Gildan Activewear Inc. Q2 FY2020 Earnings Call

Thank you for joining us for the Q2 2020 Gildan Activewear Earnings Conference Call. After the presentations, we will have a question-and-answer session. Now, I would like to turn the call over to Sophie Argiriou, Vice President of Investor Communications. Please continue.

Thank you, Diana. Good morning to all and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the second quarter of 2020. We also issued our interim shareholder report containing management's discussion and analysis of consolidated financial statements. These documents will be filed with the Canadian securities and regulatory authorities and the U.S. Securities Commission, and are available on the company's corporate website. On the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rhod will take you through the results for the quarter and a Q&A session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results. I will now turn the call over to Rhod. Rhod?

Thank you, Sophie, and good morning to all, and thank you for joining. We hope everyone is continuing to stay safe and is keeping well. This morning, we reported our second quarter results, and as we expected back in April when we last reported, we incurred a significant earnings loss in the quarter tied to the impacts that COVID-19 is having on economic activity, and in turn, our business. However, despite the loss in the quarter, we maintained a strong focus on our key priorities: taking business decisions and actions to strengthen our competitive positioning for the long-term by accelerating our efforts under our Back to Basics strategy to simplify our product portfolios, remove complexity and cost from our business, better support our customers and drive long-term market share growth, all of which I will cover shortly. Moreover, by tightly managing our business, we generated strong free cash flow of $177 million in the quarter, more than offsetting the impact of the earnings loss and improving our liquidity position, which stood at $1.2 billion at the end of June. Further, during the quarter, to increase our financial flexibility as we move through this global health crisis, we negotiated a 12-month covenant amendment to our existing credit agreements. The amendment provides that our leverage covenant now excludes the impact of our financial results for the second quarter from the leverage ratio calculation through the first quarter of 2021. At the same time, we also negotiated higher covenant levels, and the combination of these two factors gives us ample flexibility to navigate through the duration of the pandemic. Finally, in line with improving demand trends, we started to resume production at various operating levels across the majority of our facilities, implementing comprehensive biosecurity protocols to prioritize the health and safety of our employees returning to work. These measures, led by our medical and human resources staff, cover testing and monitoring, safe transportation, reconfiguring the floor space in facilities to ensure appropriate physical distance, and the provision of personal protective equipment for all employees. Overall, we are proud and grateful for the way the Gildan team, both manufacturing and non-manufacturing employees, have stepped up to new challenges and have come together during this crisis. Turning to our sales and earnings results for the quarter. Not surprisingly, the effect of the lockdowns that started in March and continued through April and May significantly impacted sales and earnings in the quarter. We generated sales of $230 million this quarter after reflecting a sales discount accrual of $25 million. Sales were down 71% from a year ago, with Activewear sales of $132 million, down 80%, and sales of hosiery and underwear of $98 million, down 28% compared to last year. The decline in our overall sales was primarily driven by volume declines, resulting from the significant demand downturn in the quarter and inventory destocking, as well as negative product mix impacts and higher promotional discounting. Moving to demand trends in Activewear. With shutdowns in effect during the quarter, in principle, distributors closed warehouses and retailers shut their doors, causing significant sell-through declines in our channels of distribution. In the U.S. imprintable channel, we saw POS declines to lose up to 80% in April before starting to pick up in May as reopenings occurred, averaging down approximately 50% for the month and then ending the quarter in June down in the 20% range compared to last year. Although for the quarter, average POS was down 50%, trends improved sequentially on a monthly basis, and we were ahead of our expectations, and in some categories, like fleece and fashion basics, POS turned to positive growth in the month of June. Having said that, we have seen some pullback in POS in the imprintables channel during the latter part of July, which I'll cover a little later. In our international markets, where the COVID-19 impact hit earlier than in North America, we saw POS declines continue to decelerate during the second quarter and trended better than we expected, particularly in Europe, which was down approximately 30% for the quarter. The impact on our sales from these lower sell-through levels was also compounded by high levels of destocking as distributors mostly serviced end customer demand from their own inventories. Consequently, inventories in the distributor channel at the end of the quarter were and continue to be significantly below prior year levels as our customers have adjusted to lower levels of demand. Our sales in the activewear category also reflected the impact of higher promotional incentives in imprintables, which we initiated in June and subsequently extended through July and August. These incentives are aimed at driving the ongoing sell-through of our products from distributors to screen printers. As a result, we recorded a sales discount accrual of $25 million during the quarter. This pricing initiative is directly linked to our Back to Basics strategy, where we are leveraging our low-cost position to reinforce market leadership, drive further market share gains and capture available demand in what we know is a difficult market environment. We know this playbook well, and though it is still early days, we are very pleased with the results of this initiative in all three categories where we are running the promotions: basics, fashion basics and fleece. Finally, in the retail channel, sales of activewear were also down due to the widespread closure of retail stores, most notably impacting our business with department stores, national chains, sports specialty retailers and global lifestyle brand customers, partly offset by better sell-through in the mass and online channels. Moving to our hosiery and underwear sales. The overall decline in this category was due to lower sock sales, partly offset by strong performance in underwear sales, where we saw a 23.5% increase in sales during the quarter compared to last year. Lower sock sales reflected the overall industry demand decline in this category as well as the impact of retailer inventory destocking. Conversely, we were very pleased with the double-digit sales growth performance related to our underwear programs despite a decline in overall industry demand in this category, driven by sales of private brand underwear and mask and underwear products sold through online platforms. With our private brand men's underwear program now rolled out in all stores of our largest mask retail customer in a new display format, we have seen sell-through trends accelerate meaningfully, and we are very encouraged by the significant gains in market share related to this program. This covers our sales performance, and now let's move to earnings, where I'll talk about the $224 million of GAAP charges that we took in the quarter: $130 million of COVID-related charges and $93 million in accelerated Back to Basics initiatives that are simplifying our business, lowering our cost structure and positioning us for the future. So starting with the COVID-related charges. The bulk of these costs primarily related to unabsorbed manufacturing labor and overhead costs incurred in the quarter while our facilities were idle or operating at low capacity levels. These cash and non-cash costs, which amounted to $86 million, would have normally been absorbed into inventory if our facilities had been running at normal levels. However, as we kept most of our facilities closed for the second quarter to manage and align our operations and inventory levels, these costs were treated as period costs, which flowed through our cost of sales in the quarter. In addition to the manufacturing idling costs, we recorded a $25 million charge related to the unwinding of commodity positions due to lower production requirements during the second quarter and through the remainder of the year. During the quarter, we also made a very difficult decision to further reduce our global workforce, with reductions of approximately 6,000 people in manufacturing and 380 people in SG&A positions. Overall, this decision allows us to adjust our manufacturing, sales, and administrative support infrastructure, with the current business impact of COVID-19, and provides us with good flexibility to move into the back half of the year. Charges associated with the workforce reductions amounted to approximately $8 million for the second quarter. While you would expect higher charges related to these headcount reductions, most manufacturing employee severance costs are based on statutory requirements and are accrued on an ongoing basis from the date of employment. Annual cost savings related to these employee reductions, and the yarn spinning closure, which I will talk about as part of our Back to Basics initiatives, are projected to be approximately $46 million. Finally, as a result of the current environment, we took an inventory reserve of $14 million related to the decline in the net realizable value of certain retail end-of-line products. While we incurred significant COVID-related costs in the quarter, we also recorded $93 million in charges tied to actions related to our Back to Basics strategy. Managing our business through the effects of the pandemic led to decisions and actions to significantly accelerate initiatives tied to our strategy of simplifying our business and optimizing operations, which in turn, we expect will materialize in further cost reductions and better position us for market recovery. Consequently, we incurred additional inventory charges of $26 million related to our imprintable SKU rationalization initiative, and $16 million related to our retail product line inventory management initiative. While the work we have done to optimize our imprintables product offering is now complete, we will continue to review our retail product line offering for further potential improvements as we move through the back half of this year. We also recorded restructuring charges of $29 million in the quarter, primarily related to the planned closure of a smaller specialty yarn spinning facility in the U.S. Lastly, charges related to our Back to Basics strategy also included the $25 million impact of the strategic pricing action in imprintables taken in the quarter covered in the sales discussion. So putting this all together, we reported a gross loss in the quarter of $148 million, or $122 million on an adjusted basis after adding back the SKU rationalization charge of $26 million. The significant decline compared to last year was due to the combination of lower sales, manufacturing idling costs, inventory provisions, and the impact of unwinding the excess commodity commitments. On a gross margin basis, we reported a negative GAAP margin of 64.6% and 52.2% on an adjusted basis, mainly as a result of the COVID-related and Back to Basics charges just discussed. Of these charges, $196 million impacted the gross loss and $170 million impacted the adjusted gross loss for the quarter. Excluding these charges would have resulted in an adjusted gross margin of 18% in the quarter, down primarily due to the impact of negative product mix and discounting. We expect the gross margin will revert back to more normal levels as our sales recover. Further, we remain committed to driving toward our long-term gross margin and SG&A margin targets, which we have previously outlined under our Back to Basics strategy. SG&A expenses for the quarter of $65 million were down $27 million or close to 30% compared to last year, reflecting the impact of lower compensation, lower distribution costs driven by lower sales volumes, and cost containment efforts. Separately, during the quarter, we reported a recovery on the impairment of trade accounts receivables line of $6 million due to strong collections in the quarter, which has led to lower expected credit losses. Summing all these elements up, we reported an operating loss of $236 million and an adjusted operating loss of $180 million during the quarter. After financial expenses of $60 million, which were up $6 million over last year due to fees incurred in connection with the covenant amendment and higher average borrowing levels, the overall net loss for the quarter totaled $250 million or $1.26 per diluted share, and $197 million or $0.99 per diluted share on an adjusted basis. Normally, I would close with the discussion of our guidance. However, having suspended our annual guidance in March due to the uncertain COVID-19-impacted environment, let me instead give you some color in terms of what we're currently seeing in the marketplace. As we moved into July, we were initially encouraged to see further improvement in imprintables POS in the U.S. from quarter end levels. However, we have now seen some retraction in POS during the latter part of July, and POS is now down in the 15% to 20% range as reopenings have slowed or reversed in certain states in the U.S. On the retail side, we are encouraged by our sales so far in the third quarter, which through July month-to-date are tracking slightly ahead of prior year levels. Although overall, we have seen further POS improvements in July, POS is mixed in retail depending on the channel. Sell-through in mass and online channels continues to perform strongly, up in the double-digit range, while POS in the mid-tier and sports specialty channels, although better than what we saw in the second quarter, is still being impacted by weak traffic trends and continues to show declines in the 20% to 30% range. That finishes our update. And in closing, while the trajectory of the pandemic remains uncertain, we continue to focus on strengthening our competitive positioning and driving market share gains. We believe we have acted swiftly and executed on important initiatives to provide us with the necessary financial and operating flexibility to take us through this challenging environment, and which will allow us to emerge as a stronger company for the long term. And with that, I will turn it back over to Sophie.

Thank you, Rhod. Before moving to the Q&A session, I ask that you limit the number of questions to two. And we'll circle back for a second round of questions if time permits. I'll now turn the call over to the operator for the question-and-answer session. Diana, go ahead.

Your first question comes from the line of Paul Lejuez of Citigroup.

Hi, thanks. It's Tracy Kogan filling in for Paul. I was wondering if you could talk about the specific categories that you took promotional pricing in. And was it in specific categories? Or was it across the board? And do you anticipate having to take any further action in the current in the coming quarters? And then just secondly, I wonder about the state of your distributor partners and if any of them are financially challenged? And if you think there are any troubles perhaps on the horizon there?

Yes. I'll start off with the pricing. Look, as far as our pricing is concerned, I mean, we went in April with negative POS of 80%. And then we started to promote our fashion basics and selective colors, which we saw great signs in terms of our POS; then we expanded that to all of our colors in fashion, which continued driving our POS. And then we added basics and fleece. So there are really three categories: our fashion basics, our basic traditional T-shirts, and some of our fleece categories. It's really not all other products; it's just the core items within those categories. We've seen a big improvement in our POS in all three segments, and what Rhod read in his script is that we even saw it at the beginning of July, given trends toward positive POS overall, which was driven mainly by the big improvement in these tiles, which have somewhat come down a little bit toward the end of July but are still tracking pretty good. So we're pretty excited about our pricing strategy as we go forward. And I think more importantly, with the pricing strategy, it all ties into what we're doing from a Back to Basics strategy. The two go together because we're going to take significant costs out of our structure that will allow us to maintain very competitive prices in the market and continue to grow our share as we go forward. I mean, we've taken out in our SKU rationalization. We're taking 2/3 of our product lineup. We used to manage 30,000 SKUs within our brands; we're down to 10,000. So that's a major impact on our overall cost, improving manufacturing efficiency, reducing SG&A, and improving our service and inventories that we're going to have both in the channel and our warehouses, as well as our adoption of overall working capital improvements as we continue to go forward. So although we're pricing more aggressively today, and we probably most likely will continue that as we go forward, the economics of our business will be the same because we're going to absorb costs out of the system and provide better returns as we go forward while continuing to emphasize our leadership position in the channel.

As far as the distributors are concerned, our distributors have basically done very well. Most of them are POS has obviously improved. One of the reasons why we reversed our reversal on ADT is because of the payment from our distributors, so the cash flow is coming in. And we don't have any concerns about our distributor base today.

Thank you. Your next question comes from the line of Vishal Shreedhar of National Bank.

Hi, thanks for taking my questions. Just wondering, as the markets recovered, did you see destocking turn to restocking? And can you give us a sense of how much months of inventory are held by our wholesalers?

Well, we destocked about 1/3 of our inventory that was in the channel at the end of Q1, which is roughly about $150 million in the distributor channel. And we also destocked recently in retail as well. But as far as the wholesale channel, we destocked. The other thing is that typically in Q2, we sell a lot of fleece going into this fleece season, and we didn't ship any of those all quarters; basically, they'll be shipped as we move into Q3 and Q4, as of once spaces as the market needs those goods. So it won't extend dating terms on fleece like we historically have done. So those are really the two factors that have reduced sales in the quarter, and particularly in footwear, and beside a negative for POS.

Okay. And regarding your PPE ambitions and thoughts, has that evolved regarding making masks and gowns? Or do you still expect a negligible contribution from that business?

Look, we're doing our part in terms of helping local governments with masks and gowns, as part of our initiative regarding COVID. But you have to understand that it's not a long-term opportunity for us. I mean, masks pre-COVID were selling for $0.03 a piece. Today, they're selling at $1.50, so there's a lot of capacity that's coming online in Asia, particularly. We think that that's not a long-term sustainable business. But we'll do our part to provide support to help local governments with masks and gowns as part of our initiatives.

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

Thank you. Good morning. Thanks for all the color in your prepared remarks. I'm just wondering if you can provide some insight into what end markets are driving the sequential improvements in POS in the imprintables business.

Well, the thing that's really happened is I guess, from a longer-term perspective, the big positive is people staying at home in casual wear. I personally have been at home since the beginning of the crisis, and I wore out my T-shirts and my sweatshirts, right? So I think that's a real positive sign for us. So the traditional way where people might have got a shirt in a gathering or a jog, run or something may not be wearing or finding other ways to get those products. I mean, I think that's the key. So we've seen online sales, the distributors that are not sure but the screen printers that sell online, that's a big growing area. It's probably doubled in sales during the COVID crisis, I would say. And the other big thing is reselling; I mean, there's a lot of reselling of our products online. And also, one of the big areas that are the strongest part of our business right now is our national account business, where we have large free print customers that basically provide product to retailers. We know the global supply chain is just not there today. So we're benefiting as people look at buying more products locally, and we think that that's a big opportunity. Retailers are putting more of the screen-type T-shirts on their floor right now as they reopen. So people will find a way to get the product. I think that's the message here. Obviously, there was a shock in April, when everything came to a crashing halt. But at the end of the day, we believe that the long-term viability of products that we make is there, and the market will continue buying our products, and we're well-positioned with our product strategy and price strategy to capture a significant amount of share as we go forward.

Okay. Thank you. And then with respect to the gross margin, Rhod, you gave some good color in your remarks around all the puts and takes on gross margin in the quarter, and you indicated that you expect it to sort of revert to more normal levels as your sales recover. Is there anything you can provide in terms of anything more discrete around how you expect your gross margin to evolve into Q3, and at the back half of the year?

Yes. Thanks for the question, Stephen. If you look at the gross margin, as we said, the gross margin was down in the quarter. And it dropped down for the two reasons that I highlighted: It was down because of negative mix, about 600 basis points; and it was down because of the discounting, the promotions that we've provided in the Printwear channel, which the impact of that is about 400 basis points, right? So effectively, that was driven by this negative mix impact. The negative mix impact was driven by the mix associated with lower fleece that Glenn called out. If you move into the retail channel, you'll see that we sold a lot lower level of higher-value retail products as the mid-tier channel was closed, and the sports specialty stores were closed, right? So that had a negative impact as well. So as we move into the back half of the year, we expect sales to recover with all of the reopenings; effectively, our mix will revert back to normal levels. And then regarding promotion, we talked about how things evolve in the back half. One of the things that we're really driving is the cost of the business, and we would expect that to contribute to gross margin as we move through the back half of this year and into 2021, and then obviously, forward, as we drive toward those long-term Back to Basics targets.

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

Thanks, good morning, Glenn. I wanted to ask you on the decision to institute the sales discount, was this something that was determined internally? Or was this determined based on what you were seeing in the channel?

I didn't hear your question; it didn't come in first. Can you just repeat that, please?

Sure. Yes. So I was just saying, the decision to institute the sales discount, was that something as a reaction to what you were seeing in the channel? Or was that more a decision internally based on what you guys have in terms of your low-cost manufacturing footprint?

If it's a decision on we were we drove the promotional activity in the market based on our ability to look at where we are today and to continue our focus on our Back to Basics strategy, which is basically focusing on fewer SKUs, bringing them to market at the right price, and driving market share. So we tested the like I said earlier, we tested our strategy early on, and as we saw the results, we continued our pricing strategy. I think it's important, with all the initiatives that we've put together, and we know to the 400 basis points of negative margin, even if we continue to price at these levels, our margins should normalize based on all the cost savings that we have going forward. So the upside for us is that we reduce our promotion, and then we'll see margin expansion. I think we can consider where we are now and how we positioned our Back to Basics strategy, where we can be aggressive on pricing and still maintain normalized margins. That's sort of where we're heading right now as we continue to ramp up. We started ramping up all of our manufacturing facilities and really just building it up to about 70% of the capacity that we had pre-COVID. At the same time, our focus is also continuing to work on cash flow. We're still doing a lot of work on reducing inventories and generating free cash in the back half of the year. So all these things combined have positioned our strategy to make sure that we're positioned for the long term. The most important thing I can leave you with today is that everything we've done over the last three months will make our company very strong as we emerge from this whole situation, including, I think, one of the biggest opportunities is basically the whole shift in the global supply chain. If you look at the world in the future, people who were able to go and find Asian manufacturers and buy product from them are not running so fast anymore. We think there's a lot of opportunity for us, particularly in our retail and global lifestyle brands, as we continue to move into 2021 to leverage our low-cost manufacturing and basically take advantage of the big shift in the global supply chain.

Got it. And then one last one for me. I'm just curious to know what progress has been like in Bangladesh. I know you guys are in the early stages of building out the facility there, so I'm just curious to know if you can give any color on how that's progressing?

Yes. Look, we're slowly progressing in final dash. The reality is that we're probably going to be behind by six months, and the plant is scheduled now to start in Q2 2022. So we are cautiously seeing what happened over these three months, and then obviously, now we're putting our minds around going forward. For us, Bangladesh is a part of our overall business. It's not just so much functionally for our international growth, but it's also a function of driving our fashion basics and other categories that we have. It's not being built just strictly to support international; it's also to support where we think the market is growing in the future as we continue to gain share in those categories. So we're going to definitely go full speed ahead with the project, but it's going to still be delayed probably about six months.

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

Thanks and good morning. Just a commentary in the press release around the fashion basics category turning positive in June, just wondering maybe you can talk about the drivers of that? It was just surprising, given the current macro backdrop. I think some of that category serves, I think, the uniform business on the corporate side; is it that? Or was there something else driving that growth?

No, this category is not really on the corporate side. I mean, the corporate side is really in our case, is more the basics, actually, because they're used for advertising, event planning, and other things. That category, basically, is still down. We've come back because we think we're generating share in the category by our pricing strategy. The fashion side of it is; it's completely different, it's more traditional screen print-type business. At the end of the day, we have basics, and we have fashion, and the big two differences between these two shirts: one's open-end, and one's fund, and we define this as fashion. The reality is that every one of these shirts has a tearaway label, so there's patient feature for a tearaway label with different fabrications. Consumers are looking for value right now. When you look at all the shirts in the industry, there's not a big differentiation between all these shirts. Price is a big driver of product in our channel, and we're a couple of low-cost manufacturers. We're investing heavily in cost reductions and new capacity expansion, and we think we're going to continue to aggressively price this category and take market share. It's the area of growth for us, and we're going to make sure that we get our share of that growth.

Okay. And then on the working capital, it looks like there was a sizable lift that drove free cash flow there. Just trying to get an idea of what drove the strong accounts receivable during the quarter? Was it from your larger customers? The smaller ones? And then sort of how are those collections trending into Q3, if you can provide some color there?

Rhod?

The big reduction in accounts receivable was really driven across the board. As Glenn mentioned earlier, I think the distributors have done a great job as they worked through the second quarter. Effectively, they have worked with us; we've collected from our distributors, we've collected from our retail customers. So I would say, we're very pleased with the way that our receivables came in through the quarter. As we mentioned earlier, we've taken a reduction in our allowance for expected credit losses on receivables. With respect to inventories, we sold down out of inventories in the quarter, as we expected to do with all of our operations basically down or operating at very low levels. Again, we're very pleased with the cash that we generated from inventory. With respect to our payable side, we worked with a lot of our suppliers and partners, and we were able to manage that very well during the quarter. So all in all, I think it was a great job by the team to manage working capital and effectively work our way through what is a difficult environment with everybody to drive that cash flow, and also really just set us up well as we continue into the back half of the year.

And then if I could just squeeze in one on the inventory, I guess, as you restart your facilities, I think it was about $150 million to $160 million left in working capital now. Should we expect that to remain positive through the back half of the year as you restart, or as the industry restarts and you start to shape out? How should we think about that line item through the back half of 2020?

We should think about looking at our focuses continuing to reduce inventory, but at the same time, improve service because we're focusing on fewer products and fewer SKUs. We think there's still a significant amount of inventory we can take out of our system and generate free cash between now and the end of the year. We're focusing on that, and we're ramping up our production. However, we're not ramping up our production at the same rate of sell-through. As we continue to grow and sell in Q3 and Q4, our production will be at a lower level than our actual sales, which will allow us to continue to reduce inventories and generate free cash in the back half of the year.

If you look at the full year, we did a great job in the second quarter. One of our objectives for this year, as we move through a difficult environment, is to generate free cash flow and have positive free cash flow for the full year. We're still very focused on that.

Your next question comes from the line of Brian Morrison of TD Securities.

Hi, good morning, Glenn. You've alluded to my question several times, but I want to ask it directly. In terms of your incentives and promotional activity, does this in any way impact your 30% gross margin target? Do you think you can achieve 30% in each of retail, private label, and Printwear? And just maybe update us on the facility consolidation initiatives and SKU rationalization. Is that complete at this time?

The Printwear is definitely complete; there's still a little bit of work to do in retail. But as far as our overall margin is concerned, we are not changing aspirations to get to the 30% margin. We're also focused on the sub-12% SG&A. Let's look at that as having a significant driver of our focus right now. As far as the Printwear is concerned, we've got our product line down to where we need it to be, and you just can emphasize the amount of costs we're going to take out of our system by just streamlining; it's going to be excessive, and it's going to be very positive to overall manufacturing. We're providing the same look at our retail business; not on the same scale because it's not the same type of scale business, but we're going to continue to focus on large programs that give us good returns and fewer SKUs. Similar to how we are in underwear right now. We have a huge opportunity to consolidate our manufacturing base, focus on efficiencies, and drive toward the target of our 30%. I think as we move into next year, our planning says we cannot see the Printwear business recovering fully. We just don't know at this point. Next year, I think when we look at if we can get our margins up to normalized type margins and then move from there on to our goal, that would be a good outcome for us, with a good SG&A reduction, is how we're trying to see things. But the promise is that thing is a little bit of the only. But I think we're really well positioned right now and also focusing on our working capital cash flow generation, which we cannot emphasize enough, and making sure that enrollment is improving, right? Because all these things will ultimately allow us to get better growth on return.

That's good. And then with respect to the shift in your floor plan strategy at your major retailer now fully complete? And I think you said significant market share gains. Are you seeing the potential for an accelerated acceleration of the potential for product category expansion on those private label initiatives?

Well, we've had quite a bit of expansion this year. A lot of the new products in the new space that we've obtained this year has really only gotten set probably the first week of June. So in Q2, although underwear has done fantastic, we really haven't had much of an impact on how well things are going to go. We are very optimistic about all of our retail business, to be honest with you. These online businesses doubled in the quarter. We're doing well everywhere, so I mean, retail, which is tracking on a year-over-year basis, is also in July, and we're going to see continued growth as we move into the future.

Okay. Just very quickly, Rhod, do we anticipate in terms of your period costs that get expensed in Q1 and Q2 here as we go through the remainder of the second half, manufacturing operations have restarted? Is that now behind us?

No, you'll still see some period costs rolling through in the third quarter, right? Because, as Glenn said, effectively, we've got our facilities running at 7% to 8%, in that range. When you we don't have effectively running at full levels of operation, right? So at those lower levels, you still will see some period costs running through in Q3, and then we'll see where we are in Q4.

I appreciate the color.

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

Hey, Glenn, I just want to confirm what you said earlier. You guys are now restarting your manufacturing capacity with the view that imprintable sales will be back to about 70% of the pre-COVID sales. I want to make sure, did I hear that correctly?

No. Right now, the Printwear sales are somewhat in June, and let's say; where we're tracking July is 15% to 20% negative. We haven't guided to next year at this point, but our manufacturing is ramping up to about 70% of our normalized capacity. That means there's a delta of 10, right? We're drawing down inventory. Now if sales continue to grow like we saw at the beginning of July, then we'll just increase capacity, but we'll keep it up below our actual expectations of sales because we want to continue looking at cash flow generation and reduction of inventory. So we can manage that as we go, and we're just bringing it on in stages. We'll see how things evolve as we move into the second, the third, and the fourth quarter, but we're pretty optimistic. We know our pricing strategy is working, and we'll see where it takes us. But we haven't guided to next year at this point. We're bringing on as we need.

Okay. Great. That's helpful. And then just on the men's underwear, up 23.5% in Q2, did that strength continue into July? Or was part of that strength related to just dependent demand as people started shifting back to more discretionary?

No, the overall category, I think, is slightly down overall. We're selling our product, not just our private label business, but also our Gildan brand, which is doing very well at the retailers and online customers that are supplying and selling our products. So it's a combination of those two. We have significant share gains in underwear in the quarter, I mean; it was quite substantial on an overall basis. So it's going very well. It's just a question of our positioning in the market, and we're pretty excited about the future.

Okay. That's great. Maybe a very quick one for Rhod. In the last quarter, you mentioned you guys were maintaining your fixed cash cost at $35 million to $40 million per month. Is that still the case? Or is it starting to move up as you restart some of your capacity?

Yes. The $35 million to $40 million is the guidance that we gave effectively when we've got everything idle, right? If you look at our whole system, effectively when it's idle. In April, effectively, we were a little bit above that. As we guided into May, we could see that if we stripped away some of the costs associated with running facilities at very low levels and started a bit of the ramp back, we were definitely at that $35 million range. We feel very good about our cash burn associated with our underlying cost base. As we moved through the quarter, actually, we've done more. As we talked about some of these initiatives, we've taken out costs in certain areas that will also reduce our base underlying cash burn on a go-forward basis. Overall, I think we feel like we're in very good shape. Our liquidity is very strong; it's $1.2 billion. From ability to weather further impacts on a go-forward basis, we've got a very strong balance sheet, very strong access to liquidity. We're winding down inventory as we go forward in with the strategy where we balance up production. Overall, I think we feel very good about our positioning.

Thank you. Your next question comes from the line of Matt Bank of CIBC.

Good morning. First question is, can you give any color on what is happening in your two biggest end markets specifically, so corporate and then merchandising and tourism?

Well, I mean, look, it's hard for us to get a handle on that, to be perfectly honest with you. If the market is slowly recovering, you can see that tourism is more of a local phenomenon, where people are traveling and spending money closer to home. Instead of people coming from outside, they're basically it's more localized. There is activity happening in all these areas. The overall market, I would say, is probably the event-driven items that are still large gatherings are still negative in the overall market. Those other categories are coming back. One of the areas where we're seeing the strongest growth is online, basically selling through. We don't sell all online, but as people are at home and looking for products and features that are difficult, we see that even though they may not have the event, they're still able to find products in different formats. That's helping change the landscape.

Okay. And then I just wanted to clarify on a question asked earlier, I'm just not sure. On the customers' inventory levels, are your customers keeping inventories at the lean levels that they were at after the destocking process? Or are they now restocking, which would be basically a tailwind?

Right now, I'd say that they're more or less staying at these levels. In fact, there could be a little bit more destocking to be honest with you in this quarter because they might be a little bit cautious. Overall, I would say it's stable or slightly down.

And there are no further questions at this time.

Well, thank you, everybody. I'd like to thank everyone for joining us once again, and we look forward to speaking to you very soon. So stay safe, and have a great day. Thank you.

Thank you for participating in today's conference. This concludes today's call. You may disconnect at this time.