to get to an outlook for net-net positive POS for the year?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, first of all, it's negative so far through this point in time this year, which is really the smallest part of the year, right? So -- and we've seen in the trailing 4 weeks, basically, obviously, a pretty good improvement in our POS. So we're very encouraged about it, to be perfectly honest with you. The area -- there's only one area that would still have negative POS, which is just dragging us down a little bit, which is our heavyweight basic T-shirts. So all the other categories are actually doing really well. I mean our fashion T-shirt business is doing well, at least, is still very positive. Comfort Colors is -- that's doing extremely well. AA is doing very well. So everything is performing like we -- in the basics segment, last year, we were negative in all of our categories. Today, the mid-weight category is actually trading positive. And the only area that we're actually down is in our heavyweight. And that somewhat could be a trend in weights of products. It's not necessarily a fashion versus basic, it's just that it's the heavier-weight shirt that we sell, and a lot of that goes to the corporate promotional products segment basically. So we think that it's turning and we're cautiously optimistic, and we'll see how things turn out. But we can't tell where it will go. I mean we only talk to the trend and the things we put in place. And with our SKU reduction, we're really focused on making sure that our service levels are improving. So all in all, I think we should be in that position.

[Stephen MacLeod, Analyst]

Okay. That's helpful. And then on the gross margin, you cited your expectation or sort of your long-term goal of getting -- achieving your 30% gross margin target. Is it -- are you still expecting to sort of hit that run rate as you exit 2021?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Yes. That's still our focus, Steve.

[Stephen MacLeod, Analyst]

Okay. That's great. And maybe similarly on the SG&A as a percentage of sales?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Yes. I mean we drive -- our target for the SG&A is at 12%. And if you look at last year, 2019, we had driven down pretty closely to that. We will see some increase in our SG&A this year, effectively. But again, our SG&A performance, we think is -- has been and will continue to be very strong, and we're very comfortable with that target.

[Stephen MacLeod, Analyst]

And in terms of the timing of that target, is that similarly -- a similar time line with the gross margin?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Correct.

[Operator]

Our next question comes from Chris Li of Desjardins.

[Christopher Li, Research Analyst]

First question, just going back to the coronavirus. I appreciate the fact that you guys have limited sourcing exposure to China and China is not a bigger market overall. I guess my question is, Glenn, do you expect or are you starting to see some impact on some of the end-user demand in the U.S. side? I'm thinking maybe perhaps the tourist industry or anything that has potential impact from the buyers?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, you know what, I think that there's 2 things in terms of the impact. The answer to that is no. Secondly, it works both ways, is that typically, people that would travel abroad, may not be traveling abroad and will go to the local theme park and stay at home and go to the beach in Florida and buy T-shirts, right? So I think that all the puts and takes in terms of consumers buying souvenir-type products, I mean, I'm not really concerned. I think the one thing that we maybe need to look at, and if you look at some of the reporting of other people in the industry is that there's been a supply disruption, particularly because 40% of the world's product comes from China, that -- I think we're well positioned, actually, in our manufacturing in Central America, particularly in our private brand strategy to support customers that may not want to travel to parts of the world to support their growth initiatives. I mean, I think it's a big factor because people in the back of their minds will think, has it gone? Has it not gone? What's the story? So with all the puts and takes, I think we haven't factored in that into any of our opportunities at this point. But I think that that's something that we also, in the back of our minds, could be benefiting from in the long term. So it's hard to say because this thing either can brought under control, and maybe there will be an effect. But no, our guidance is based on what we see today and what the environment is as we see it.

[Christopher Li, Research Analyst]

Okay. No, that's helpful. And maybe a couple of quick ones for Rhod. With respect to your guidance, EPS guidance, how much share buyback, if any, is reflected in your EPS guidance?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Generally, we've got that in the high end of the guidance, Chris, right? So effectively, if you look at our track record, I'm sure buyback has been very good over the last 4 or 5 years. We're very happy to announce the 5% new program this year. And effectively, we expect that to unfold during the year. Obviously, we'll see exactly what the environment looks like as we move through the year. But the way to think about it is that it's in the high end.

[Christopher Li, Research Analyst]

High end. Okay. And then just your CapEx intensity of 4% to 5% for this year. Is that sustainable over the next 2 to 3 years as you build out your capacity in Bangladesh?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

It is. That's -- our focus is running at 4% to 5%. I think we outlined that when we spoke in November at the investor conference. And really see that as our run rate over the next few years.

[Operator]

Our next question comes from Brian Morrison of TD Securities.

[Brian Morrison, Research Analyst]

Can I just go back to the operating leverage for 2020? I'm trying to reconcile the guidance and the operational efficiency drivers for 2020. And what I mean is, when I look at the $1.66 starting point and then add back heritage, the impact of the buyback, your 3% top line growth next year, I just don't see too much factored into operational efficiencies that I think is a noted driver of growth. So when I look at the FX and inflation headwind and then heritage as a tailwind, what are the key drivers of this 80 basis points of leverage forecast for this year? I think a good portion of it's got to be the 50 basis points from Alstyle. And then did you say 2021, you will achieve the 30% target for the whole year? Or is that you'll achieve it during the year? And what really kicks you in to get you to the 30% for 2021?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Look, I think if you look at achieving the 30% target, obviously, we feel very good about that. We're focused on it because we've got all of the fundamental drivers, right, that we're working away on. And when we said that we will achieve that, that's exit run rate for 2021. So all of these strategies are playing out over time. If you look, effectively, very definitely, we see our manufacturing cost initiatives, our overall Back to Basics strategy, really driving an increase towards that target, right? We had called it out previously that effectively, the overall impact of that strategy is probably around 200 basis points. And we very definitely see all of that coming through, right, as we move towards -- through this year and also into 2021. So that's very definitely a driver. We see mix, obviously, will drive the overall -- top line will drive the bottom line as well. So I would say all of the elements are in place in order to allow us to get to that -- the target that we're going after, take some time. We've obviously got to finish the movement in Mexico. We've got to effectively drive the various initiatives. We've got inflation that we've got to deal with, right, as we move through this year. And we'll see what it looks like for 2021. I think we feel very good about effectively all of the elements coming together to drive that.

[Glenn J. Chamandy, Founder, President, CEO & Non]

And maybe just add one more point to that is that our SKU rationalization in terms of the impact on our manufacturing has not been felt at this point in time. So that's another area of improved gross margin as we reduce complexity in our manufacturing. I said before that the Mexican operation closure, and most of that will be only hitting us in Q4, but will really impact 2021. And the other area of opportunity for us, too, is that our Bangladeshi expansion, what we said to investors is that we're supporting a lot of our international growth through Central America. So as we leverage Bangladesh, that will also be another opportunity for us to expand margins as we push more product from Bangladesh into those markets, which would be better conducive from duties and so forth in some of the markets we're selling. So all of these things that we're doing are continuing driving further improvements on our gross margins as we go forward. So it's a constant theme, right? We're committed to making sure that we achieve our goal, and we're putting the things in place and making the hard decisions to make sure that we achieve those by the end of 2021, moving into 2022.

[Brian Morrison, Research Analyst]

Okay. Just a quick follow-up. Have there been any inefficiencies with your transition of your manufacturing operations? And just to confirm, you're going to get to a 30% gross margin with a low single-digit growth rate?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Correct.

[Brian Morrison, Research Analyst]

And sorry, any follow-up on have there been any inefficiencies with the manufacturing transition?

[Glenn J. Chamandy, Founder, President, CEO & Non]

No, there hasn't -- no, no inefficiencies. We've consolidated our hosiery operation. We've -- we're in the process of still ramping up Rio Nance VI. And we feel very comfortable with our position in manufacturing. There's still -- like anything else is that this company's focus has been manufacturing optimization from day one, right? So that's why we're the global low-cost manufacturer. So we just don't sit on our laurels and sit back. We're constantly making sure that we're driving for performance, and we feel very comfortable. And we just had our investor trip in Honduras and people can see the expansion plans. We expanded Rio Nance V, we expanded Rio Nance I, and we're expanding Rio Nance II as we speak. We're consolidating all that Mexican equipment. So these are things that are really in our sweet spot, and all they do is give us leverage and lower cost. So it's not rocket science for us. So we're very comfortable and we haven't missed a beat. And the one thing that I think is relevant, though, is there is inflation, greater inflation is very relevant everywhere. Transportation cost, dyes, chemicals. There's a lot of inflation, too. So we don't underestimate the inflation. So the good news for us is that as we continue driving these initiatives, I mean, we're going to be able to offset inflation and bring higher margins to -- and better returns for our shareholders.

[Operator]

Our next question comes from Jim Duffy of Stifel.

[James Vincent Duffy, Managing Director]

Glenn, I wanted to dig in some on your comments around the imprintables business in POS. How much of the imprintables business is that heavyweight category that's under pressure? And if you exclude that, what type of growth rates are you seeing from the balance of the imprintables business?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, we're seeing good growth rates everywhere else, to be perfectly honest with you. Our Fashion business is very strong. Our fleece is very strong still, Comfort Colors, AA. I mean all of these are very strong for us.Last year, the big impact was both on the basic segment, really, there's 3 different shirts we have in that segment: 2 mid weights and 1 heavyweight. We've seen the 2 mid-weight shirts really bounce back actually from a POS perspective. And the only area that's really down now is our heavyweight category. So the POS has actually improved. And we'll see what happens as we go forward. And that could be somewhat also just a weight change in the industry because fashion shirts are all lighter-weight shirts, they're 4-ounce shirts versus our heavy categories are 6-ounce shirts. So it might be just more of a category thing than a product thing, but we'll see how it goes, but the trend is good. We are slightly ahead of what we anticipated as we projected for this year. And net-net, we're going to have positive POS for the full year, and we feel comfortable with that position.

[James Vincent Duffy, Managing Director]

Understood. I'm trying to understand how big is that heavyweight category for you, however?

[Glenn J. Chamandy, Founder, President, CEO & Non]

It's probably around -- overall, around 15% of our business in T-shirts, something like that.

[James Vincent Duffy, Managing Director]

Okay. That's helpful. And then you have the double-digit growth you're looking forward to in underwear. Can you talk about the revenue mix between underwear and socks within that hosiery and underwear category?

[Glenn J. Chamandy, Founder, President, CEO & Non]

Well, basically, our sock business will be flat for the next year. And all of the increase in that category is coming from good, strong growth in underwear where we're seeing -- we're very optimistic about our underwear growth next year.

[James Vincent Duffy, Managing Director]

How big is the underwear, though, Glenn?

[Glenn J. Chamandy, Founder, President, CEO & Non]

We don't break that out. If you look at the category, as we ended up '19, socks would be flat and all the growth in that category next year will be underwear.

[James Vincent Duffy, Managing Director]

Okay. And then, Rhod, last one for me. Can you talk about inventory targets assumed for year-end in the cash flow? And how that should progress across the year?

[Rhodri J. Harries, Executive VP, CFO & Chief Administrative Officer]

Yes. If you look at -- from an overall perspective, from an inventory standpoint. I mean the one -- if you look at our inventory levels effectively we've been building them really over the last quarter, and we continue to build them, really, this is the time of the year where we built inventory, right, as we get ready for this season. Effectively, if you look -- I mean, effectively, we'll build this quarter. We will effectively build a little bit into the second quarter. And then I think you'll see it probably -- the way to think about it is probably flat through the remainder of the year, effectively. I mean we want to make sure that we have good availability of goods to support that POS growth that will improve as we go through the back half of the year. So effectively, it's, I would say, you'll see -- you've seen a build, and effectively, we're at that level, be up a little bit in the second quarter, but then flat as we go through the remainder of the year.

[Operator]

There are no further questions. I'd like to turn the call back over to Sophie Argiriou for any closing remarks.

[Sophie Argiriou, Vice President of Investor Communications]

Thank you, Michelle. This concludes our call. Again, thank you all for joining us this morning, and we look forward to speaking to you soon. Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.